A systematic investment plan or SIP is the best plan that helps you invest in mutual funds on a regular basis. You can choose to invest weekly, monthly or even quarterly – the most popular choice being monthly.
There are multiple reasons why SIPs are the best way to grow your money especially when you have a goal to plan – e.g. your child’s education. SIPs can be bought easily and you can start with a very low amount – Rs. 500 per month. In this blog, we will talk about the ‘Big 5 advantages’ that SIPs offer to you as a parent.
But before that, let’s understand what a SIP is
What is SIP?
A SIP or systematic investment plan is an investment mode through which an investor can create a regular mechanism of investment for themselves.
Let’s take the example of investor X. Investor X wishes to invest Rs. 10,000 every month in a mutual fund.
In this case, investor X can create a SIP for a fund they want to invest in and the money will be deducted every month automatically (the deduction can be weekly, monthly, or even quarterly, depending on the investor’s choice).
Think of it as a recurring deposit, with better returns.
Now that we know what a SIP is, let’s get to know why investing via SIP is the best choice you can make to enlarge your corpus.
5 Reasons SIP is the best
These are the 5 main reasons why you should invest via a systematic investment plan to reach your financial goals
1. Suitable for Long-Term Investment
Any financial advisor will tell you that if you want to invest long-term, SIP is the way to go.
The reason is simple, regular investing and automatic deductions keep investors motivated to stay invested and reach their investment goals quicker.
During the 2008 financial recession, many people withdrew money from mutual funds. However, the ones that remained invested via SIP, attained a huge profit once the markets rose.
Long-term investing makes sure that even if the market is down at the moment, once the markets rise, the investor will make profits.
2. Goal-planning
SIPs are good tools to plan for a future goal – to buy a 4-wheeler or to pay for college tuition fees maybe 10-15 years from now.
When you determine the amount required to achieve your goal, you will know how much you should invest and how long it will take to reach your goal. This will help in planning effectively.
Having financial goals is very important to creating a financially secure future. One must have a defined idea about what financial goal one wants to reach by the age of 30, 40, 50, and so on.
3. Effect of Compounding
Compounding is one of the biggest advantages of a SIP.
Over time your investments grow because you start earning returns not on your principal amount, but on the interest that keeps getting added to it.
Let’s take an example. Suppose you invest Rs.1,000 in a mutual fund that gives you a yearly return of 10% p.a. Your amount becomes 1,100. at the end of the first year. At the end of the second year, the rate of return is 11%, this time the returns will be calculated on Rs. 1,100 and not the principal amount, which is, Rs. 1,000.
This ensures the growth of your corpus and is one of the reasons why experts advise you to not withdraw your investments when the market is down.
4. Curated by Experts
With the increasing number of fund types like equity, debt, mixed, gold-based, etc. there is a wide variety to choose from based on your risk appetite and preferred investment duration.
This has led to customized offerings based on individual needs, supervised by experts in the SIP domain. All you need is to specify your goal and timeline and you are provided with the best possible funds that can meet your future goals.
SIPs have become popular over the past few years, because of the ease of investing and the flexibility provided in terms of the amount of money that can be invested.
You can stay invested as long as you want, although average returns have been higher when invested in the long term.
Research also shows that the returns offered by SIPs are more than recurring deposits in banks, in the long term.
5. Automates Your Investment Experience
SIPs automate your investment experience, which makes you a regular investor. It is easy and convenient and because of the online surge, today, it is super easy to invest via SIP. If you choose the lump sum method, you will have to manually invest an amount and there may be times when you can miss an installment.
With automated installments and a streamlined process, investing via SIP has now become an extremely popular method, to reach long-term goals like saving up for your child’s education.
FAQs
Why is SIP investment good?
By investing through SIPs, you will do away with the burden of timing the market as you could then avail the benefit of Rupee Cost Averaging. By investing through SIP, you will tend to invest in the up and down markets. This helps you shy away from the volatility of the market. Additionally, you will benefit from the power of compounding, which fundamentally generates returns not only on capital but also on returns.
Is SIP good for students?
Investing in SIP can be a huge benefit for students. It cultivates a healthy investment habit, and they can invest a small amount to start their journey. SIP is best for beginners and a comparatively safe investment vehicle.
What are the features of SIP?
A SIP offers the following features:
It is best for long-term investment, brings financial discipline, allows small investment amounts, benefits from the power of compounding, and is a comparatively safer investment tool.
Why do people prefer SIP?
A systematic investment plan helps bring discipline to an individual’s investment habits. A SIP will automatically deduct a pre-decided amount periodically. Investors also do not need to worry about timing the market while investing via SIP. It is one of the best investment vehicles for beginners.
