Why SIP - Systematic Investment Plans?

The Manageable steps to Financial Freedom

Investing is challenging because of the plethora of avenues available but is also tiresome when you have to set aside your time and willpower. SIPs solve that for you. Systematic Investment Plans automatically allow you to invest a small chunk of money at regular intervals. When you activate a SIP, a fixed amount is deducted from your account every month and is invested in a Mutual Fund of your choice. (Now, multiple services allow you to invest in Stock baskets through SIP).

Nonetheless, this isn’t enough evidence to blindly trust SIPs. So let’s find out all the upsides to SIPs so that you can make an intelligent decision about them.

What is Rupee Cost Averaging?

The primary benefit is you do not need to time the markets anymore. When a fixed amount is getting invested at regular intervals, you invest in the market at its highs and lows. Hence, there is no need to pursue the risk of timing the market over the long term. Through SIP, you purchase a certain amount of fund units, more when the market is low and fewer when the market is high. This averages out the cost of buying these units over the long term.

What is Compounding in SIP?

SIPs tend to offer more returns than lump sum investments because of Rupee Cost Averaging and its long term nature. The returns compound with every passing year, and you build generational wealth. For instance, if your current corpus is Rs. 100 and you make a 10% return on it; you will earn 10% returns on Rs.110 the following year. So rather than having a total of Rs. 120 (Rs. 10 on Rs.100 for two years) you will have Rs.121 (Rs.10 for Rs.100 for the first year, and Rs.11 on Rs.110 for the following year.) This gap grows exponentially with time.

Low Seed Capital Requirement

You can start SIPs with minimal capital, sometimes as low as Rs. 100. You can continue to increase this amount proportionally to your income increase, making it an ideal instrument. A good tendency is to increase your SIPs by 10% every year. If you are a professional, the assumption is your income increases by this percentage every year. This increase also guards you against inflation.

SIPs = Discipline

You can now set up payment mandates! Mandates mean that the fixed amount we talked about will get deducted automatically from your bank account. This brings in the sense of discipline because this chunk goes to your investments rather than getting wasted in mundane pleasures.

Liquidity

The funds have no say in when you can stop your SIPs. This gives you the liberty of using these investments as an emergency fund. Fund managers do enforce a lock-in period, however. If you pass this lock-in period, you are free to liquidate the investments whenever you want, as well.

Needless to say, SIPs are an excellent option for people with regular income sources. They can protect you from significant market fluctuations, unlike lump-sum investments. You can set investment goals with SIPs, plan retirement exits, or build a solid wealth foundation. We hope this was enough evidence to convince you to consider investing through Systematic Investment Plans.