One of the crucial advantages of SIP is that it helps to build the habit of saving and investing simultaneously. It inculcates a feeling of commitment in the investor because you have to keep aside a fixed amount each month for investment purposes. Additionally, as the amount to be set aside is very nominal i.e. as low as Rs 500 to Rs 1000, you don’t feel the burden on your shoulders. SIPs have helped to change the entire perspective towards saving and investing. You don’t postpone your decisions to a future date and are in a better position to start investing as soon as possible.
2. Achieve financial objectives
If you don’t have a plan, then it becomes quite difficult to achieve the things you want in life. A similar situation happens in case of life goals also. You may have thought of buying a house or going on an exotic vacation. But you don’t know how to realise your dreams. In this scenario, SIP mutual funds help in ways more than one. Whether it is a short-term or long-term goal, SIP can make things possible. Since the whole process of SIP is so much goal-oriented and disciplined that it keeps you on the right track. You are able to achieve your goals in the expected time. Moreover, in case of a majority of open-ended funds, you enjoy a lot of liquidity. This allows you to withdraw your investments during emergencies.
3. Lower cost of investment
It is fairly ok to have wealth creation expectations from your investment. Especially, in case of equity investments you got to have a robust strategy to make money. Yet another less complicated way of making money is to lower your overall costs involved in investment. SIP mutual funds enable this in a streamlined fashion through the process of rupee-cost averaging. In this, the fund manager keeps buying units of the said mutual fund scheme with your monthly SIPs irrespective of the state of stock markets. Hence, during slump more units are bought and during rally lesser units will be bought. In this way, your average per unit cost of investing reduces dramatically. Moreover, you are freed from the worries of timing the market.
4. Enjoy power of compounding
Compounding happens when you earn interest on the interest already generated. In this, both of your initial investment and interest earned on it are used to find out the interest for the next periods. When you invest in SIP mutual funds, you enable power of compounding to work on the invested money. Thus, you are able to earn higher returns as you move ahead in your investment journey. Compounding works well when you stay invested for longer period of time. It is because of this reason that even smaller amounts like Rs 500 invested every month turns into a big corpus after some point of time. That’s why it is always beneficial to start investing as early as possible.
5. Advantage of diversification
You should keep all your eggs in the same basket. Same principle applies in investing also. Instead of putting all your money in one asset, you need to assign it in different asset classes. If it’s within same asset class like equity funds, you need to own at least 4-5 different equity funds in your portfolio. This mechanism is known as diversification. It involves spreading your investment amongst multiple securities to reduce the risk of fluctuations in returns. While investing in SIP mutual funds, you get the advantage of diversification. With a nominal amount of Rs 500, you are able to get a wider exposure across asset classes, sectors, industries and market capitalisations. In this way, your firm-related risks are reduced which enhances your chances of wealth creation.
SIP mutual funds are a prudent way to achieve financial objectives only when you stay committed and invest regularly. However, fund returns are not guaranteed and always subject to fluctuations.
Archit Gupta is Founder & CEO ClearTax. Views are his own.