What is SIP and what are its benefits?
SIP, or Systematic Investment Plan, is a popular investment option that has gained traction among investors over the years. It is a simple and disciplined way of investing in mutual funds, allowing investors to invest small amounts regularly over a specified period. In this article, we will delve into the benefits of SIP and why it is a great investment tool.
SIP, or Systematic Investment Plan, is a popular investment option that has gained traction among investors over the years. It is a simple and disciplined way of investing in mutual funds, allowing investors to invest small amounts regularly over a specified period.
Few of the reasons, why SIP is a great investment tool are- Disciplined approach to investment
One of the biggest advantages of SIP is that it helps investors cultivate a disciplined approach to investment. By investing a fixed amount at regular intervals, investors develop a habit of investing regularly, which can help them achieve their financial goals.Power of compounding
The power of compounding is another advantage of SIP. When investors invest in mutual funds through SIP, they earn returns on the principal as well as the accumulated interest. Over time, the interest earned gets reinvested, leading to a compounding effect that can result in significant wealth creation in the long run.Flexibility
SIPs offer a high degree of flexibility to investors. They can choose the amount they want to invest, the frequency of investment, and the duration of the investment period. This makes it easier for investors to align their investment goals with their financial capabilities.Rupee cost averaging
Rupee cost averaging is another benefit of investing through SIPs. Since investors invest a fixed amount regularly, they get to purchase units of the mutual fund at different prices. This helps in averaging out the cost of investment, reducing the impact of market fluctuations on the overall investment.Goal-based investing
SIPs enable goal-based investing, allowing investors to invest in mutual funds based on their financial goals. Whether it's saving for a child's education or retirement, SIPs can be customized to cater to specific financial goals.Diversification
Investing in mutual funds through SIPs offers investors a high degree of diversification. Mutual funds invest in a basket of stocks and other financial instruments, which helps spread the risk. This reduces the impact of market volatility on the overall investment and helps investors achieve stable returns over the long term.Convenience
SIPs are a convenient investment option as they can be set up easily through an online platform or mobile application. Investors can monitor their investments and track their performance regularly, making it easier for them to make informed investment decisions.Low investment amount
One of the most significant advantages of SIPs is that investors can start with a low investment amount. This makes it easier for small investors to start investing in mutual funds and take advantage of the benefits of investing regularly.Tax benefits
Investing in mutual funds through SIPs also offers tax benefits. Equity mutual funds held for more than one year are subject to long-term capital gains tax, which is currently 10%. Additionally, investors can also claim a deduction of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act, 1961, by investing in ELSS mutual funds.Professional management
Mutual funds are managed by professional fund managers who have extensive experience and expertise in the financial markets. By investing in mutual funds through SIPs, investors can take advantage of the professional management of their investments, leading to potentially higher returns.
In conclusion, SIP is a simple and effective way of investing in mutual funds. It offers several benefits, including disciplined investing, the power of compounding, flexibility, rupee cost averaging, goal-based investing, and diversification. By investing in mutual funds through SIPs, investors can achieve their financial goals and build long-term wealth.
Predicting and judging the behaviour of stock market is a very difficult matter and even the expert investors make errors in their judgement in this respect. So a normal investor cannot time the market and cannot take advantage from its ups and downs. For such investors the SIP mode of investing is suggested in which one has to systematically invest every month some amount in a particular mutual fund scheme and then the investment will go on multiplying depending upon the direction of market movement.
Generally It is seen that if the market is moving up gradually and say in 10 years time the index doubles from its original value then all the investment made through SIP mode will also increase in its value in almost same proportion. Only in unfortunate cases when the market does not rise and remains stagnant or even goes down then SIP investments will not give any return and it is also true for any other investment in share market made by the investors.
SIP is a technique that helps the investor to invest regularly and forget about the daily ups and downs of the market and simply go on investing a fixed amount every month. If the market goed very high intermittently then the investor can sell his holdings also and wait for the market to come down and again start a fresh SIP scheme.