SIP: Is It The Best Investment Instrument?
When you invest in a mutual find scheme you have the option to invest into it using a SIP. We’re sure you’re wondering what is SIP or a systematic investment plan? SIP or Systematic Investment Plan is the savings instrument that allows investors to invest their hard-earned money in regular intervals and inculcate the discipline of investment.
When an investor opts to invest in SIP, a fixed portion of their income is automatically debited from their account and is invested in mutual funds of their choice. This helps investors generate high returns without having to investment a hefty amount in lump sum. In a nutshell, SIP is perhaps one of the best ways to save money in a disciplined manner.
But here’s the deal: budget 2018 introduced on the 1st of April 2018 introduced long-term capital gains (LTCG) tax on mutual fund SIP sparking a debate amongst finance experts. In fact, a lot of people started believing that ULIP investment could be a better alternative for SIP investment after the introduction of LTCG taxes since ULIP plans offer tax benefits.
Remember, tax benefits are not the only parameter that one must take into account when selecting a savings instrument. In this article, we will disclose how SIP works and how power of compounding and rupee-cost averaging make it one of the best financial instruments for investors of all risk profiles.
So let’s get started! Shall we?
How Does Systematic Investment Plan Work?
A SIP investment is easy and flexible. When you choose to invest in SIP, the money gets debited from your account automatically and it gets invested in the mutual fund scheme of your choice. Each month or each period when your money gets debited to buy the mutual fund scheme, you get some additional units of the fund. This is based on the market value for the day.
Every time you invest money into the mutual fund scheme, some units are allotted to you at the current market rate. Hence you get to invest into the mutual funds without having to pay through your nose and this lets you to average out your investments.
It is difficult even for experts to be able to predict the financial market with certainty. Volatility plays a key role and this makes it difficult to judge the market accurately. This volatility is what makes your investment insecure and you may actually end up losing money in the market because of this. This is where the SIP plans comes to your rescue and helps you regain confidence.
SIP not only allows for regular investments, but also lets you invest in a recurring manner. The amount gets debited from your account every month and you are able to invest a small amount of money each month. This helps you manage your budget efficiently and slowly inculcates the good habit of investment. Eventually, this investment earns you a lump sum return at the end of a few years that could be used to fulfil your future financial goals.
Understanding Rupee-Cost Averaging
When the market is very volatile, most investors aren’t usually confident about investing their money in the market. They look for a suitable for their entry. Opting for rupee-cost averaging helps you save from this hassle. Since you invest into the market regularly, your money buys you units at both the time, when the price is less and when the price is high. This lets you achieve a lower average purchase cost giving more power to the money invested by you in the market.
Understanding Power of Compounding
SIP helps you harness the power of compounding. Compound interest on SIP helps you maximize your profits. The compounding rule says that the earlier that you start investing in SIP, the more time will you money get to grow. So it makes sense to start investing in Systematic Investment Plan at the earliest.
Benefits of a Systematic Investment Plan
In addition to the power of compounding and rupee-cost averaging, there are a lot of other benefits of SIP investments. Here are just 5 of the many benefits of SIP:
- SIP helps you inculcate the habit of disciplined savings. This is absolutely essential for any investor who wants to have a successful portfolio. When you invest in SIP, you are committed to saving regularly and this helps you reach your financial objectives quickly and easily, without having to compromise with your necessities.
- SIP gives you flexibility and this is important from a longer-term perspective. Investors may choose to discontinue their investments whenever they wish.
- SIP offers you long-term gains because of the power of compounding and rupee-cost averaging. The SIP investments allow you generate attractive returns in both long and short-term, depending upon your risk appetite.
- SIP investment is very convenient and hassle-free. You can issue standing instructions to your bank about the amount of money you want your bank to debit from your account to be used in SIP. Once you issue instructions, the money will automatically get debited from your bank account and will be invested in the mutual fund market.
- The minimum investment amount for SIP is Rs.500. This makes SIP accessible for people from all walks of life. In addition, the risk-free nature of SIP makes it an apt investment alternative for those looking for safe investment instruments that promise lucrative returns.
Over to You!
We’re sure now know why SIP or systematic investment plan is a great way to invest in the mutual fund market for both seasoned as well as novice investors. In fact, for those who are just starting to invest in mutual funds, SIP investments could be the safest bet.
Starting investments in SIP is very easy and all one needs to do is to decide whether one wants to invest in a lump sum or in regular monthly intervals. The benefit of investing in SIP outweighs most other investments including ULIP investments.