Over the past decade, Systematic Investment Plans (SIPs) have gained prominence in the arena of mutual fund investing. This is due to the benefits that the system provides. Let’s look at the top 5 such benefits provided by SIPs.
Power of compounding
This is easily the most significant benefit of SIPs. It is best explained by numbers and also showcases the importance of starting investing early. Let’s take a look at the following table to elaborate this point:
If you were to save Rs 4,000 every month without fail for the next 30 years, you’d have a corpus of Rs 14.4 lakhs without making any investment. But if you would invest this amount and if it would earn 5% per annum compounded monthly, the corpus would stand at Rs. 41.7 lakhs, which is almost 3 times of the corpus without investment. At 10%, the corpus would be worth over Rs. 1.1 crore.
It is easy to deduce from the table that the more time you have to invest, the bigger the corpus can become. This is due to the power of compounding as a longer duration allows your money to be multiplied more times over. For instance, if you were to reduce the tenure by just 5 years at 5% compounding, the resulting corpus would be less by about Rs. 12 lakhs.
Rupee cost averaging
The concept of SIPs is based on the principle of rupee cost averaging. SIPs require you to invest a pre-decided amount in a fund or security periodically, typically every month. By investing a fixed amount regularly in a well-managed mutual fund or some other financial instrument, your money continues to get deployed according to the fund’s portfolio or the instrument’s composition.
Further, one does not need to be concerned about the direction of the market movement while undertaking systematic investment. When markets are up, you get lower number of units than when markets are down. In this way, the per-unit cost of holding the fund averages out over a period of time and that is why the principle is known as rupee cost averaging.
Inculcatesaving and investment discipline
SIP is a tool that can help you adopt a disciplined approach to savings and investment by setting up a mechanism of investing a fixed amount in a mutual fund or other instrument at regular periods, typically monthly. In this manner, by signing up for an SIP, you are disciplining yourself to set aside a particular amount every month to save, proceeds of which will be deployed in the financial markets.
Given that saving is a necessary evil which initiates the process of creating a retirement corpus and discipline is quite difficult to adhere to, SIPs help you ensure that the investing process does not slow down during your working life.
No need to time the market
Trying to time the market may seem extremely alluring due to potential skyrocketing returns, but is a recipe for disaster. Even experts with several decades of trading or portfolio management experience would not be able to claim proficiency in this aspect. So, for novices and intermediate investors to try to time the market in order to gain the maximum out of it is a major mistake.
With SIPs, you don’t need to time the market as rupee cost averaging ensures that you are invested in the market through thick and thin.
SIPs are convenient in two forms – one, it is easier to make a small monthly contribution towards investing than to make a large lump sum investment, and two, it is quite easy to setup.
While the former is quite evident, for the latter, one has access to many methods. You can make use of services of a financial advisor, bank, or any other market intermediary to setup an SIP. In fact, there are several mobile and web-based platforms which can do this for you apart from suggesting the right fund for your life stage and objectives. To get more idea on the SIP Investment plans you can always click here and make your learning curve steeper.