SIP- Why is everyone in the investment arena falling head over heels for it? What are its long-term benefits? Is it something you should try, too?
What is SIP and why is it so popular these days?
An SIP or Systematic Investment Plan is a smart financial planning tool that serves the purpose of a strong foundation securing your dreams. It aids in investing your hard earned money in mutual funds in a non-burdensome way. With SIP, you can invest a small amount every month and build a healthy financial saving over a fixed time frame to achieve both your short term and long term financial goals.
In simpler words, an SIP is a small periodic investment for a fixed period of time with a potential for higher returns, thus proving its capability as a beneficial investment avenue to gradually build wealth.
Why start an SIP right now?
More and more people, today, are interested in finding ways to have cushion money to fulfill their dreams and goals, for which SIP seems like a reasonable path. If that is not convincing enough for you, here are 5 solid reasons why investing via SIP is a good idea:
- Good for Financial Goals: Making a sudden huge investment to buy a car or house or for any other financial goal is not feasible for everyone. SIP solves this problem by allowing you to build the required wealth over time by making regular yet small monthly investments.
- Flexibility: SIP gives investment an ‘as you wish’ direction. You can choose every aspect of your investment, i.e., how much, for how long and how frequently. You can also set the particular date you would like to invest on. Furthermore, you can even pause or cancel the SIP as and when required.
- Light on your Pocket: SIP allows you to invest as low as INR 500 a month (depending on the type of fund), which is a great option if you are on a tight budget or have a salary figure to just get by.
- Power of Compounding: Unlike your savings bank account, SIP thrives on compound interest rather than simple interest. This means that you will not only earn interest on the deposited amount but on the interest, too! Keeping this in mind, the earlier you start investing, the higher the returns you get.
Suppose you start investing INR 2,000 at the age of 23 at 15% interest rate and continue investing till the age of 60. On the other hand, one of your friends starts investing INR 2,000 at the age of 30 at 15% interest rate and keeps investing till the age of 60. Here’s how you will benefit more by investing early than your friend who starts investing 7years later than you.
You can also check the expected returns and profitability of varied monthly investments with this handy SIP calculator.
- Better Investment Value with RCA: The concept of RCA (Rupee Cost Averaging) in SIP helps you catch better price points in an investment, irrespective of the market volatility. It instills discipline in your investment plan, guiding you to buy fewer units when the market is up and more units when the market is down. Ergo, in its sheer simplicity, it guides you to Buy Low and Sell High; thus exhibiting better profitability and freedom from the hassle of timing the market.
Important Note: You may choose to cancel and redeem your investment early; however, the same is not recommended as it exposes you to the possibility of premature withdrawal penalty and drops in the return value.
As is evident, a smartly crafted investment plan like SIP helps you sustain better financial health over a period of time. It helps you stay safer in an ambiguous market by allowing you to invest small and get higher returns with reduced risk. All you have to do is choose the right set of mutual funds in sync with your own financial goals.