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 in simple words, 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 healthy financial savings over a fixed time to achieve your short-term and long-term financial goals.
In simpler words, an SIP is a small periodic investment for a fixed period with a potential for higher returns, thus proving its capability as a beneficial investment avenue to build wealth gradually. You can check our Systematic Investment Planning calculator to define your financial planning.
Why start an SIP right now?
More and more people today are interested in finding cushion money to fulfil their dreams and goals, for which SIP seems like a good 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 pause or cancel the SIP 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 get by.
- Power of Compounding: Unlike your savings bank account, SIP thrives on compound interest rather than simple interest. This means that you will earn interest not only on the deposited amount but also on the interest! Keeping this in mind, the earlier you start investing, the higher your returns.
Suppose you start investing INR 2,000 at age 23 at a 15% interest rate and continue investing until age 60. On the other hand, one of your friends starts investing INR 2,000 at the age of 30 at a 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 instils discipline in your investment plan, guiding you to buy fewer units when the market is up and more units when it is down. Its simplicity 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 a premature withdrawal penalty and drops in the return value.
As is evident, a smartly crafted SIP plan helps you sustain better financial health over 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 mutual funds in sync with your financial goals.
