10 Reasons Why You Should Start a SIP
Last Friday, I met my old college friend- Priyanshu. While discussing various stuff, he told me that he has decided not to invest in ‘Fixed Deposits’ anymore. Well, there is no doubt in saying that he has made a good decision. We all know that FD is no longer a strong investment option for creating our desired wealth for the future.
During our conversation, Priyanshu suddenly got eager to know more about investing in Mutual Funds. I told him that Mutual Funds have of late become the talk of the town. I explained to him the benefits of investing in the same. Anyways, he also asked me whether he should invest in Recurring Deposits instead of Mutual Funds. As we went further in our discussion, I realized that he used to think one can invest in Mutual Funds only in a lump sum mode like FDs. But, the fact is that you can even invest in a Mutual Fund through SIPs.
Later, I told him that as he is doing a day job and earning a regular income, he should start investing in the Mutual Funds via SIP mode. Investing through SIPs works in a similar manner like Recurring Deposits (RDs). One key difference between the two is that you get units while investing in Mutual Funds. Another major difference is that through SIP investing you can earn relatively higher returns than RDs. Further, the rate of returns in SIP Mutual Funds is not fixed as in the case of RDs.
In the SIP or Systematic Investment Plan, a fixed sum of money is automatically invested in your chosen Mutual Fund on a specified date of each month. When you set up SIPs, your Bank Account is debited and your desired sum gets invested in your chosen Mutual Fund scheme.
Why You Should Start a SIP?
If you are a beginner in Mutual Fund investing, you might have this doubt why you should opt for investing through the SIP mode. Here are the ten best reasons why you should start a SIP.
1. Automate your investments: You can set up SIPs to activate investments in the Mutual Fund from your Bank Account on a particular date. This results in developing a habit of investing in the Stock Market and helps you create a large corpus in the long run.
2. Developing an investment habit towards your goal: SIP investing builds a regular investing habit for an individual. So, if you have any financial goal, your well planned SIPs can make it more feasible to achieve.
3. Variety of investment plans: SIPs help you invest in Mutual Funds with your desired amount for a chosen term. Moreover, you have a variety of schemes to choose from according to your financial needs like Equity based mutual funds, debt mutual funds, balanced funds, etc.
4. Flexibility in investments: Using a Step-up SIP, you can gradually increase your SIP amount with the increase in your earnings. In Mutual Fund investing, you can choose to stick to your regular SIP amount. But, if you wish, you can also choose to increase or decrease (up to the minimum investment amount) your SIP amount with the help of a Flexi-SIP.
5. Affordable investments: When you invest in the Mutual Funds through SIPs, you can create a huge capital over a long period of time. SIP investing doesn’t require you to invest a large sum of money in every installment. So, your household expenses are not at all hampered due to SIP investing. You can start investing in SIP with an amount as low as Rs 500 per month.
6. Rupee cost averaging: Investing in the Mutual Funds through SIPs fetch you more units when the market moves down and fewer units when it goes up. Therefore, this averages out the overall costs of your investments over time.
7. You do not need to time the market: You don’t need to know whether the Stock Market has hit rock bottom or it has reached its peak. You can invest in the Mutual Funds any time through SIP as its rupee cost averaging feature nullifies the market volatility.
8. Long-term investment: Mutual Funds are typically meant for creating wealth in the long run. Investing through SIP let you invest in the market with small amounts over a long period of time. The higher is the investment horizon, the greater is the scope to earn larger returns.
9. Power of compounding: The returns on your SIP investments are also reinvested in the market. Therefore, you not only earn returns on what you invest but also on your reinvested returns. The longer you stay invested in the market, the greater is your scope of enjoying the power of compounding.
10. Diversification: You get the opportunity to enjoy the benefit of diversification while investing in SIPs. You can easily allocate your investment across diverse asset classes and industries. Diversifying your investment results in reducing your security-specific risks and increases your chances of earning larger returns.
Quick Note: Long term capital gains on an Equity Mutual Fund are tax-free if such gains don’t exceed Rs 1 lakh in a Financial Year. This goes to show that Equity Fund investing via SIPs is a wonderful way to accumulate a huge investment in the long run. Further, Investing in ELSS up to Rs 1.5 lakh in a Financial Year is allowed as a deduction against Gross Total Income for the same period. Setting up SIPs in an ELSS can help you gain tax benefits with ease.
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Mutual Funds have become extremely popular in recent years among the middle-class Indians because of AMFI’s “Mutual Funds Sahi Hai” campaign. SIP investing is a great way to invest in Mutual Funds for building huge wealth in the future.
People who don’t invest in Mutual Funds are either lacking in knowledge or simply scared to invest in the same. However, the Mutual Fund industry in India is highly regulated by SEBI, which reduces the chances of occurring malpractices to nil.
In this article, we have tried to highlight the major advantages of investing in Mutual Funds via SIP route. Again, you can start investing with as low as Rs 500 per month in a SIP. Mutual Funds can help you fulfill all your financial needs if you invest in it in a systematic manner.