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Why SIP Investment is Best Way to Invest?

13 January 2022
6 minutes

Introduction

There has been an exponential rise of investors participating in the share market over the last 5 years. The majority of investors who invest in the stock market invest in mutual funds. In addition, the systematic investment plan (SIP) has become an extremely popular and efficient strategy among investors. This article discusses what an SIP is and why it is an effective way to invest in mutual funds.

What Is a Systematic Investment Plan (SIP)?

A Systematic Investment Plan is one of the two ways in which you can invest in mutual funds. The other way is to invest a lump sum. In an SIP, you essentially invest a fixed amount of your convenience every month on a particular date. Every mutual fund has its minimum investment amount that you will have to adhere to. There are SIP calculators on the web that can help you understand what SIP is suitable for your investment objectives and goals. Read on to understand why SIPs are popular.

Advantages of Systematic Investment Plan (SIP)

  • SIP brings more discipline to your investments and savings

People often complain about not being able to save money. By choosing this SIP route, you get to invest in regular intervals every month that will automatically translate into savings before you spend your money. Slowly but steadily, it brings financial discipline and also helps in realizing the returns later.

  • Start with small amounts

 With SIP, you get to start investing with as little as INR 500 a month. If your earnings are not very high or your savings are low, you can still take advantage of or be a part of the growth of the Indian stock market by choosing to invest in SIP plans in various mutual funds.

  • Don’t stress about timing the market

One great advantage of investing in SIP plans is that you don’t have to stress about timing the market and investing accordingly. When the stock market is extremely high, with the same amount, you will be allotted lesser shares and vice versa. So, the averaging works and your portfolio will be well balanced at the end of the day. 

  • Grab the benefit of compounding

When you invest in an SIP, the monthly returns derived from the SIP will be reinvested in your investment amount until maturity. So, with time your investment amount is exposed to the impact of compounding and helps you with exponential growth.

  • Stop anytime you want 

The majority of the SIPs do not charge any penalty or fine if you want to stop the plan at any point. All you have to do is to go to your Demat account and opt out of the plan. This is one advantage that traditional investments like Fixed Deposits/Recurring Deposits do not provide. 

  • Skip if funds are tight

Sometimes for various reasons, you might not have enough funds in your bank account that can be used for investing in SIP. Don’t worry. SIPs allow you to skip a month without any charges or fines. You can come back later and keep investing as you did every month, unlike an RD or an FD. 

  • Have more money? Start another SIP

If you got promoted or started realizing more disposable income every month, you can choose to start another SIP plan in different mutual funds that invest in other sectors or industries. This way, you can start investing your extra money and make a decent return on it.

  • Do not mix investments and emotions

Another important aspect of investing in the stock market is never letting emotions take over your investment decisions. The stock market, by principle, fluctuates continuously. Do not make any impulsive decisions based on the point performance of the market. This is another area where SIPs make a lot of difference. By bringing discipline into the investment approach, you can help yourself not react to the short-term volatility of the markets. 

  • Past Performance

People who had invested in mutual funds 15 years ago are now reaping big rewards. Let’s have a look at some examples.

Let’s say you had started a SIP of ₹3000 per month in HDFC Top 200 (see more details of this mutual fund here) in 1999. In a 15 year period, you would have spent a total of around ₹5.4 lakh. At the same time, your investment would be worth almost a whopping ₹35 lakh!

Let’s take the same SIP amount in Franklin India Prima Plus (see more details of this mutual fund here). Again, you would have spent a total of ₹5.4 lakh. Your investment’s worth in 15 years would be nearly ₹31 lakh!

Systematic investment plans or SIPs shield you from many harms. Some of them are short-term risks, short-term volatility, emotional and impulsive reactions, overspending, and so on. SIP plans are one of the safest and most convenient ways to invest in the equity markets of India through mutual funds. Learn more about SIP here. It is no surprise then to see the number of people opting to invest using SIP plans increase so much.

Key Takeaways

  • SIP is one of the best forms of disciplined investment, which should be done consistently over a period of time.
  • An investor may diversify their portfolio by starting an SIP in two or more funds.
  • Investments in certain funds are eligible for deduction from taxable income under Section 80C of the Income Tax Act. One can save tax each year by investing in an SIP.
  • For getting compounding benefits, it is important to hold investments for an extended period. 
  • Start investing at an early stage of life. Remember, Rome was not built in a day, and Warren Buffet accumulated 99% of his fortune only after the age of 50.

FAQs

Q: How to start an SIP?

A: One can start an SIP either online directly through an AMC or offline through a mutual fund distributor or agent.

Q: Are there any conditions to start SIP Insured?

A: Yes. The AMC imposes a few conditions for those looking to start SIP Insured. However, the conditions may vary amongst different companies. The conditions may include terms like minimum investment period, the maximum number of defaults allowed, the redemption of units, etc.

Q: Can I make a lumpsum investment along with SIP?

A: Yes. An investor may start an SIP and purchase additional units at the same time. Therefore, an investor may start a monthly SIP of, say, Rs. 5000, and make an additional lump sum investment of, say, Rs. 1,00,000.

Mutual Fund Calculator

SIP Calculator PPF Calculator EMI Calculator
Lumpsum Calculator PF Calculator Car Loan EMI Calculator
Mutual Fund Return Calculator Gratuity Calculator Personal Loan EMI Calculator
SWP Calculator HRA Calculator Home Loan EMI Calculator
Sukanya Samriddhi Yojana Calculator CAGR Calculator SBI EMI Calculator
FD Calculator GST Calculator SBI Personal Loan EMI Calculator 
RD Calculator HDFC EMI Calculator SBI Home Loan EMI Calculator
NPS Calculator HDFC Personal Loan EMI Calculator SBI PPF Calculator
Simple Interest Calculator HDFC Home Loan EMI Calculator SBI RD Calculator
Compound Interest Calculator HDFC FD Calculator SBI SIP Calculator
Interest Rate Calculator HDFC RD Calculator SBI FD Calculator

 

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