When it comes to investments, people are always looking for options that would help them secure their future. With the changing times, various investment options have emerged in the market, but one option that has been trending among investors is the Systematic Investment Plan or SIP.
With an SIP investment, investors get access to various assets, such as stocks, bonds, gold, etc., through mutual funds that target different financial goals and objectives. And today, most investors, from new to experienced, prefer making SIP investments for different goals, including retirement, a dream house, children’s education, or even a vacation. Here are some of the reasons explaining this wide popularity of SIP investments among investors.
- SIP instils financial discipline through regular contributions
With a systematic investment plan, one can begin investing with as little as Rs 500 per month. This flexibility makes mutual fund investment accessible to everyone without putting a strain on finances.
It also allows you to set up automatic monthly investments into your chosen mutual fund schemes. Once set up, your investments happen automatically on the date specified by you without any additional action required. This ensures that you stay invested even during market fluctuations and enjoy the long-term benefits of mutual fund investments. This flexibility makes it easier for people to invest according to their convenience and hence stick with their investments for the long term.
- Power of compounding maximises returns
Compounding refers to the process of earning interest on your investment earnings. Over time, this can lead to significant growth in your portfolio. For example, let’s say you invest Rs 10,000 in an SIP mutual fund that generates an annual return of 10%. After one year, you will have earned Rs 1,000 in interest, and your portfolio will be worth Rs 11,000. If you reinvest that Rs 1,000, you will earn an additional 10% on it. As a result, your portfolio will now be worth Rs 12,100.
This process continues year after year, resulting in ever-increasing growth for investors as they not only receive the interest on the principal invested amount but also on the interest that keeps adding up.
- Rupee cost averaging helps to ride out market fluctuations
SIP investments offer the benefits of rupee cost averaging, which help to average out the cost of purchase and reduce the risk associated with timing the market. With this strategy, investors buy more units when the price is low and fewer units when the price is high. This helps to smooth out market volatility and maximise your SIP investment returns over the long term.
- Dual benefit of tax deduction and wealth accumulation
When you invest in an Equity-Linked Saving Scheme, you can avail a tax deduction of up to Rs 1.5 lakh under section 80C of the Income Tax Act, 1961. Moreover, ELSS funds have a lock-in period of only three years, making it attractive for investors who want to invest in SIPs with short-term objectives and also claim tax benefits.
Ending note
Investing through an SIP can help you to reach your financial goals by averaging out market highs and lows, eliminating emotional decision making, and allowing you to benefit from compounding returns. With these benefits, SIP investments allow investors to grow their wealth significantly over the long term and are hence one of the most preferred investment options today.
