If you are new to the world of investment, it is common to have doubts about the different types of investments and mode of investment. One such popular mode of investment is the SIP (systematic investment plan) mode of investment. SIP is a means to invest in mutual funds. This article will offer top reasons why you must consider SIP investments in your portfolio.
Here are top 5 reasons why you must consider SIP investments to gain higher returns on your mutual fund investments:
- Investment discipline
One of the biggest benefits of SIP investment is that it inculcates the habit of financial discipline among investors. As SIPs are autonomous, your money gets transferred from your bank account to purchase units of mutual fund scheme regularly. This develops the habit of regular saving among investors which is important in the investment world.
- No need to time the markets
You must have heard the adage investment tactic – ‘Buy low and sell high’. Even though this strategy works miracles to achieve significant returns, not everyone can master the art of timing the markets. In fact, in an attempt to time the markets, most investors end up facing adverse losses. SIPs remove this concept of timing the markets by regularly investing in the markets.
- Rupee cost averaging
When you start an SIP, regular investments are made towards your desired mutual fund scheme. The number of mutual fund units acquired is based on the NAV (net asset value) on that day. As the NAV of mutual funds constantly change due to volatility in the markets, different units of mutual fund scheme would be acquired at any given time. If the markets are low, you would end up achieving higher units of the scheme than when the markets are high. This averages out the total cost of the mutual fund units purchased over time. This concept is known as rupee cost averaging.
- Power of compounding
Compounding works by reinvesting your earnings to further make more returns. Basically, your money works on its own to make more money for you. Unlike lumpsum investment, you do not have wait to accumulate a substantial amount to invest in mutual funds. With SIP, you can begin investing in mutual funds right now, allowing you to stay invested for a longer duration. And the longer you stay invested in the markets, the higher would be the benefits of the power of compounding. This is the reason why several experts refer to compounding as the eighth wonder of the world.
- Light on your pockets
SIP investments do not burn a hole in your pockets. As an investor you can invest as low as Rs 100 per month in your desired mutual funds.
You can also use an SIP calculator or SIP return calculator to understand the future value of your mutual fund investments. This will help you to better plan your finances. SIP mutual fund calculators are usually offered by most fund houses or AMCs (asset management company). Happy investing!