What is SIP?
An investor commits to invest a specific amount for a continuous period at regular intervals, this ensures that he gets more units when prices are lower and fewer units when prices are high, this works on the principle of rupee cost averaging when invested at different levels and automatically participate in the swing of the market.
Benefits of SIP
Systematic Investment Plans (SIPs) offer several advantages to investors who want disciplined, long-term exposure to mutual funds.
- Inculcates Savings Habit - SIPs encourage regular investing by committing a fixed amount and investing it systematically every week, month, or quarter.
- Flexibility - Starting or stopping a SIP is easy and can be done as per your convenience.
- Wide Choice - You get a wide selection of mutual fund schemes and asset management companies to choose from.
- Convenient - No need to visit an AMC office or deposit cheques every month. Sign an auto-debit/ECS form and the SIP amount is deducted from your bank account on the chosen date.
- Low Investment Amount - You can start a SIP in India with as low as Rs. 1,000 per month.
- Diversification - Investing via SIPs in equity mutual funds spreads risk across companies, sectors, and markets. Further diversification can be achieved by investing on different dates in a month.
- Helps Achieve Your Goals - SIPs help you meet future financial goals such as retirement, higher education, marriage, etc. You can set a target amount and reach it over time by investing small sums regularly; the SIP amount can be decided based on your goal.
- Tax Savings - By choosing an SIP in an ELSS (Equity Linked Savings Scheme), you can save tax under Section 80C. This provides tax benefits and the advantage of rupee cost averaging. Note: ELSS investments have a lock-in period of 3 years for each investment.
- Helps in Compounding - Starting early and saving regularly for a longer period allows you to benefit from compounding returns.
- Rupee Cost Averaging - Discipline and commitment to invest a fixed sum at regular intervals ensures you buy more units when NAVs are low and fewer units when NAVs are high, reducing the effects of market volatility over time.
Tips: Review your SIPs periodically to ensure they still align with your risk profile and financial goals. Consider increasing SIP amounts over time as your income grows to accelerate goal achievement.