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A Beginner’s Guide to SIPs
One of the smartest ways of investing that gained popularity in recent years is the SIP. In fact, equity mutual funds SIPs generated 10.26% annual return for the five-year period from March 2014 to March 2019, beating FDs and gold, according to an article on The Economic Times. But many people are still not aware of this form of investing. If you too would like to learn more about Systematic Investment Plans, here’s what you should know.
What is SIP?
Some people think that SIP is a product. But that’s not the case. It is a mode of investing in mutual funds. Systematic investment plans allow you to make fixed contributions at regular intervals to the mutual fund of your liking. Instead of the traditional lump sum investment, SIPs allow you to grow your wealth at your own pace and budget.
What are the Various Types of SIPs?
Broadly, there are 4 different types of Systematic Investment Plans:
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Top-up
In this scheme, you can increase the amount you invest in a plan at regular intervals. This can be useful for salaried individuals, who might be expecting a raise in the near future. You can use an SIP calculator to estimate how much you wish to invest or increase.
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Flexible
Also known as Flexi-SIP, this scheme allows you to increase or decrease the plan amount according to the market conditions as well as your financial situation. When it comes to market conditions, there is an automatic formula that allows investors to go for a higher amount when the markets are falling and invest less when the markets are high.
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Perpetual
In this, the investor can choose to not select the end date, making the plan perpetual. The investor can close the plan when they have achieved their financial goal.
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Trigger
If you have good understanding of the financial market, then trigger SIP can be a great option for you. You get much greater control with this scheme.
What are the Advantages of Investing in SIP?
Some of the main benefits of systematic investment plans are:
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Convenience
SIP is one of the most convenient ways to invest, especially for salaried individuals. You can start with as low as ₹100. You don’t need a bit amount to start on the journey of building wealth. Investing in this method is really simple as well. You can invest in an SIP online.
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Advantage of Compounding
With systematic investment plans, you can leverage the power of compounding. The interest you earn keeps getting added to the capital. This way you are able to grow your wealth in an exponential manner. The greater the tenure, the greater will be the growth rate. This makes them great for meeting long-term financial goals. With the help of an SIP calculator, you can easily know how much you need to invest, for how long and your expected returns.
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Tax Benefits
There are certain tax saving benefits associated with investing in mutual funds via the SIP route. For instance, when you invest in ELSS via this route, you can claim tax deductions of up to ₹1.5 lakhs on your taxable income under Section 80C of the IT Act.
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Rupee Cost Averaging
The risk exposure in mutual funds can be reduced with the help of SIPs. This is because when the market is down, you get a larger number of units, while fewer units are purchased when the market rises. This reduces the cost per unit.
So, go ahead and start your journey to achieving your financial goals. The earlier you start, the more time you give your money to grow.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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