Several investors keep their money in bank savings account with the aim to keep their money safe. However, what these investors do not understand is that though these investment options might help investors with safeguarding their money, these investment options barely offer any rate of interest, which means that your money will not grow. In fact, these investment options do not even offer inflation-beating returns meaning that your money is likely to fall in value over time. So, what is the solution to this? You can invest in investment options that can help you with wealth creation, such as mutual fund investments. You can invest in mutual funds either through lumpsum mode of investment or SIP mode of investment. In this article, we will understand why SIP, short for systematic investment plans have become popular among retail investors.
What is SIP?
SIP is an investment tool that allows investors to invest in mutual funds in a systematic and regular manner. Under SIP investment, an investor allots predetermined sum of money towards their desired mutual fund schemes at regular intervals for a predetermined period of time. As SIP investments allow investors to predetermine their investment amount, investment duration, periodicity of their investments, etc. they are quite flexible in nature. An investor can invest as low as Rs 100 per month in SIP mutual funds.
Benefits of SIP investments
Following are some of the benefits of investing in mutual funds through SIP mode of investment:
- Flexibility – SIP investments are quite flexible in nature. An investor can pause or stop their SIP investments at any timewithout paying any penalties for missing out on their SIP instalments. They can also increase or decrease their SIP investment amount, investment duration. After stopping their SIP investments, an investor has the option to either redeem their investment amount or let it stay invested in the mutual fund scheme.
- Rupee cost averaging –SIP investments ensure that an investor stays invested during different market cycles (bearish market phase and bullish market phase). This results in an investor buying higher number of mutual fund units when the markets are low than when the markets are at its peak and vice versa. This averages out the cost of the mutual fund units bought by the investor. This concept is termed as rupee cost averaging.
- Power of compounding – One of the biggest parameters that ensure significant returns on an investment is the investment horizon of the investment. When an investor is invested for a prolonged duration, they can enjoy higher benefits of the power of compounding. Compounding is an investment concept where in the returns of an investment are reinvested to earn more earns. Basically, your money works to make more money for you. Hence, the higher the investment duration of an investment, the higher are the benefits from the power of compounding.
- Regular investing – As SIP investments are automatic in nature, they instill a habit of financial discipline among investors which is important to stay invested in the markets.
Now that you have understood the benefits of SIP investments, what are you waiting for? Begin investing in mutual funds through SIP mode of investment today. SIP the sooner, the better! Happy investing!