Mutual funds can be a great way to secure your financial future through professional management and strategic diversification of your holdings. Generally, you can invest in mutual funds by making an upfront lump sum investment or via regular contributions through a Systematic Investment Plan (SIP).
A lump sum investment involves investing a large amount of money into the fund. However, such an investment needs sufficient resources and knowledge of timing the market. And this is where an SIPcan help. With this, you can make smaller and more frequent investments, thus, insuring your portfolio against market’s uncertainties and giving you the potential to earn capital appreciation over the long term.
An SIP offers a flexible approach to investing for both small-time investors looking to create a more secure financial future, as well as more experienced investors wanting to diversify their portfolio. With that being said, here are 5 more compelling reasons why you should invest in mutual funds through SIPs.
1. Potential for higher returns with rupee cost averaging
SIP investments allow you to benefit from rupee cost averaging. This means that if you keep investing in mutual funds through regular instalments, your average purchase price per unit will be lower than if you had invested a lump sum amount. This helps reduce overall risk by making sure that you are not buying too many units at high prices or too few at low prices. As a result, this helps guarantee better returns over time as your investments grow with the market’s performance.
2. No need to time the market
Investing through SIPs eliminates the need to time the market because you are investing small amounts regularly instead of a lump sum investment. This helps reduce volatility associated with large initial investments since you don’t need to worry about timing their purchases perfectly to get maximum returns on your investments. Instead, you can just focus on setting aside some funds every month and let the investments grow slowly but steadily over time without having any additional worries about market movements affecting their returns.
3. Tax savings benefits
You can save on taxes by investing in equity linked savings scheme (ELSS) funds through the SIP mode. ELSS funds are eligible for tax deductions under section 80C of the Income Tax Act, 1961 and are one of the most tax-efficient investments available today. As an investor, you can claim up to Rs 1.5 lakh deduction on your investments every financial year and reduce your tax liability.
4. Power of compounding
You caninvest in SIP plans an amount as low as Rs 500 and reap the benefits of compounding over time. The power of compounding essentially means that when you invest, the returns generated from one investment are reinvested and earn their own return.
This process then creates a snowball effect on returns as profits from investments generate more income, which in turn generates yet more profit. Therefore, it is important to start with mutual fund investments as early as possible and stay for as long as possible.
5. You can stop your SIP anytime
You have the flexibility to stop your SIP investment plan at any time. This can be particularly helpful if you are going through a financial crunch or have an unexpected expense to deal with. Moreover, if the fund you have invested in doesn’t perform as expected, you can discontinue this SIP and explore other best mutual funds to invest in.
With disciplined investing, power of compounding, and rupee-cost averaging as its key feature, an SIP investment can be a powerful tool to save for retirement, your child’s education, or another important goal. Also, to make the most of SIP investments, be sure to use a mutual fund SIP calculator to determine your projected returns. This way, you can compare and understand the different plans available and select one that aligns with your investment objectives and financial obligations.