The benefits of SIP in the long term

Dr. Deepti Dwivedi

Today, people are well aware of the advantages of investing in stocks. But this trend has become increasingly attractive in recent times, with more and more people exploring the option of a systematic investment plan (SIP) to invest their money. A SIP is a technique used by investors to buy mutual fund units or shares on a regular schedule periodically without worrying about the market. This helps in averaging out the cost of investment and reduces risk.

  • DISCIPLINED SAVING

SIP is a disciplined way of investing as it helps build long-term wealth by instilling the habit of regularly saving small amounts over an extended period. For example, suppose one invests Rs 3,000 every month in an equity fund that reports a 15% annualized return before taxes for 20 years. In that case, the value of his investment will increase from Rs 1.5 lakh to around Rs 4.2 lakh on average, and his wealth will grow by nearly two times.

  • FLEXIBILITY

SIP is a valuable tool for investors who want to generate regular returns on their investments while retaining the flexibility of choosing where and when to invest. For example, if one has surplus money at the end of a financial year, they can use it in a fund with high growth potential instead of investing it in another lower-yielding fund that will lock it in for the entire year.

  • SMALL INVESTMENT AMOUNT

SIP is beneficial for people who want to start investing in mutual funds but do not have a large amount of money. Since SIP has a fixed installment, they can add to their investment every month or every quarter until the adequate sum is reached. So, for example, if one invests Rs 3,000 per month over ten years, his investment will grow to Rs 3.12 lakh instead of Rs 30,000 that is made after one year.

  • MINIMUM RISK AND BEST RETURNS

SIP is the best option for investors who want to earn reasonable returns with minimum risk. Since it ensures a regular monthly installment, it ensures that the average price paid per unit or share over some time remains stable. This reduces the risk of buying a stock at higher prices and then watching their values fall, which often happens to units or shares purchased as a lump sum.

  • LONG TERM GAINS

SIP helps generate long-term wealth, as the return on investments becomes meaningful over a more extended period. For example, most mutual funds report strong returns over an average three- to five-year period, so if one has invested Rs 10,000 every month for three years (Rs 36,000), it will be worth around Rs 3.6 lakh at the end of five years.

  • CONVENIENCE

SIP is a convenient way of investing in mutual funds as it does not require the investor to monitor market movements, and the amount remains constant throughout the period. All that one needs to do is continue with regular investments even if they don’t have money every month. In addition, there are specific plans where additional contributions can be made by investors when they have money.

  • EFFECT OF COMPOUNDING

SIP is beneficial for investors who are aiming to accumulate a large corpus in the long term. Since compounding works over an extended period, it significantly increases the value of an investment. This is because interest income from equity investments is reinvested in the fund to generate more returns, which make up part of the compounded return over time. Learn more about the power of compounding by watching this video.

  • YOU CAN STOP SIP WHENEVER YOU PLEASE

SIP is beneficial for risk-averse investors as it allows them to stop investing any month without incurring a loss. For example, if one invests Rs 3,000 every month in an equity fund and the market drops by 20% after six months, one can opt out of future investments. In this case, one will have invested Rs 18,000 (i.e., Rs 3,000 x 6 months) in the fund and can take out their principal amount of Rs 12,000 and dividends accumulated over the period upon selling units or shares.

SIP is beneficial for investors who can set aside a part of their monthly income to invest in mutual funds. It helps build long-term wealth by instilling the habit of regularly saving small amounts over an extended period. Its flexibility allows one to take advantage of short-term fluctuations, and its convenience keeps investment costs low. This is in addition to the effect of compounding, which significantly increases return over the long term. SIP is beneficial for people who want to start investing in mutual funds but do not have a large amount of money. Since SIP has a fixed installment, they can keep adding to their investment every month or every quarter until the adequate sum is reached.