SIP is a common way of investing in mutual funds. It stands for a systematic investment plan, which translates into making regular payments of a fixed amount spread over the investment tenure. Each month a fixed amount will get deducted from your savings account towards the mutual fund you have selected. SIP gives you the flexibility to choose payment frequency, which can be weekly, monthly, or quarterly.

SIP allows you to enter the market with small regular payments and takes the burden off from making significant lump sum investments. It is most suitable for individuals who can make small but regular payments out of their disposable income.

There are multiple benefits of investing through SIP.

  • It helps you become disciplined and systematic with regular payment
  • Power of compounding
  • Rupee cost averaging
  • Flexibility
  • Hedge against inflation
  • Simplicity of choice
  • Higher returns and lower cost

Systematic and disciplined investment

SIP lets you plan your investment in sync with your current expenses. It gives investors a chance to invest small amounts of money over a period than making a significant lump sum investment all at once. With facilities like auto-debit, you can set up a plan for a fixed amount to get deducted from your account regularly.

Power of compounding

SIP functions on the power of compounding, which lets investors reinvest their earnings to receive more returns on their investment.

In other words, a nominal amount invested for an extended period grows multiple times its actual value than a significant one-time investment. The power of compounding makes SIP an attractive option for small investors. However, you might not ultimately realise the power of compounding in a short period. It works better when you remain invested over an extended period.

Rupee cost averaging

Rupee cost averaging lets investors accumulate units over time according to market conditions. You get more units when NAV value is low and less when there is an uptrend. Because of SIP, you buy more units for every market correction.

Flexibility

SIP offers tremendous advantages in terms of flexibility. If you don’t want to make a long term commitment as needed for PPF or tax-saving FDs, SIP is a better route. Most of the mutual funds are open-ended, meaning you can exit at any time. SIPs don’t have a fixed tenure, and you can pay according to your convenience and cash flow. There is no penalty for early withdrawal.

Additionally, you can increase or decrease the investment amount with the change in your investment goals and horizon.

Simplicity of choice

SIPs are simple to understand. You can commence investing with a small amount, as low as Rs 500 and see it grow with time. SIPs are convenient and easy to track. It techeas a sense of financial discipline, which helps you save more.

Higher returns

Compared to traditional savings schemes, SIP helps your investment grow faster, aided by the power of compounding. It enables you to beat the rising cost in the economy because of inflation.

Acts as an emergency fund

Unlike traditional savings plans and PPF, SIP mutual funds are open-ended, and you can withdraw anytime without incurring a penalty. Hence, SIP acts as a fund in emergencies.

Tax Savings

ELSS mutual funds or equity-linked savings schemes let you save income tax of up to Rs 1,50000 under section 80C of the Income Tax Act. On other mutual fund schemes, capital gain tax is levied per the investor’s income tax slab.

Best Performing SIPs

Fund Name 1 yr 3 yr 5 yr
PGIM India Midcap Opps Fund – Growth 109.3% 20.3 % 18.5%
Axis Midcap – Growth 63.6% 18.2% 19.0%
UTI Flexi Cap Reg – Growth 76.5% 17.4% 16.8%
Kotak Emerging Equity Reg – Growth 89.6% 15.3% 17.5%
Tata Midcap growth Reg – Growth 74.8% 14.8% 16.0%