SIP or Systematic Withdrawal Plans have become extremely popular in recent times. SIP is a method you can use to invest in mutual funds. Compared to putting money in one go, you are better off using an SIP if you are a new investor. What SIP lets you do is put a fixed amount of money in a mutual fund of your choice, every month. This amount gets automatically debited from your account on a date of your choosing. Thus, you do not have to worry about making the payment every time.
Here are top reasons why you should start an SIP:
You can stop an SIP anytime you want. After stopping your SIP, you have two options – you can let your money remain in the mutual fund or you can withdraw a part or all of it. In comparison, if you start a Recurring Deposit (RD), you will have to specify a duration for which you will continue making payments. You can opt out but there will be a penalty.
Also, depending on which fund you choose you could earn a little to a lot more than the rate offered by an RD.
You can skip paying for your SIP if you do not have enough money at the time. No penalty or fine will be levied against you. In case of an RD, you most likely will have to pay a fine.
You do not need a lot of money to start taking advantage of mutual funds. Most mutual funds let you start with as low as ₹500 a month. Many high growth schemes require you to start with large capital. Fortunately, such is not the case with SIP.
No Need to Time the Market:
As you might already be aware, the markets have ups and downs. Whenever you put a lot of money in an equity mutual fund, there is a risk that you might invest when the market is high. Which means, in the short term, you might end up losing some money.
This risk is eliminated when you pay using SIP:
In SIP, each payment is of a fixed amount. When the markets are high, you get fewer units of a mutual fund. When the markets are low, you get a higher number of units. This way, over a long period of time, you average the ups and downs of the market. Thus, you do not pay a high price for mutual fund units. This is called Rupee cost averaging.
This takes off the burden of worrying about market conditions making it simpler and easier.
Benefit of Compounding:
Mutual funds keep investing your money till you choose to redeem it. This means that the longer you leave your money in the fund, the more growth your money will experience. So instead of collecting money and then doing something with it, by starting an SIP, you are allowing your money to grow. Your first SIP installment would have grown much by some amount by the time your next installment happens. By the third installment, your first and second installments would have combined and grown. This allows an exponential growth to your invested money.
Often people become greedy when the markets are high – they keep on buying. And when the markets crash, they become too cautious and stay away. This is how emotions affect how your money grows.
When you invest via an SIP, you put away a fixed amount every payment cycle without paying much attention to the market conditions. In the long term, your regularity in paying causes you to gain incredibly.
You might have observed, most people complain of not having enough money. This is because people start spending more money when they earn more money. Without realizing, you end up with no savings even though you have started to earn more.
One good way to ensure you invest is by doing so before you spend. Imagine it to be compulsory, like tax. You can set up an SIP to deduct an amount from your account a day or two after you receive your monthly income. That way, you are left with money that you can spend on other expenses.
Starting an SIP was not the easiest of tasks earlier. But now, with the emergence of online distributors like Groww, you can research, start, stop, and redeem an SIP from anywhere in minutes! All you need to do is upload a picture of your Aadhaar card, PAN card, and Bank Statement/Cancelled Cheque. If you are already KYC verified, the process will be even faster!
Disclaimer: Mutual funds are subject to market risks. Please read the offer document carefully before investing.