Posted on January 01, 2016
1. Disciplined Savings and Investment Habit: Many investors fail to build a substantial investment corpus because they are not able to invest in a disciplined way. Savings not invested regularly often gets spent on discretionary lifestyle related expenses. Systematic Investment Plans in mutual funds help investors to maintain a disciplined approach to savings and investment. SIPs also help investors take emotions out of the investment process. Very often investors get very enthusiastic in bull market conditions, but get nervous in bear markets. It is an established fact that investments made in bear markets help investors get high returns in the long term. By investing through SIPs in a mechanical way, investors can stay disciplined, which is critical to achieving their financial objectives.
2. Can be started with small investment: Mutual Fund SIP can be started with very small amount of money, as low as
र 500/- per month. Investors do not need to wait to accumulate a lump sum amount to invest in mutual funds. SIPs are suitable for all types of investors.
3. Power of compounding: By investing even a small amount on a monthly basis through SIP investors can build a substantial corpus in the long term through the power the power of compounding. For example, if an investor invests just
र 2000/- per month through SIP in an equity fund and continue the SIP for 25 years, assuming an average annualized return of 15%, he or she can build a corpus of more than र 65 lacs. This demonstrates the "power of compounding"
4. Rupee Cost Averaging: One of the biggest advantages of SIPs is in rupee cost averaging. Equity as an asset class is volatile. SIP takes advantage of the volatility through rupee cost averaging. By investing a fixed amount every month, the SIP investor buys less number of units if the market goes up and more units if the market goes down. By investing in SIPs investors do not need to time the market. Rupee cost averaging ensures that SIPs gives good returns in the long term.
5. Flexibility of investments: SIPs offer flexibility with regards to the frequency of investment, viz. daily, weekly, fortnightly, monthly etc. There are also no restrictions and penalties on regular SIP payments and withdrawals, A big advantage of SIPs is that as your income and savings increase, you can use the facility of SIP top up, to invest more on a regular basis.
6. Tax Benefits: SIPs in equity funds enjoy long term capital gains tax benefits. For the purpose of long term capital gains tax calculation, first in first out principle is employed.