Top 6 Factors that Make SIP In Mutual Funds a Good Investing Habit
- DetailsWritten by PolicyBazaar -
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Updated date : 10 December 2019
For a long time now it is clear that investing in mutual funds through SIP is more about developing a habit of investing instead of the arithmetic involved around investment. What encourages most investors is the numbers-driven and traditional rationale for SIPs. And what makes them keep investing is the habit-inducing nature of Systematic Investment Plans.
If precisely taken into consideration why SIP is the most preferred form of investing in mutual funds, the idea is pretty clear. It is the psychological factor that drives people to get into an investment practice and gain profitable returns irrespective of the market fluctuations. Doing justice to the name as ‘Systematic Investment Plan’.
Why SIPs offer Good Returns?
SIP is a method of investing a fixed sum regularly in mutual funds regardless of the market conditions or NAV. Even when the market is low you automatically end up getting more units.
Here is an example: Suppose start investing with Rs. 8,000 every month. You will get 400 units at a NAV of Rs. 20 i.e. Rs. 8,000/20 = 400. In case the market falls and the NAV drops to Rs. 16, then also you will get allotted 500 units, i.e. Rs. 8,000/16 = 400. It is one of the key reasons that make SIPs the most suitable method for investing in mutual funds. You can see in the given example of how the units got increases even when the markets dipped.
And when you plan to sell your investment, then also the units will remain of the same value. However, your profit margin is higher for units that were bought at a lower price. Actually, on your entire investment, the average price that you have paid is comparatively lower that converts it into higher returns. In this way, SIPs automatically help the investors reach the goal of ‘invest low and get higher returns’.
Well, that was the calculation, what about the psychological aspect? It is because the main problem with investors lies in investing and not where to invest. In fact, it is about not investing at all and on the other continuously investing every month. Here is the investment that doesn’t stop even when the markets fall unlike other methods when people sporadically stop investing if the market witnesses even a minor fluctuation.
Below are some of the reasons that make SIPs a great investment method for naïve investors:
SIP Brings Financial discipline
Everyone would talk about wealth creation as the main reason for investing in mutual funds through SIP. But the most valuable feature of the SIP-approach is imparting financial discipline as a habit among investors.
Amid the busy-schedules, people often tend to forget investing. To ensure that there is no more forgetting; taking the SIP route makes sense to ensure systematic and timely investments in mutual funds. Once you opt for it, money gets invested in the preferred funds every month (automatically).
It helps in putting a hold on start and stop mode of investing, where investors continue investing when the market is optimistic. And stop investing the money as soon as there is a downfall.
Here’s how SIPs work:
The money gets debited from your bank account and is invested in the funds, without you missing out on investment. Most of the people choose their SIP auto-debit date in the first week of every month when they get salaries. You don’t realize and you create a large corpus by regularly investing a small amount over a period of time.
For example, you invest Rs 5,000 monthly and after 5 years, assuming an annualized return of 13% as per current trends, you will get a sum of Rs. 4.15 lakh. And if continued for 10 years this will be about Rs. 11.81 lakh. The key is to stay invested.
Automation of Savings
SIP is a great way to save every month in an automated manner. You can decide a fixed amount that you want to save and can invest to bring the financial discipline. You have the option to choose your monthly SIP date on the 2nd of every month to ensure that the amount is allocated to savings instead of spending it on your whims and fancies. Being steady is the key to wealth creation and has worked well for parents for long. Now that you have the technology to reach your financial goals, why not benefit from it.
Even Small Investments Reap Bigger and Better Returns
You can even start with a monthly investment of Rs. 500. It is not necessary that you spare a large amount every month. As your salary increases, you can increase the SIP investment amount.
The Benefit of the Compounding Effect
When you start investing regularly through the SIP mode, you actually invest through the market cycle. You get more units at the same price even when the markets fall. And when the markets rise, you get much higher returns because of the extra units that you gained during the market corrections.
Simply put, compounding is about earning interest on the reinvestment of the interest earned. This is the key factor in turning a small investment into a huge corpus over the years. In fact, it is recommended that you start with a small amount and then wait to grow and then further increase the amount to get profits.
Here is an example: Let’s say you start your monthly SIP with Rs. 1,000 in an equity scheme with a 10-year horizon. As per the past trends, if you get 14%returns in equity funds and factoring in the inflation, you would get nearly Rs. 2.62 lakh at the end of 10 years. You invested only Rs. 1.2 lakh and got more than double your actual investment.
With time your financial goals and investment needs might also change. And SIPs in mutual funds allow you to modify your tenure and amount as per your preferences.
To ensure that you are not missing even a single SIP investment you can get the auto-debit option activated. In this way, you don’t need to worry about transferring the money. Just ensure that you have sufficient balance in your bank account. Isn’t that amazing and easy?
In a Nutshell
As you can see how SIPs help in regularizing your investment regardless of the market ups and downs. It imbibes investing a habit for most of the investors. And regularly investing is the key to wealth creation. So, start your SIP now in mutual funds and enjoy the profitable returns.
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