SIP stands for Systematic Investment Plan, which is comparable to a recurring deposit but is market-linked. This means that the returns on Recurring Deposits are fixed, whilst the returns on SIP mutual funds are variable. SIPs are another critical financial planning tool. Let’s have a look at how we can do it.
To invest in a SIP, one may select a convenient date and the frequency with which the money is deducted. The frequency of your SIPs may be set to daily, weekly, monthly, or quarterly. On your chosen SIP date, the payment will be auto removed from your bank account under the ECS mandate.
Now that you know what a SIP investment is, you can see how it can benefit you with your financial planning.
Benefits of SIP Returns to meet your long-term financial goal
Rupee cost averaging: SIP is a recommended investment strategy over lump sum investments due to rupee cost averaging. When the market is high, the investor buys fewer units of the fund, and when the market is low, the investor buys more units, averaging the cost of the units over time. This helps to absorb market volatility, allowing you to boost your earnings enormously over time.
Diversify your investments: Your risk appetite or tolerance is the level of risk you’re prepared to take while investing in a specific asset class. Each investor’s risk tolerance is different, and it is influenced by a range of factors such as discretionary income, investment horizon, and, most importantly, age and present or future demands.
As young investors, you may have a higher risk appetite than individuals in their middle or relatively close years. Your risk appetite may be affected by liabilities.
Know how much you want to invest: You may invest as low as Rs 500 in most mutual fund schemes that provide SIPs. Calculate the financial cost of your goal, the time required to achieve it, and the expected returns you may expect from your investments to establish the SIP amount necessary for your desired aims. Considering your cash flows, duration, and expected returns will help you choose the right SIP quantities to start with.
Effective Goal setting: You may have a variety of financial objectives, some of which are short-term and others that are long-term. Long-term investments should be made in equity-based assets, while short-term investments should be made in a hybrid or debt fund. The earlier you begin a SIP, the larger your corpus will be.
Compounding power: You will profit from compounding power if you invest in mutual funds using a systematic investment plan (SIP). Interest is levied on the whole amount owed (principal plus interest), not just the principal. The magic of compounding helps you boost your revenue tremendously over time.
High Flexibility: SIPs provide a lot of flexibility since you may start a new SIP to build your corpus if you start earning more extra income each month. Aside from that, SIPs provide flexibility by allowing you to change the amount, term, and even plan at any moment. If you wish to terminate your SIP, you must submit a request to the distributor or AMC. On the other hand, exit load costs may be imposed on short-term investments.
As a result, long-term SIPs should be on every investor’s radar. SIPs, when used in conjunction with wise fund selection, assist one’s money compound over time, assure a disciplined approach, and aid in the accumulation of long-term wealth. Calculate the amount you’ll need to fulfil your financial objectives with SIP calculator before setting up a SIP and then back-calculate the amount you’ll need to invest in your SIP accordingly.