Systematic Investment Plan, Benefits of SIP, ELSS Funds

Systematic Investment Plan, Benefits of SIP, ELSS Funds

26 Jul 2018

What is a Systematic Investment Plan?

A Systematic Investment Plan or SIP is a smart and hassle-free mode for investing money in Mutual Funds. SIP allows you to invest a certain pre-determined amount at a regular interval (weekly, monthly, quarterly, etc). A SIP is a planned approach towards investments and helps you inculcate the habit of saving and building wealth for the future.

How does it work?

A SIP is a flexible and easy investment plan. Your money is auto-debited from your bank account and invested in a specific mutual fund scheme. You are allocated a certain number of units based on the ongoing market rate (called the NAV or Net Asset Value) for the day.

The benefits of SIP:-

Every time you invest money, additional units of the scheme are purchased at the market rate and added to your account. Hence, units are bought at different rates and investors benefit from Rupee-Cost Averaging and the power of compounding.

  • Rupee-Cost Averaging: With volatile markets, most investors remain skeptical about the best time to invest and try to ‘time' their entry into the market. Rupee-cost averaging allows you to opt out of the guessing game. Since you are a regular investor, your money fetches more units when the price is low and lesser when the price is high. During phases of volatility, it may allow you to achieve a lower average cost per unit.
  • Power of Compounding: Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it earns it... he who doesn't... pays it." The rule for compounding is simple - the sooner you start investing, the more time your money has to grow.

Let us illustrate our point with the help of an example:-

If you had started investing Rs. 10,000 a month on your 40th birthday, in 20 years time you would have put aside Rs. 24 lakhs. If that investment grew by an average of 7% a year, it would be worth Rs. 52.4 lakhs when you reach the age of 60.

However, if you had started investing 10 years earlier, your Rs. 10,000 each month would add up to Rs. 36 lakh over 30 years. Assuming the same average annual growth of 7%, you would have Rs. 1.22 crores on your 60th birthday – more than double the amount you would have received if you had started ten years later!

Systematic Investment Plans also provide a whole host of benefits such as:-

  • Disciplined Savings – Discipline is the key to successful investments. When you invest through SIP, you commit yourself to save regularly. Every investment is a step towards attaining your financial objectives.
  • Flexibility – While it is advisable to continue SIP investments with a long-term perspective, there is no compulsion. Investors can discontinue the plan at any time. One can also increase / decrease the amount being invested.
  • Long-Term Gains – Due to rupee-cost averaging and the power of compounding, SIPs have the potential to deliver attractive returns over a long investment horizon.
  • Convenience – SIP is a hassle-free mode of investment. You can issue a standing instruction to your bank to facilitate auto-debits from your bank account.

SIP’s have proven to be an ideal mode of investment for retail investors who do not have the resources to pursue active investments.

Significant Pointers about SIP

Investors must look at consistent performers in the category rather than short-term performance. Retail investors must take the benefit of the power of compounding by considering the SIP mode for wealth creation. Mapping of investment strategy to specific life goals can help investors to have clarity about the investment objective. Investors should focus on the following significant pointers regarding a SIP:-

  • If your salary increases, then increase your SIP amount. Ideally, opt for top-up SIP instead of a general SIP.
  • You can increase SIP amount by a specific percentage after certain duration of time.
  • Have a half-yearly or yearly review of funds.
  • Do not get upset by market fluctuations and don’t look at NAV’s daily.
  • Keep investing during market downturns also.
  • If you want to save tax under section 80C, then invest in ELSS funds.
  • Read a lot of investment-related books.
  • Virtues of a great and successful investor are exemplary discipline and patience.
  • Look out for consistent performers. Use a Systematic Transfer Plan (STP) if you have a lump sum amount to invest. Don’t be emotionally attached to any mutual fund. Switch to another fund if there is a hint of any particular fund consistently lagging behind in comparison to either the benchmark and / or peers.
  • Your nominee and contact details must be updated in all your active SIP’s.
  • Taxation on equity mutual funds depends on the period of holding from the date of purchase.
  • You should not have more than 5 to 7 funds in your portfolio.
  • Evaluate your fund performance over the coming year and decide accordingly.
  • Keep your investment strategy simple.
  • Always take help of financial planners to plan your investments.

So, Invest through SIP and enjoy the benefit of long-term compounding.

Founded in 2005 by new–age entrepreneur Abhishek Bansal, the Abans Group has evolved into a globally diversified conglomerate, providing expertise in Broking Services, Non-Banking Financial Dealings, Financial Services, Agri-Commodity Services, Warehousing, Realty & Infrastructure, Gold Dore Refinery & Manufacturing, Trading in Metal Products, Pharmaceuticals, Software Development & Wealth Management. The Group is a comprehensive financial and non-financial services and solutions provider, aiming to provide end-to-end solutions to its clients.