Benefits of Investing in SIP

Published On: 19-Dec-2021

Systematic Investment Plan (SIP) is a facility offered by the mutual funds to investors. Here one can opt to invest in a mutual fund scheme on regular basis by registering a standing instruction, wherein mandated amount by the investor is deducted automatically from the bank account and invested in the mutual fund scheme as specified in the registration process.

SIP has been emerging as a preferred investment route for retail investors due to the several benefits. It is also reflected in the monthly SIP inflows into the mutual fund industry as per the data issued by the Association of Mutual Funds in India (AMFI).

Monthly SIP inflows during August 2021 were all-time high at Rs. 9,923 crores. Around 25 lakh SIPs got registered during the month, with outstanding live SIP accounts currently at 4.23 crores. Further, SIP Assets Under Management (AUM) is Rs. 5.27 crores as of August 31, 2021, which is around 14% of the overall mutual fund AUM.

Here are the five benefits of investing in SIP:

Inculcates Financial Discipline

SIP enables automation of mutual fund investments, whereby the investments are made at periodic intervals, like daily, weekly, monthly, quarterly etc. As such, it allows the investors to inculcate a sense of financial discipline into their lives, as the savings get converted into investments at pre-specified intervals without any manual intervention.

The convenience of Investing

SIP investment is convenient for the investors as they need to undertake a registration process only once. After that, the SIP amount is automatically deducted from the bank account and invested in mutual funds. The investors can also pre-set the number of SIP investments, like 12, 24, 36, 60, perpetual, etc. One can also register a SIP top-up, wherein the SIP amount increases gradually, which may sync with the increasing income over time.

Rupee Cost Averaging

SIP helps the investors mitigate the risk of timing the market, as the investments are made at different market levels over longer period time would help in averaging the investments by adding invests irrespective of markets being expensive or cheap. As such, the investment cost gets averaged over time. This concept is called Rupee Cost Averaging, which means that the costs are averaged over time with equal investment amounts.

For example, if an investor has invested Rs. 10,000 at NAV of Rs. 10 in a month, they are allotted 1000 units. In the next month, the NAV increases to Rs. 12.5, they are allotted 800 units. So, while the number of units allotted in the next month at higher valuations is less, the overall portfolio valuation increases for the investor, as the portfolio is now valued at Rs. 22,500 for 1800 units as against the investment cost of Rs. 20,000 with an average price of Rs. 11.11 per unit.

Assuming the NAV next month lowers to Rs. 12 per unit, the number of units allotted to the investor for investment amount of Rs. 10,000 are 833.33 units. The number of units allocated increases at lower valuations, which can benefit the investors later when the valuations rebound.

Eliminates Emotional Bias

When the markets are volatile and particularly when the investment value drops due to fall in market valuation, investors tend to get worried by seeing the notional drop in the valuations and in return may discontinue the investments. This is because the emotions of fear may take the front seat, as the investors prioritize the safety of capital over returns.

However, discontinuing the investments during such a period can harm in achieving the financial goals significantly since, at lower valuations, higher units get allotted for the investors, also lowering the overall average cost of investing. Further, it also takes away the potential benefits of such investments when the markets rebound.

Enables Wealth Accumulation

An investor can register a SIP with an amount as low as Rs. 500 without any upper ceiling. One can enjoy flexibility while registering a SIP in terms of SIP amount and mutual fund scheme. SIP enables wealth accumulation for the investors without any inhibitions of starting with a lower amount.

Further, since SIP ensures consistent investing, a small amount of savings every month can indeed work wonders. Just like tiny drops of water make an ocean, small savings can help accumulate a healthy corpus over time. For example, Rs. 10,000 invested per month in a mutual fund scheme for 30 years can turn into an investment value of Rs. 2.08 crores, assuming 10% annualized returns.

The consistent SIP inflows bear testimony to the convenience in investing, and wealth accumulation enabled through SIPs. Therefore, there is a significant merit for retail investors to adopt SIP as an investing approach in their investment journey and financial plan.