What is SIP: How It Works & Its Benefits

Shyam Kumar January 15, 2023 0 Comments

In this article we’ll be looking What is SIP and How it works along with its benefits.

What is SIP:

A Systematic Investment Plan (SIP) is a method of investing a fixed sum of money at regular intervals (generally on a monthly basis) into a mutual fund. It is a disciplined approach to investing, allowing investors to regularly save and invest small amounts of money over time, rather than making a lump sum investment. SIPs also benefit from the power of compounding, allowing investors to potentially grow their wealth over the long-term. It is commonly used in India and other countries for retail investors to invest in mutual funds. This approach to investing has become increasingly popular in recent years, and for good reason.

10 benefits of investing through SIP:

1. Rupee-cost averaging:

One of the biggest benefits of SIP is that it helps to reduce the impact of market volatility on your investments. By investing small amounts of money at regular intervals, you are effectively buying more units of the fund when the price is low and fewer units when the price is high. This is known as rupee-cost averaging and it can help to reduce your overall investment risk.

2. Discipline:

SIP helps to instill discipline in investors by encouraging them to save and invest regularly. When you invest through SIP, you are committing to invest a certain amount of money at regular intervals, regardless of the state of the market. This helps to ensure that you are consistently saving and investing, which is key to building wealth over the long-term.

3. Convenience:

SIP is a convenient way to invest in mutual funds. With SIP, you can set up automatic investments on a regular basis, such as monthly or quarterly, so you don’t have to worry about remembering to invest. This makes it easy to stick to your investment plan and ensures that you don’t miss out on any investment opportunities.

4. Flexibility:

SIP allows investors to start with small amounts and increase their investment amount as their financial situation improves. This makes it a great option for individuals who may not have a lot of disposable income initially, but want to start investing for the future.

5. Power of compounding:

SIP allows the power of compounding to work for you. Compounding is the process of earning interest on your interest, which can help to grow your investments over time. By investing regularly through SIP, you are able to benefit from compounding, which can help to significantly increase your returns over the long-term.

6. Rupee cost averaging effect:

Since SIP investments are done at regular intervals, it helps to average out the cost of investment. It means that when the market is high, you invest less and when the market is low, you invest more. This helps to average out the cost of investment and in the long run, the returns tend to be higher.

7. Tax benefits:

SIP investments in Equity Mutual Funds (ELSS) qualifies for tax benefits under Section 80C of the Income Tax Act, up to a maximum limit of INR 1.5 Lakh.

8. Liquidity:

SIP investments are highly liquid and can be easily redeemed as per the investor’s requirement.

9. Diversification:

SIP allows investors to diversify their portfolio by investing in a variety of mutual funds. This helps to reduce the overall risk of the portfolio and increase the chances of earning higher returns.

10. Professional management:

SIP investments are professionally managed by fund managers, which makes it a hassle-free investment option.

Also Read: How To Buy Shares [Complete Guide]

Conclusion:

In conclusion, SIP is a convenient and effective way to invest in mutual funds. By investing small amounts of money at regular intervals, SIP helps to reduce the impact of market volatility, instill discipline, and make it easy to stick to an investment plan. It also provides the benefit of compounding, tax benefits, liquidity, diversification, and professional management. It’s important to consult with a financial advisor to determine the right SIP option that align.