14th Aug 2024 Pune, Maharashtra, India Convenient and affordable investing, risk mitigation and the potential for long-term wealth creation are just some of the reasons why Systematic Investment Plans or SIPs have gained traction among investors in recent years.
As of February 2024, the number of SIP accounts in India rose to 8.2 crore, according to the Association of Mutual Funds in India. The quantum of SIP investments nearly doubled between Financial Year 2018-19 and FY 23-24, rising from Rs 92,693 crore to Rs 1,79,948 crore.
SIPs are an increasingly popular investment vehicle for mutual funds, making financial market investments accessible even to laypersons. As FY 2024-25 approaches, here are some reasons why investors could consider adding SIP investments to their annual as well as long-term financial plan.
1. To make investing simple: Lack of financial expertise, along with the risk of volatility, are among the biggest deterrents to financial market investments. Mutual funds, however, aim to open the market to novice investors by giving them access to a diversified and professionally managed portfolio at an affordable amount. SIPs further add to this ease of investment. Investors can set aside a set amount at pre-determined intervals – often monthly – into a scheme of their choice. The minimum instalment amount ranges from Rs 100 to Rs 500 in many schemes. After a one-time application process, the amount is debited from the investor’s bank account on schedule. You can invest for a fixed duration or stay invested until your financial goal has been reached or you need that money. You can also pause your investments or change your SIP amount.
2. To encourage discipline: By facilitating investments on autopilot, SIPs assist in cultivating a habit of setting aside money every month. Over time, even small but regular investments have the potential to generate inflation-beating returns and build wealth. When planning your investments, you can use the SIP calculator on the website of Bajaj Finserv Asset Management Company to estimate the potential size of your corpus based on your instalment size, expected returns and investment horizon.
3. To benefit from diversification: An important investment strategy to mitigate risks and manage market volatility is portfolio diversification. A diversified portfolio invests in multiple assets and asset classes to tap into different market movements and reduce the impact of each individual asset on the basket. It can be challenging and expensive for an investor to independently create a diversified portfolio. However, with an SIP in a mutual fund, investors can achieve such diversification even with a modest instalment thanks to a professionally planned portfolio purchased with a pooled investment. Moreover, there are several types of mutual fund schemes in the market, investing in debt instruments, equity as well as some other asset classes. An investor can choose a suitable scheme based on their investment horizon and risk appetite, preferably after consulting a financial advisor.
4. To manage volatility: One of the key risk mitigation strategies of SIP investments is rupee cost averaging. A fixed amount of money is regularly invested, regardless of market conditions. As a result, investors buy more mutual fund units when the Net Asset Value or NAV is low and fewer units when it is high. Over time, this reduces the average per-unit cost of your investment, thereby increasing potential gains. Moreover, it helps leverage volatility by purchasing more units when prices are low and fewer when the market is on a high, without investors needing to independently time the market. Additionally, an SIP encourages you to ignore brief periods of volatility if you have a long investment horizon, over which markets tend to stabilise. However, no mutual fund investment is risk-free and returns or capital safety are not guaranteed.
5. To tap into compounding: The returns on mutual fund investments are earned on a compounding basis, which means that the returns are reinvested and further returns are generated on it. Over time, this has the potential for exponential growth. This is what gives even small SIP instalments the potential to build wealth over a long investment horizon.
6. For tax benefits: SIPs in equity linked savings schemes or ELSS offer tax benefits. An ELSS is a mutual fund that invests primarily in equity or stocks. They have a lock-in period of three years and you can claim tax exemption for up to Rs. 1.5 lakh of the investment amount under Section 80C of the Income Tax Act. This is only applicable to those who have opted for the old tax regime.
Conclusion:
SIP investments may be a suitable addition to your financial plan and strategy in the upcoming financial year. Through small but consistent investments, they have the potential to build wealth over time and mitigate some of the risks associated with market volatility. You must note, however, that all mutual fund investments are subject to market risk and no investment strategy is fool-proof.