10 Reasons Why You Should Start an SIP

10 Reasons Why You Should Start an SIP

by 5paisa Research Team Last Updated: Mar 16, 2023 - 05:14 pm 131.5k Views
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A systematic investment plan (SIP) is a regular method of investing in mutual funds. Normally, SIPs work best with equity funds and ELSS funds, although you can virtually do SIPs with every possible fund. From an investment perspective, the beauty of SIP is that it helps you to build wealth gradually, systematically and with a much higher degree of assurance.

Why to start with a SIP right away?

A systematic investment plan is your ticket to long term financial planning and wealth creation. Here are 10 reasons to start your SIP today.

  • SIP is simple, which is what makes it appealing even to someone who is new to investing. If you are familiar with recurring deposits with banks, then the SIP is exactly that concept. You allocate a small amount each month and it grows into a reasonably large corpus over the long term.
  • SIP is the best route to your long term financial plan. We all have dreams but to fructify these dreams you need a financial plan. The best way to achieve your financial plan is to use the SIP route. Work out current cost; inflate the cost to the future and work backward to determine how much you need to put in equity SIPs each month. That is all!
  • SIP is all about making time work in your favour. The longer you continue the SIP, the more it compounds wealth and the greater your return on investment. In fact, among all the factors, time period works most effectively in favour of starting your SIP right away.
  • More than an investment, SIP is a discipline. That means; you need to inculcate the habit of saving and investing early on. Quite often you see two people with the same level of income ending up with vastly different levels of wealth. The difference can arise if one uses the prudent method of saving through SIPs. SIP forces you to save and invest for the future.
  • Apart from the time factor, there is another strong argument in favour of starting your SIP early. It allows you to step up the SIP contribution over time. Normally, our income levels tend to increase over time but most of us don’t increase our savings and investments proportionately. Higher income is not only a license to spend more but also an obligation to save and invest more. This can be effectively achieved through SIPs.
  • The earlier you start the SIP you are better able to structure your spending around the SIP. Quite often, we tend to look at savings as a residual item. That will not work. You need to first make your plan and determine how much of monthly SIPs you need to do. Once that is done, look to adjust your expenses accordingly. That is the way to create wealth. If you wait till you earn enough, you will never reach that point. That is where SIP comes in handy.
  • SIPs reduce your cost of acquisition over time. In any investment, the cost of purchase matters a lot. But the challenge is that you don’t know the right time to buy. The best way is to opt for a SIP. A SIP will give you more value when the markets are up and more units when the markets are down. Over time, this rupee cost averaging (RCA) works in your favour to bring down your overall cost of acquisition.
  • SIPs are flexible. It often happens that you get into a set of funds and then realized that some of the funds are underperforming. When you start a SIP early, you have the time and the flexibility to make changes.
    • SIPs handle volatility best. Like it or not; markets have been volatile. If you look at the last 10 years, markets have been trending for 2 years and have been volatile for the rest of the period. If you had bought an equity fund at the peak of the market in 2007, you would have earned less than an FD in the last 12 years. A SIP would be a different story altogether.
  • SIPs are cost effective and also tax efficient. You have the choice of opting for a direct plan to reduce cost. Even after the 10% tax on LTCG, equity SIPs are still very tax efficient over the long run.

The moral of the story is not to ponder over the issue for too long. Just fill up your SIP form and the rest will follow!

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