Why Invest in ETFs Through SIPs?
5paisa Research Team
Last Updated: 25 Nov, 2024 04:17 PM IST
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Content
- 1. Ease of Entry with Smaller Investments
- 2. Benefit from Rupee Cost Averaging
- 3. Diversification on a Budget
- 4. Lower Expense Ratios and Better Cost Efficiency
- 5. Liquidity and Flexibility
- 6. Automated Investing and Discipline
- 7. Compounding Gains Over Time
- 8. Ideal for New Investors
- Conclusion
Investing in Exchange-Traded Funds (ETFs) through Systematic Investment Plans (SIPs) combines the best of two worlds: the diversification and cost efficiency of ETFs with the disciplined, gradual approach of SIPs. This strategy allows investors to face market volatility, benefit from rupee cost averaging, and build wealth over time without needing to time the market.
In this article, we’ll explore the advantages of ETF SIPs and help you understand why investing in ETFs Through SIPs is a viable option for both new and seasoned investors.
1. Ease of Entry with Smaller Investments
One of the biggest advantages of SIPs is that you don’t need a large amount of money upfront to start investing. Unlike lump-sum investments, where you may need a considerable amount to buy a ETF, SIPs allow you to invest in small amounts, even as low as ₹500. This makes ETFs accessible to individuals who may want to invest gradually or might be cautious about committing too much too soon.
For example: Imagine wanting to invest in an ETF that tracks the Nifty 50. Rather than spending a big amount to buy units in one go, you can set up a SIP to gradually build your portfolio over time.
2. Benefit from Rupee Cost Averaging
Market ups and downs can be nerve-wracking, especially when investing a large sum all at once. By investing in ETFs through SIPs, you don’t have to worry as much about timing the market. SIPs enable what’s called “rupee cost averaging,” which means that you buy more units when prices are low and fewer when prices are high. Over time, this can average out the cost per unit and potentially lower the overall cost of investment.
For example: Let’s say that the ETF you’re investing in has been a bit volatile. One month you buy units at a lower price, and the next month at a higher price. Over time, your average cost becomes more balanced, and you’re less affected by short-term fluctuations.
3. Diversification on a Budget
ETFs are known for their built-in diversification, as each ETF unit represents a “basket” of assets, whether that’s stocks in an index or bonds in a sector. By investing in ETFs via SIPs, you’re adding to your diversified portfolio bit by bit. You can have exposure to multiple sectors, regions, or commodities without having to pick individual stocks or assets yourself.
For example: An ETF tracking the Nifty 50 gives you exposure to India’s top 50 companies. By investing through SIPs, you’re essentially buying into a little slice of the top Indian companies each month, building a diversified portfolio over time.
4. Lower Expense Ratios and Better Cost Efficiency
Traditional mutual funds often have higher expense ratios because they’re actively managed. ETFs generally have lower costs since they are passively managed and simply track an index. By investing in ETFs via SIPs, you’re not only benefiting from the cost efficiency of ETFs but also spreading out your costs over time, which can make it more manageable.
Plus, since ETFs trade on exchanges, you won’t have to worry about extra charges like front-load fees often associated with mutual funds.
5. Liquidity and Flexibility
One of the major advantages of ETFs is that you can buy and sell them on exchanges during market hours, just like stocks. While SIPs in mutual funds usually have lock-in periods (or exit load fees if you pull out early), ETF SIPs don’t have such restrictions. You have the flexibility to sell your ETF units whenever you want, giving you quicker access to your money if needed.
6. Automated Investing and Discipline
SIPs bring a sense of discipline to investing, and this can be especially helpful when applied to ETFs. It’s easy to get caught up in market emotions, but a SIP does the investing for you automatically. Set it and forget it—each month (or quarter), your SIP will invest in your chosen ETF, helping you build your investment without the need to make constant decisions.
7. Compounding Gains Over Time
When you invest through an SIP, you get the advantage of compounding. By regularly adding to your investment, you earn returns on your returns over time. This effect can snowball, especially with ETFs that have historically provided steady returns. If you’re looking at long-term goals like retirement or wealth creation, this can make a significant difference.
8. Ideal for New Investors
If you’re new to investing or don’t want to get into the technical and fundamentals of stock-picking, ETF SIP is a good start. They provide exposure to multiple sectors, require a low initial amount, and the SIP format simplifies the entire process.
For example: Instead of managing a bunch of individual stocks, you can focus on a single ETF or a couple of ETFs that align with your financial goals. It’s a more simple, easy and, hassle-free approach to get started with.
Conclusion
Investing in ETFs through SIPs combines the best of both worlds: the affordability and accessibility of SIPs, and the diversification and lower costs of ETFs. If you’re looking to build wealth gradually, without the hassle of timing the market, this approach might just be the trick you’ve been searching for! So, whether you're new to investing or just exploring new strategies, consider adding ETF SIPs to your portfolio.
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Frequently Asked Questions
Not all brokers offer SIPs specifically for ETFs, but many do. It’s best to check with your brokerage platform to confirm if they support SIPs for the ETFs you’re interested in.
The ETF itself may have a small expense ratio, but unlike mutual fund SIPs, ETF SIPs usually don’t have entry or exit loads. You may, however, have to pay brokerage fees when buying or selling.
Investing in ETFs through SIPs is relatively safe, especially if you choose ETFs that track broad market indices. However, like any investment, there are risks involved, particularly with ETFs that track volatile sectors or assets.
There’s no right or wrong amount. It depends on your financial goals, budget, and risk tolerance. You can start with as little as ₹500 in some cases, but a larger amount can help you achieve your goals faster.
Yes, ETFs through SIPs are ideal for long-term goals, especially if they track stable indices. The compounding effect and rupee cost averaging can help maximize your returns over the long run.