Over the years, SIP investment has become quite popular in India. So much so that in February 2023, its contributions reached Rs. 1,41,696 crore. So, what is it about SIP that has made it so popular? One of the reasons for that is that you can make investments in small amounts. Another reason is that SIP investment plans can be set up easily through distributors or the fund house’s website. It can prove to be a suitable option when you do not have a lot of money to invest upfront. This way, you invest a little every month, and you can grow your investment amount gradually. Here, we will discuss whether SIPs can help you make money when looked at from a long-term perspective.
SIP investments
What does SIP investment mean
A Systematic Investment Plan (SIP) is a strategy that allows investors to invest their money in small amounts on a regular basis and gain long-term benefits from it. A predefined amount is withdrawn from the investor’s account on a monthly or weekly basis and goes into mutual funds.
Advantages of Systematic Investment Plan
Here are some advantages of SIP that can help you gain an idea of how SIP investment helps make money in the long run:
Disciplined investing: With SIP, money is withdrawn regularly from your bank account for investment. This investment will eventually bring discipline to the way you handle money by committing you to invest small amounts of money regularly. Thus, you can ultimately grow your corpus over time. You can consider starting an SIP investment with Bajaj Finserv Flexi Cap Fund for long term growth.
Flexibility: SIP for wealth creation allows you to be flexible. It helps avoid long-term obligations of large amounts like investing in Public Provident Funds (PPFs) or Unit Linked Insurance Plans (ULIPs). This allows you to invest a portion of your maximum budget elsewhere and earn money from it too. These are open-ended funds that may be withdrawn whenever you choose, as opposed to fixed term funds. However, it is to be kept in mind that withdrawing from some SIPs before a specified period comes with some minor costs in the form of exit load.
Compounding: When you opt for an SIP investment, the returns earned are reinvested in your principal investment until maturity. As a result, your investment is exposed to the influence of compounding throughout time, assisting you with exponential development.
Stop whenever: Most SIPs do not charge a fine or penalty if you wish to stop the investment at any point. You just need to go to your Demat account or your mutual fund account or to the distributor and opt out of the plan. This is an advantage of SIP over traditional investments like Fixed Deposits/Recurring Deposits. This ultimately helps you commit to a habit of investing, even with small amounts. The act of investing opens prospects to making more money.
How SIP helps earn money
The process of SIP follows two principles, rupee cost averaging and compounding. The following is an explanation of how these two principles work in tandem to increase profitability in the long run:
Rupee cost averaging: SIPs follow the principle of rupee cost averaging, thus decreasing market volatility and increasing overall returns.
To make this concept simpler, suppose you initially buy a mutual fund at a higher value, then you will get fewer units for a certain price. However, the value reduces at some points, and thus you get more units for the same price in the subsequent cycles. This ultimately averages out the overall value of your mutual fund, which is what rupee cost averaging is all about.
Compounding: Because of compounding, even saving money in smaller amounts for extended periods of time can have a significant impact in the long run. The money you invest grows over time as it earns returns. Further, the interest earned gets reinvested. Thus, your returns also generate subsequent returns. The final amount that is received on maturity is determined by the return rate applied to your contributions.
With these two principles functioning together, SIPs help you get the same units of mutual funds in each cycle on average while ensuring that your investment gains as much interest as possible. Ultimately, this helps you beat inflation over the long run and even make some extra money.
To conclude, we explored what SIP means and how SIP investments can help make money in the long run. We have discussed the benefits and shown how SIPs can help investors overcome market volatility and make use of the power of compounding. However, this is possible as long as investors are disciplined, patient, and goal-oriented. It is recommended that investors periodically review their SIP performance and make the necessary tweaks to their investment strategy as needed. You can easily start your SIP journey with the help of Bajaj Finserv AMC, today. Choose your preferred scheme by visiting the investor portal and start your SIP in a hassle-free way.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
