#JanoTohMano – Why SIP Is A Smart Investment Option

Read on to know why SIP is a smart investment option and how it can help you in maintaining a healthy financial portfolio for long term benefits.

The common disclaimer that you see for all the mutual funds starts something like this – mutual fund investments are subject to market risk and…. – it doesn’t matter what is said after this, as this is good enough reason to scare away most of us from investing in mutual funds, isn’t it?

While we may feel that dealing with markets is risky, we should be open to understanding and evaluating different options that are available for investment in the current market. As this video below shows, much of how we invest is actually based on myth and superstition, rather than well thought out money management. We believe that some investments will give us a big bonanza rather than investing systematically.

Though most of us rely on the traditional method of investing in fixed deposits, the question that should pop out at us is – why should you park the money in a low returns zone when you have the option of getting better returns with reduced risk? Obviously, the last two words – reduced risk would be music to our ears!

If you think you have taken care of the following, investing in mutual funds using an SIP would indeed be a lower risk one:
• You are ready to invest for a longer period
• You are aware in which cap your mutual fund falls (large/medium/small cap)
• You can put in steady amounts at regular intervals, which are predetermined

To have a diversified financial portfolio, one must explore the options along with other conventional methods like deposits, PPF etc. Before we get into the details of investing through an SIP, let us understand the term briefly.

What is an SIP?

SIP is not a product or an investment in itself, it is only a process of doing an investment, and it need not be just for mutual funds and can even be for a Recurring Deposit where in you transfer certain amount at regular periods.

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SIP means Systematic Investment Plan, one which allows you to transfer a particular amount (for e.g, Rs. 5000) at regular intervals (for e.g., 5th of every month) for a fixed or flexible period. This would be taken care of by ECS, wherein your funds would be transferred automatically from your bank account as per set guidelines like date, amount etc, instead of the hassle of remembering and issuing the cheques every month.

Why should one invest in equity through SIP?

To enjoy the benefits of a mutual fund, one needs to invest it for longer period, which usually exceeds beyond the lock in period (if any). This is because you will be rewarded more when you reinvest the interest instead of withdrawing it.

Let us see the perks of doing it through an SIP in detail.

1. Ease of maintenance
It is easy to maintain your mutual funds if you do it through an SIP as it can be done via ECS and you can keep an auto debit on your bank account every month. One can start investing as low as Rs. 500 per month to start with and is good for beginners who want to learn the market going forward.

2. No need of lump sum amounts
The good thing with SIPs is that you need not have a bigger chunk to start investing in the mutual funds. As you can pay in smaller amounts, it would not alter your current financial conditions and would still give good returns in the long term.

3. Power of compounding
We all know that the amount obtained from a compound interest is bigger than a simple interest and this is another reason for you to use an SIP. That is, you will earn profits on your returns as it gets reinvested inherently and the final amount at the time of maturity will be much higher. This is the reason why it is recommended to start out at an early age in doing an SIP, longer time in investment – greater the profits.

4. Rupee cost averaging
This is good news for those who cannot keep a watch on the market, as the market volatility is well taken care in an SIP. As the amount that you transfer is constant every month, it buys more units when the market price is low and less number of units when the market price is high, averaging out the risk factor involved.

5. Beat inflation
This is another excellent reason why you should go for equity SIPs. For a layperson, in spite of the deposits or salary hike etc, these will only help her (or him) to an extent in managing expenses. If we take a longer period say 10 years, the interest that you get from deposits or other known sources would not be able to match up to the expenditure incurred because of inflation, and hence investing in equity is a desirable from this aspect.

An SIP done on a long-term basis would take care of your financial needs like children’s education or your needs post retirement.

As the video above shows, a single investment plan is not so suitable for your different short term and long-term goals. Money needs to be channelized through different investment options like equity linked mutual funds to have a varied financial portfolio.

After all, we need to have financial freedom, where money takes care of money in the long run! For more details, log on to http://www.janotohmano.com/

Post supported by Birla Sun Life Mutual Fund

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Image source: Birla Sun Life Mutual Fund.

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