Embracing the habit of SIPs can pave the way for a financially secure and prosperous future, points out Misbah Baxamusa.
Small atomic habits may seem insignificant on their own, but when compounded over time, they have the power to transform your life: James Clear.
Small atomic habits when acted upon consistently can make a huge difference. When it comes to shaping your financial future, you can use systematic investment plans to instill a positive, disciplined habit of investing.
With SIPs in mutual funds, you can save and invest regularly to build a solid financial future. In this article, we will explore the benefits of SIP to investors.
The mutual fund industry has seen an impressive spur of growth in the last decade with AUM growing from Rs 8.26 trillion on April 30, 2013, to Rs 41.62 trillion on April 30, 2023 (AMFI, 2023).
SIPs have also seen phenomenal growth with the SIP book increasing from Rs 4,050 crore in 2017 (AMFI, February 2017) to Rs 13,686 crore in 2023 (AMFI, February 2023). However, the penetration of mutual funds in India is very low.
When it comes to the GDP to AUM ratio, India stands at a mere 17% as compared to the world average of 75% (AMFI & World Bank, 2021).
SIPs in mutual funds are a widely accessible, easy and disciplined way to build wealth. Let's look at some benefits of investing in mutual fund SIPs:
- Rupee-cost averaging: When fixed amounts are invested at predefined intervals, the investor will end up buying more units when the price of your mutual fund scheme's net asset value (NAV) is low, and buy fewer units when the NAV is high.
This gradually averages out the overall cost of investment, reducing the impact of market volatility on the value of the investment.
Rupee-cost averaging is a simple and effective way to invest, especially for long-term investors who want to reduce the impact of market volatility on their investments.
- Reducing market timing risk:Although it is impossible to time the market, SIPs eliminate the very thought of timing the market.
An investor does not need to worry about different market levels since investors get consistent exposure to all market levels.
Moreover, since the small amounts are spread out over a period of time, the risk is also reduced.
This approach helps to avoid impulsive investment decisions driven by short-term market fluctuations, ensuring a more balanced and rational investment strategy.
- Discipline: Discipline is the key to achieving long-term financial needs.
By committing to a regular investment schedule through SIPs, investors cultivate a habit of consistent investing.
Consistent savings build up a habit and help the investor to slowly and steadily build the portfolio with time, at the comfort of the investor.
With time, growing a portfolio and discipline also encourages the investor to build further on the habit.
- Convenience and ease: Through SIPs one can engage in automatic investment, eliminating the need for investors to manually invest each time as the money gets auto-deducted through a mandate.
The operational ease associated with SIPs makes it a 'start and forget' type of investment.
Further, one can also register a Top-up SIP while starting a SIP which will automatically increase your SIP savings every year.
Although it is not recommended, SIPs can be stopped or paused at the convenience of the investor.
- Better returns: Historically SIPs have given attractive long-term returns. An internal study by NJ indicates that SIPs have generated 16.61 per cent returns in the last 25 years (an average of 11 equity mutual fund schemes).
SIPs today are an important element to build wealth and fulfil financial needs.
Moreover, through the option of top-up SIP one can explore ways of building wealth and fulfilling needs faster by increasing SIP amounts periodically.
Since the SIPs are generally done with a long-term investment horizon, one also benefits from the power of compounding in the long run.
- Affordable and practical: SIP is a flexible investment option that can be tailored to meet the individual needs of investors.
In terms of the investment amount, the investment can be started with just Rs 500.
The duration of the investment can also be set based on the discretion of the investor depending on the horizon of their financial needs.
For most investors, big or small, SIP also sounds like a practical way of investing in markets with discipline.
- Diversification: With SIPs, one can build a portfolio of suitable schemes from different fund categories as per your risk profile.
Thus, one can also diversify your portfolio as per your risk profile and requirement.
- Inherent benefits of mutual funds: SIPs in mutual funds offer inherent advantages, providing investors with several key benefits such as tax efficiency, liquidity, professional management and diversification of underlying securities.
These advantages empower investors to make investment decisions, optimise returns, manage risks and achieve financial needs efficiently.
To conclude, SIPs in mutual funds offer a host of benefits that make them an ideal investment choice.
From rupee-cost averaging and reducing market timing risks to instilling financial discipline and convenience, SIPs provide a reliable and effective way to build wealth.
The power of compounding, better long-term returns, affordability, and the ability to diversify further enhance the appeal of SIPs.
Additionally, the inherent benefits of mutual funds, including tax efficiency, liquidity, professional management, and diversification, add to the overall advantages of SIPs.
Embracing the habit of SIPs can pave the way for a financially secure and prosperous future.
Misbah Baxamusa is CEO, NJ Wealth Financial Products Distribution Network.
Disclaimer: The information contained herein is only for information and does not constitute, and should not be construed as investment advice or a recommendation to buy, sell, or otherwise transact in any security or investment product or an invitation, offer or solicitation to engage in any investment activity.
Mutual fund investments are subject to market risks, read all scheme related documents carefully before investing.