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Why You Cannot Ignore SIP Anymore?

By Sandeep Kumar Gupta, Mutual Fund Distributor

Sandeep Kumar Gupta
Sandeep Kumar Gupta

SIPs are a way to invest in mutual funds where investors don’t purchase units all at once with a single lump sum payment. Instead, they make investments over time by making small, regular payments. This allows them to allocate a manageable portion of their income systematically. Moreover, it averages out the total cost of the units bought for the scheme and increases returns. Small investors find SIPs convenient because of their flexibility and low minimum investment amount. Let us see this in detail. 

Wealth creation through SIP 

An SIP helps create long-term wealth. It gives investors access to compounding power, which is one of its main advantages. Over time, the benefits it accrues for an investor multiply much more than any other long-term investment and thereby help investors achieve their wealth creation goal.  

Lifetime goals achievement; rupee cost averaging  

When you consistently invest the same amount in a fund, you purchase more units when the price is lower and fewer units when the price is higher. Thus, you would gradually lower your average cost per unit. It can smooth out the market's ups and downs and lower the risks of investing in erratic markets by using a prudent and long-term investment approach. 

SIP turns the volatility to our advantage. In fact, market volatility is where rupee cost averaging performs best. Markets go through both downsides and upsides and are volatile, which causes the costs of investments to be averaged out through regular investments. 

A fixed monthly investment buys more units when the price is low and fewer units when the price is higher. Regardless of how the market changes or rises or falls, the average unit cost will always be lower than the average sales price per unit, thereby leading to a profit in the long run. 

Light on pocket 

SIP is cost-effective because you make small, recurring contributions rather than a sizable investment all at once. When money is tight, you can skip the instalments and change the monthly SIP amount to suit your needs and financial situation. Even students/young workers with low-paying/part-time jobs can invest easily because beginners can start with as little as Rs. 500. 

SIP beats inflation; a tax-efficient tool 

In ten years, a rupee today won't be able to purchase exactly the same amount of goods. This is the impact of inflation, which is price increases over a predetermined time frame. Therefore, a certain amount of money will purchase fewer goods in the future than it does now. If you don't invest wisely, for instance, Rs 100 will only be worth Rs 94 the following year, if the average inflation rate is 6%. Therefore, consider the damaging effects of inflation on your savings and choose investments that will produce long-term returns that are higher than inflation.  

Long-term SIP investing helps reduce inflation’s impact. Assume there is 6% inflation. You would always be on top of things, so to speak, if your SIP returns around 10%. In an SIP, you make regular, fixed contributions to the plan over a predetermined tenure. You will be able to balance inflation by a comfortable margin thanks to the compounding effect of an SIP. 

While the investment proceeds from some 80C investments, such as PPF, are tax-free, the interest received from other 80C investments is subject to the investor's individual income tax rate. Before the start of FY19, capital gains and profits were tax-free, but that year's Union Budget changed the taxation system. In SIP mutual funds, capital gains up to Rs 1 lakh will not be taxed. 10% capital gains tax will be applied to gains over Rs 1 lakh. Tax consequences in SIP investments only occur at redemption, not throughout the investment's term. SIP continues to be one of the most tax-efficient 80C investment options, even with the introduction of the capital gains tax.