SIP is your best shot at long term wealth creation

By Tori 4 years ago

Timing the market is almost impossible, even seasoned investors are sometimes unable to foresee which way the market will go in the future. Some investors who are new to mutual funds feel that it is better to enter the market when the funds are performing. But the truth is, mutual fund schemes like equity mutual funds are constantly exposed to market’s volatile nature. Fluctuations in equity markets tend to remain unchanged. The best time to enter the market is now and if you are seeking capital appreciation over the long term by investing in a market linked scheme, you can consider starting a SIP in a mutual fund scheme of your choice.

What is SIP?

A Systematic Investment Plan is an easy and convenient way of investing in mutual funds. It is just like recurring deposit with a bank but the main difference here is that returns from your SIP investment might fluctuate depending on the performance of the scheme. Considering the current fixed interest rates on offer, one might feel that investing in mutual funds is better than banking on conservative schemes. Firstly, an investor must decide a date and a fixed amount which they are comfortable investing every month. If you allow auto-debit, every month on the predetermined date a fixed amount will be debited from the investor’s savings account and electronically transferred to the mutual fund scheme of their choice.

Is SIP ideal for long term wealth creation?

As much as it is important to determine the monthly SIP amount, investors must also understand their financial goals and plan their investment accordingly. To target life’s long term financial goals investors, need to focus on equity and hybrid schemes and start a monthly SIP. For short term goals, a debt fund might be more apt. If you have long term financial goals like retiring rich or buying your dream home or if you wish to have a destination wedding for your daughter, starting a SIP in an equity fund might help you target such goals. Even if equity funds are volatile in nature, starting a SIP with a long term investment horizon might successfully minimize the overall investment risk and optimize maximum returns.

Power of compounding

Long term investing in mutual funds via SIP might pave way the way for compounding. The power of compounding can only be witnessed when you continue to invest in mutual funds via SIP for a minimum investment period of 10 to 15 years. In simple words, compounding refers to the interest that you earn from the interest earned from the initial investment amount. Compounding is known to hold the potential to turn your small SIP amounts and turn them into a commendable corpus over the long term.

Rupee cost averaging

The reason any time is a good time to start a SIP in mutual funds is because your investment portfolio is bound to benefit from yet another investment technique referred to as rupee cost averaging. When the NAV of the mutual fund scheme you invested in is low, more units are allotted to your investment portfolio. Similarly, when the NAV of the scheme is high in the performing markets, lesser units are allotted. This adjustment of the allotment of units in quantum with the fluctuating NAV is referred to as rupee cost averaging. This way, your overall investment risk is minimized, and you can benefit even when the markers are underperforming.

Also, investing in mutual funds via SIP for the long run is ideal as your investments are eligible for LTGC tax which is 10 percent as of now and is better than STCG tax which stands at 15 percent.