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What Makes SIP An Attractive Investment Option?

Mar-05-2019Blog by – Mr. Ashish AjmeraRead Time: 3 Min.Word Count: 810157What Makes SIP An Attractive Investment Option?
Systematic Investment Plans (SIPs) have become a rage for domestic retail investors in last few years. Investing in financial markets through mutual funds schemes is a very useful and easy option for common investors and hence their participation in markets has increased intensely. SIP is similar to a recurring deposit where you deposit a fixed amount every month. Ease of transactions, tax benefits and good returns drove a wave of retail investors into mutual funds for last few years. A SIP allows investors to make regular, equal payments into a mutual fund for a period of time instead of one-time payment. The investments are spread over a longer term and allow investors to ride above the short term fluctuations in markets successfully.

SIP is a well planned approach towards investments and offers a systematic solution for long term wealth creation. Assets managed by the Indian mutual fund industry have grown from Rs. 23.25 lakh crore in January 2018 to Rs 24.52 lakh crore in January 2019, representing a 5.45% surge in assets over January 2018. Mutual Funds invest in stock market, debt market (corporate bonds as well as government bonds) and Money Market instruments such as Treasury Bills, Commercial Papers, Certificate of Deposit, etc.

Evening Out Of Volatility: Because SIPs are spread over a period of time, the short term market fluctuations do not affect their performance much. Remember that in a high growth emerging economy like India, short term market declines are normally considered to be a good buying opportunity for long term. An investor has to think about factors like his risk appetite and financial needs before deciding to put his money in a specific instrument. SIPs become very effective in this case if you are thinking about parking your funds for a long duration. 

Less Financial Stress: A SIP allows investors to make regular, equal payments into a mutual fund for a period of time instead of one-time payment. SIP thus ensures that the finances of an individual investor do not get affected heavily and lessens the financial burden even as it ensures steady flow in savings over a period of time. SIP thus offers a systematic solution for long term wealth creation for common investors without any hassle. The SIP installment amount could be as small as Rs 500 per month.

Ensuring Diversification: By investing in mutual funds via SIPs, an investor can ensure a generous amount of diversification in their portfolios. Mutual funds are of different types. For investors who have a high risk appetite, it is recommended to invest in equity mutual funds which typically tend to provide with the highest amount of returns in medium to long term.  For investors with a low risk appetite, investment in debt mutual funds makes sense as it generally offers better returns than bank fixed deposits. One can have a mix of various funds in SIP portfolios to achieve the necessary quantum of diversification as per individual risk assessment.

The Averaging Effect: SIPs have been extremely popular with Indian investors, as they help in Rupee Cost Averaging without worrying about market volatility and timing the market. Averaging reduces the average cost basis of investment in a particular stock by purchasing more shares of as the price declines. This translates into impressive returns over years. Remember that the Nifty50 has delivered a CAGR of 13.4% in the last 20 years and around 14% in the last 10 years.

Professional Fund Management: Remember that Mutual funds are great for common investors who typically lack the knowledge to invest in securities market. Mutual Funds are professionally managed by expert Fund Managers who use their extensive research experience for the benefit of investors. A mutual fund is thus an inexpensive way for investors to get a full-time professional fund manager to manage their hard earned money.

Conclusion:

With plenty of mutual fund schemes floating around, it makes sense for an investor to find a good mutual fund advisor who would be able to offer insights about which plans are suitable for an individual. To sum it up, SIP is a very convenient and friendly method of investing in mutual funds through standing instructions to debit bank account every month. SIPs have been gaining popularity among Indian MF investors, as it helps in rupee cost averaging and also in investing in a disciplined manner without worrying about market volatility and timing the market. AMFI data shows that the MF industry had added about 9.31 lakh SIP accounts each month on an average during the FY 19, with an average SIP size of about Rs 3,150 per SIP account. Total contribution made by investors through SIPs was Rs 76,543 crore in first nine months of the current fiscal as compared to Rs 67,190 crore in FY 18 and Rs 43,921 crore in FY 17.

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