Investment planning is an integral part of our financial journey. While investing, it is important to choose a disciplined approach that caters to your investment goals and risk appetite. One such disciplined approach is a Systematic Investment Plan (SIP). In this article, we discuss SIP and how it can be a smart investment planning tool.
What is a Systematic Investment Plan (SIP)?
SIP is a disciplined way of investing a fixed amount of money at regular intervals in a mutual fund scheme. SIPs can be monthly, quarterly or yearly. The investment amount is debited automatically from your bank account through an ECS mandate or standing instruction.
Benefits of SIP
- Disciplined approach – SIPs help you inculcate a disciplined approach towards investing.
- Rupee cost averaging – Your investment amount is distributed across different market levels, thereby minimizing the impact of market volatility.
- Power of compounding – Over time, your investment earns returns, which are reinvested and generate further returns, thereby compounding your wealth.
- Flexibility – You can start, stop or increase your SIP amount anytime, according to your convenience and financial goals.
How to choose the right Mutual Fund Scheme for your SIP?
Choosing the right mutual fund scheme is a crucial aspect of SIP investing. One should assess the scheme’s performance, risk, fund manager’s experience and asset allocation. There are various categories of mutual funds such as equity, debt, balanced, and tax-saving mutual funds.
Tax saving mutual funds, also known as Equity Linked Savings Scheme (ELSS), offer tax benefits under Section 80C of the Income Tax Act. The lock-in period for ELSS is three years, with a minimum investment of Rs. 500 per month. ELSS has the potential to provide higher returns in the long term due to its equity component. However, one should consider their risk tolerance and investment horizon before investing in ELSS.
Calculating SIP returns
Let’s understand the power of SIP with an example. Suppose you start a monthly SIP of Rs. 5,000 in a mutual fund scheme with an assumed annual return of 10%. After ten years, your investment of Rs. 6,00,000 will grow to Rs. 12,79,076. Similarly, after twenty years, your investment of Rs. 12,00,000 will grow to Rs. 42,68,224.
Disclaimer
Investing in the Indian financial market carries market risks and investors need to assess their risk tolerance and investment horizon before investing. The calculations provided are assumptions made for illustrative purposes only and should not be taken as investment advice. We recommend that you seek professional advice before making any investment decisions.
Conclusion
SIPs are an effective tool for disciplined and long-term investing. They provide the benefits of compounding, rupee cost averaging and flexibility. Investors should choose the right mutual fund scheme based on their risk tolerance, investment horizon and asset allocation. Tax saving mutual funds offer additional tax benefits under Section 80C of the Income Tax Act. By investing in an SIP, you can achieve your financial goals effectively.
