Why do people invest in SIP? What are the benefits of SIP?

If you are willing to invest in mutual funds shortly, then you would have come across these two terms, i.e., lumpsum investment and SIP. While both are methods for investing in mutual funds, there is a significant difference between the two. You can gain an insight into SIP by using the SIP planner. So, what’s the difference then? Read on to understand!

What is Lumpsum Investment?

Lumpsum investment is a one-time investment in any mutual fund scheme where an investor parks his excess funds at a single point in time. Lumpsum investment can be made multiple times as an investor wishes. However, there is no time limit as to when an investor should invest.

What is a Systematic Investment Plan?

Also known as SIP, the investor invests a specified amount regularly over a period of time. The amount of SIP is deducted automatically from the bank account of the investor and invested in the specified scheme. If you have a specific goal in mind, then a SIP planner can help plan your investments.

Benefits of SIP

If you are confused over SIP and lump sum investment, then here are a few benefits that SIP provides over lumpsum investment.

  1. Rupee cost averaging: It is one of the most significant advantages of SIP over lumpsum investment, where short-term volatility of the stock market is taken care of. Rupee cost averaging applies when a fixed amount is invested at regular intervals. This ensures that when the market is down, more units are purchased at lower prices and when the market is high, the value of your investment increases. Thus, whether the market is low or high, investors benefit.
  1. Emotional and impulsive reactions: Seeing the stock market volatility often triggers emotional and impulsive reactions among the investors leading to wrongful decisions. As the SIP is immune to short-term stock market volatility, therefore, such reactions are uncommon.
  1. Overspending: SIP investment compels you to allocate a part of your monthly budget to savings as no matter what, SIP will be deducted from your bank account. This keeps track and controls your overspending habits.
  1. Insurance: SIP comes with two variants, i.e., SIP Regular and SIP Insured. While the formeris a normal SIP, the lattercomes with insurance protection for the investor. The sum insured is usually 80 to 120 times the monthly SIP amount. Upon fulfillment of minimal conditions, this insurance benefit triggers, and in case of demise of the insured person, the nominee is paid the investment value as well as the sum insured. Such conditions normally include a 2-3 year waiting period, maximum 3-5 SIP skips allowed, etc.
  1. Tax benefits each year: Investing in Equity Linked Saving Scheme allows a deduction under section 80C of the Income Tax Act, 1961 up to Rs. 1,50,000. In the case of lumpsum investment, this deduction can be claimed only in the year of investment, while in the case of SIP, as the investment is made over a period of time, the deduction can be claimed for each year of investment.
  1. Low initial investment: SIP requires low initial investment and can be started with as low as Rs. 500 per month. This is in contrast to lumpsum investment, where some schemes require a minimum of Rs. 5000 initial investments.
  1. Discipline: SIPs have been instrumental in inculcating saving habits among investors. This creates a disciplined approach towards investing and brings in patience among the investors who yearns for compounding benefits.

Bottom Line

Investment in mutual funds can give you a head start in your investment journey. If you are a seasoned investor, then mutual funds can act as a great diversification tool for your portfolio. With the expertise of a fund manager, you do not need to worry about stock market technicalities. With a clear financial roadmap and keeping your goals and risk appetite in mind, you can easily select a plan that suits your needs. Beginning with SIP can be helpful to maintain consistency in investing. You do not need to wait for the right time to enter into the market with SIP investment as, ultimately, volatility gets nullified in the long run. So, start your SIP now!