Systematic investment plan, commonly known as SIP, has been gaining a lot of traction among Indian investors for the past couple of decades. It is a godsend investment avenue to those who hope to multiply their capital without parking too much of it in a single asset class at any given time. Sip is a great way to create wealth in the long run and also inculcates a good savings habit in the long term. It helps to create a significant corpus to achieve your long-term financial goals. Let’s understand how investing in mutual funds via SIP mode can be beneficial for you:
Why invest in SIP for the long term?
Following are some reasons why you as an investor should consider investing in mutual funds via SIP mode of investment:
- Helps to smoothen the volatility over a long period
In technical jargon, it is called rupee cost averaging. The primary risk of equities comes from fluctuations or volatility in prices and returns. It is precisely this risk that the mutual fund sip turns on its head. When you invest in a monthly sip for around 15 years, then you have 180 investment data points. Even if you assume that these are random dates, it is highly likely that you will get a lower average price when compared to lump sum mode of investment. Thus, SIP automatically makes the volatility work in the investor’s favour.
- No need to time the market
SIP investment is centred on the principle of time over timing. This means that if you allocate funds to an equity mutual fund in a systematic manner, then you need not fret about timing the market. Buying low and selling high is a theoretical situation that merely exists in the minds of several investors. Studies have constantly proved that if you catch most of the market bottoms and peaks and just miss out a handful of bumps, even then your returns could be quite lower than a passive sip. Thus, the SIP mode of investment is safer.
- Helps to create a diversified portfolio which lowers the risk
When your investment portfolio is diversified, you get automatically exposed to lesser risk. But how is a diversified investment portfolio really unique to an sip. That is something you can also achieve via lumpsum investing. There are two things to remember. Firstly, your sip always presumes that you are invested in a diversified equity fund. Secondly, there is an alternate aspect of strategic diversification that one can try out in sips. For instance, just as you have plain vanilla sips, you also have value-weighted sips. The value-weighted sip sets a threshold of valuations and automatically decreases or increases the sip amount. This provides you with values-wise diversification and time apart from portfolio diversification.
- The wealth effect almost negates risk over the longer term
What exactly is the wealth effect? It essentially means that as you hold the assets for longer periods of time, the wealth ratio (ratio of investment value / actual investment) goes up sharply. There is also another aspect to the wealth ratio. Over longer periods of time, the wealth effect actually negates risk to zero.