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Building Wealth through SIPs
Building wealth requires financial discipline and a long-term horizon for investing. SIPs not only encourage disciplined investing, but also make it possible to accumulate wealth with small but regular contributions. Further, it also gives the advantage of rupee cost averaging and the flexibility of choosing your own amount and frequency, making it an ideal investment option for any investor.
Consider the following example: Say, Gaurav understands the benefit of investing in equities. He wants to invest in an equity diversified mutual fund but does not have a sizeable amount to start the investment. In the wait to save the amount, Gaurav is losing precious time that will give him better returns. Instead of waiting to save that large amount, Gaurav can easily start smaller and regular investments through the Systematic Investment Plan (SIP) option and reap the benefits of starting early.
How do SIPs work?
A SIP enables you to break your investments over a quarterly or a monthly period. One can either give post-dated cheques or easily opt for the electronic clearing service (ECS) under which your bank will automatically debit the given amount on a specific date, to be invested in the mutual fund scheme.
SIPs are ideal for investors who don’t have the market expertise, a big lump sum to be invested immediately or the time to constantly monitor their investments. Through SIPs, you can easily apply the power of compounding on your investments and build a sizeable corpus over time.
Benefits of SIPs
SIPs reduce risk by Rupee Cost Averaging
When you invest using the SIP option, you buy units at different net asset values (NAVs). For example, if the market is going higher, the NAV will be more, resulting in lesser units as compared to when market is down, where you will end up buying more units. Hence SIPs help you to ride market volatility in a profitable way by automatically buying more when the prices are falling and less when they are rising. This also lowers the average purchase price for your investment as seen in rupee cost averaging.
SIPs can be started with as little as ₹500 each month. SIPs provide flexibility in choosing the amount you want to invest and you can choose your frequency as daily/weekly/fortnightly or monthly.
SIPs makes it easy to achieve long-term financial goals as your investments are broken down into smaller, less daunting, regular investments.
SIPs also offer freedom from being on the constant look out for opportunities to time the market. Over the long-term, the ups and downs of the market get evened out.
One of the key advantages of investing through SIPs is that they inculcate financial discipline making you invest a fixed amount consistently at regular intervals. By starting early, even with a small amount, you can build a sizeable corpus to achieve your financial goals.
SIPs work best in the long run as they average out the ups and downs of the stock market, prevent you from taking detrimental decisions based on emotions and offer better potential returns. As a wise investor, you should leverage the benefit of SIPs as a means to invest bit by bit and achieve the investment goal that you have in mind.
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#1
You can start SIP investments with as little as ₹500 per month.
#2
The SIP option is available for all kinds of mutual funds (except liquid funds), though it works best for equity investments.
#3
One has to be careful about ensuring the availability of funds with an ECS mandate, as you cannot pay the missed SIP amount at a later date.
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