Most investors share a common financial goal of wealth creation over a prolonged duration. However, not everyone can afford to invest the entire investment amount in one go. This is when Systematic Investment Plans or SIPs come into picture. AMFI (Association of Mutual Funds in India), a self-regulatory body under the purview of SEBI (Securities and Exchange Board of India) has released several statistics around SIP investments gaining exceptional traction among retail investors. The recent statistics being that the assets under management (AUM) of SIP investment accounts successfully enjoyed the new hit of Rs 5 lac crore in July 2021. It further stated that the average portfolio value stood at Rs 1.2 lacs in the same month. In this article, we will understand how SIP investments help investors to create wealth in the long run.
Instills the habit of regular investing
Want to know the secret behind creating wealth over a prolonged period? Well, it is discipline and consistency, both the virtues which are effortlessly offered to retail investors through SIP mode of investment. How, you may wonder. Well, SIP investments automatically deduct money from your bank accounts to invest it in desired mutual fund schemes on a specific date of each month as predetermined by you. This helps investors to inculcate the habit of saving and investing before spending. This makes it easier to achieve long-term financial goals and create wealth over a prolonged period.
Power of compounding
The power of compounding is a powerful phenomenon that help investors earn substantial sum of money. Compounding involves earning interest on the interest earned on your investments. In simpler words, your earnings from the investment are re-invested to help you earn higher returns over a prolonged duration. When you begin to invest early in your life, your investments would have a longer investment horizon to profit from the benefits of compounding. Thus, the longer the investment duration, higher are the benefits accrued from compounding. As SIPs allow you to invest a small proportion of money at regular intervals, you can invest in mutual funds through SIP at a very early stage in your life.
Rupee cost averaging
One of the other benefits of SIP investments include the rupee cost averaging it offers to investors. As SIP investments ensure regular investing in the markets, an investor ends up investing in the markets during all phases – bull market phase and bear market phase. As a result, an investor is left with higher number of mutual fund units when the markets are at its bottom and vice versa. This helps to average out the total cost used against buying mutual fund schemes. However, lumpsum investments do not offer this benefit of rupee cost averaging to investors.
No need to time the markets
One of the biggest reasons why retail investors choose to invest in the markets through SIP investments is that they do not need to time the market. Unlike lumpsum investments, which require investors to time their entry and exits in the markets prudently, SIP mode of investment eliminates this need to time the market. This is because SIP investments allow investors to invest in the markets without being massively affected by market volatility irrespective of the fact that they are currently in a downward or upward trajectory.
So, what are you looking for? Invest in SIP and achieve your long-term investment goals through this mode of automatic and disciplined investing. Happy investing!