Importance of SIP in Financial Goal Planning
October 29, 2019
SIP is a regular way of investment in mutual funds which is similar to Recurring Deposit but is market-linked. This means that the returns in case of Recurring Deposits are fixed while in case of SIP in mutual funds the returns are variable. SIPs are also an important way of financial planning. Let’s find out how?
To invest in SIP, one can choose a convenient date and also choose the frequency at which the amount will be deducted. Your SIP interval can be daily, weekly, monthly or quarterly. Your amount will be auto debited from your bank account under the Electronic Clearing System (ECS) mandate on your chosen SIP date.
Now to understand how SIP investment can help you with the financial planning, you should know the SIP benefits.
You need to be clear about your financial goals, whether it’s a long term financial goal or a short term. These will help you to choose your asset for which you wish to invest in, like a long-term plan may be your retirement corpus or your child’s marriage and investing in equity-funds or hybrid funds would be a better choice. These funds are subjected to market risks, but with SIP plans these risks are managed in the long term.
Key SIP benefits that will help in financial planning process:
Evades the need of timing the market:
We often move away from mutual funds investment in the context that we need to time the market and mutual funds are also subjected to market risks. SIP facility absorbs the market volatility or market shocks during the journey of wealth creation on account of rupee cost averaging.
Rupee cost averaging:
As opposed to the lump sum investment, SIP is a preferred investment route because of rupee cost averaging. In SIP, the investor buys lesser units of the fund when the market is high and buys more units when the market is low thereby averaging the cost of the units in the long run. This helps to absorb the market volatility thereby growing your returns exponentially on a longer tenure.
Effective Goal Planning Medium:
You may have multiple financial goals, some may be short term, some long term. In case of long term, you can invest in equity based assets, while a hybrid fund or debt fund would be better in case of short term planning. Earlier you start an investment in SIP, more can you build your corpus.
Power of compounding:
If you invest in mutual funds with SIP, you will benefit from the power of compounding. Here the interest is charged on your final amount (principal + interest) and not only on your principal amount. Over the long run, the power of compounding helps to increase your income exponentially.
Easy on your pocket:
A famous adage - every drop makes a mighty ocean stands true for SIP. With SIP, you can easily achieve your financial goals with small and regular investment. This way you can achieve your goals without affecting your present financial status. You can choose the weekly, monthly or quarterly tenure of investing in mutual funds.
Now that you know how SIPs help you in achieving your financial goals, you need to plan out your goals and fix the tenure till when you need them to be fulfilled. This will help you decide on your investment amount and also select your preferred mutual fund. For any of your goals to be fulfilled, it is necessary to select the SIP tenure for at least 5 years.
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