Here’s why investing in SIP mutual funds is the best option for salaried professionals

mutual-funds

In a country like ours, the highest burden of taxation falls on one strata of the society i.e. the salaried class. Salaried class tries to search for various alternative sources of investment to save their money for future needs.

Apart from traditional ways to invest such as those of gold, fixed deposits and real estate, SIPs (Systematic Investment Plans) have forayed to become one of the most reliable and trustworthy avenues to invest.

SIPs can be considered as a hassle free and way to invest in mutual funds. This type of investment comes with multiple benefits such as those of rupee-cost averaging, disciplined investing etc.

SIPs achieve this by investing a certain portion of our income at regular intervals of time (say monthly, weekly etc.) This is the reason why it has become one of the most systematic approaches towards investing that helps to save and build a fortune for us in the future.

Working methodology of Systematic Investment Plans (SIPs)

SIPs are a flexible, quick and easy way to invest our money into the capital markets. The money is auto-debited from our bank account as on a particular date and invested into a specific mutual fund scheme.

Units are allocated based on the ongoing market rate (called NAV or net asset value) for that particular day. This happens in case of open-ended funds. AMCs like Reliance Mutual Fund provide various categories of funds to investors, which enhances the options of an SIP.

Every time one invests money, additional units of the scheme are purchased at the prevailing market rate and added to the number of units already present in the account. Hence, units are bought at different rates and investors benefit from rupee-cost averaging and the power of compounding.

Let us now look at each of the benefits of SIPs so that we can churn out the best portfolio for ourselves.

Key benefits of Systematic Investment Plan (SIP)

1. Rupee-cost averaging

This term (dollar cost averaging) was coined by Mr. Benjamin Graham in his famous investment book, “The Intelligent Investor”. As we all know that volatility is the essence of stock markets. A stock market index never moves in a straight line, so have to be always ready to watch out for volatility. Though it may sound like a terrible thing, but volatility is what makes the story of SIPs great.

It is during these volatile times that we are able to get more units of a fund (when the markets are down). Therefore, to adjudge the performance of a mutual fund we need to look at the long term market cycles and that is what will us a fair result of mutual fund performance.

Therefore while investing through the SIP route, we need not be worried about the right time to enter into the markets. Rupee-cost averaging allows us to opt out of this stage. Since we become a regular investor, the money fetches more units when the price is low and lesser when the price is high. During the volatile period, it may allow one to achieve a lower average cost per unit.

Even for cash rich individuals, SIPs reduce the risk of timing the investments badly and losing sleep over bad decisions. The best benefits of SIPs are accentuated when someone starts investing as early as possible and at lower levels.

2. Power of Compounding

In case of compounding, when the returns are generated, the subsequent returns are paid on those already generated. This is the reason why profits and earnings start piling up at a brisk pace. This is exactly the reason why direct mutual funds that charge lower expense ratio are preferred over regular mutual funds.

Though the percentage of investors investing in direct plans is a meager 17 percent, this figure is growing exponentially.

To cut the whole story short for compounding, the earnings from investments that are generated are reinvested to generate huge returns over the long run.

3. Disciplined approach to investing

The essential attributes to generating huge returns on our potential investments is following the route of disciplined investing and having patience. SIPs bring that discipline in the life of the investors. This is because a fixed amount is invested at regular periods of time thereby committing to regular savings. Every single investment made is a step towards attaining one’s financial objectives.

When to talk about investing, we can compare the returns traditional saving options that salaried class attune to generate as compared to various large cap mutual funds. This is because large caps are considered to the safest options as compared to small and mid-caps that entail higher volatility.

Note: We would advise investors who are entering the markets for the first time to invest in large caps and follow the SIP route, unless someone has a high risk appetite.

Following this we can eventually increase our risk to other categories of mutual funds such as mid-caps, small caps etc.

The main avenues for salaried class in terms of debt instruments are Public Provident Fund (PPF), recurring deposits, fixed deposits etc. But let us compare the returns of these traditional plans to that of large cap mutual funds.

SIP Returns

Fund Name3-Year Return (%)5-Year Return (%)Since Inception (%)
SBI Bluechip Fund 10.6% 14.5% 14.6%
Mirae Asset Large Cap Fund 16.4% 16.7% 17.1%
Reliance Large Cap Fund 16.4% 15.6% 15.0%
ICICI Prudential Bluechip Fund 14.2% 13.2% 14.1%
Axis Bluechip Fund 14.9% 13.6% 14.9%

The returns for various debt instruments are highlighted below:-

Debt Instrument Current Percentage Return (%)
Fixed Deposits 6.5 to 7%
Recurring Deposits-Post Office (5-Year returns)                         7.4%
Public Provident Fund (PPF)                         7.8%
Sukanya Samriddhi Yojana                         8.2%
National Savings Certificate (5-Year)                         7.6%
Monthly Income Scheme (5-Year)                         7.3%
Kisan Vikas Patra                         7.7%

Therefore, we can see that over a longer term (3 years or more), most mutual funds through SIPs continue to provide higher returns than several debt instruments. Given this scenario, investors should opt for investments in these mutual fund schemes.

4. Flexibility of investment and withdrawal

Though it is always advisable to continue SIPs over long periods of time, a subscriber can discontinue with SIPs at any suitable time. The amount of investment can also be increased or decreased based on the convenience of the investor.

5. Convenience of Use

SIPs are a hassle-free mode of investment as we can issue a standing instruction to the bank to facilitate auto-debits from our bank account. These auto debits can be weekly, fortnightly, monthly and bi-monthly depending on our choice.

SIPs vs. Lump Sum Investment

Now that we have discussed about the potential benefits of SIPs, let us look at the parameters based on which SIPs are better than lump sum investments:-

Particular SIPs Lump Sum
Recurrent Cash Flows Good Not Good
Starting of Career Good Not Good
Rupee Cost Averaging Good Not Good

Based on the parameters discussed above, we see that SIPs are better in every way.

In terms of recurrent cash flows as the amount of investment in SIPs is very less, the SIPs deduction every month does not disturb other financial commitments significantly.

Also as we start our career, we would want to be financially independent but at the same time savings and discipline is investing.

SIPs are the best way to achieve this. SIPs encourage decent sums of money every month and seeing it grow subsequently.

Also as discussed earlier, rupee cost averaging and benefits of compounding is large in case of SIP investment as compared to lump sum.

Given the tremendous benefits SIPs offer and the cusp of growth that our economy is at the present moment, salaried class should definitely allocate a part of their savings into this avenue of investment.

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