SIP: The Power of Investments & Compounding

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Nowadays, people have become more active in the investment sector. Especially the youth of today’s generation. They are more inclined towards a safe future. So, they look for safe investment options. But sometimes due to lack of knowledge and excessive material available on the internet, they rather get confused instead of getting their queries resolved. So, in today’s article, we will eliminate this confusion and tell you about one of the safest investment options – SIP; it’s importance, and benefits.

Everyone is well aware of the stock market. People invest highly in this sector. They even earn loads of money from investing in stocks. But is there any guarantee that you will always earn profit from these investments?

No, right?

The safest investment option in today’s time has been SIP, ULIP, PPF, and a few more. All are great investment options and provide high returns in long run. Let’s study about one such investment in today’s blog – SIP.

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Systematic Investment Plan

SIP stands for Systematic Investment Plan. True to its words, it means the investment, done in a systematic way. 

Usually, people confuse SIP with mutual funds, they commonly say “SIP matlab mutual funds“. But in reality, SIP means a regular investment of an equal amount into the same security over a regular interval of time. It can be a mutual fund, gold, trading account, or any other thing. Where mutual funds are referred to as assets, SIP is just a method or process of investing in it.

FEATURES OF SIP

SIP is a smart and hassle-free investment mode. It’s one of the safest ways to increase your wealth.

  1. Start small – You don’t need a large amount to invest in SIP. You can begin with a minimum amount of Rs 100.
  2. Small amounts compound to large ones – Investing a small amount of money over a period of time will add up to a large sum of money without putting much burden. Then after the end of the chosen period, the invested amount will give returns as high as the market allows.
  3. Flexibility – SIP gives you very high flexibility. You can invest the amount of your choice and also the time period you want to invest for. You can also take out your money at the time of need. There is no lock-in period.
  4. No need to time the market – in SIP, one has to invest regularly, irrespective of the market’s ups and downs. As a result, the cost of assets is averaged out over a period of time.
  5. Convenient – It is very convenient to invest in SIP. The amount is debited from your account, depriving you of the tension and burden to remember the payment date or hire an agent.

Also Read: Cryptocurrency: The New Trend

HOW YOUR MONEY GROWS?

Under SIP, one can gain profits in the terms of:

Average Cost

The market we know today is never stable. It moves in a cycle of ups and downs. Some time the market is bullish (when prices go up) and sometimes it is bearish (when prices go down). In such situations, normally, people prefer to purchase their assets when the market is bearish, so that they can get more units in less price. They avoid purchasing the units in bullish market. This eventually breaks the continuity of investment and gives less returns.

In SIP, the continuity of the investments is emphasized. It’s either monthly, quarterly, half yearly or yearly. We invest on a regular time period in SIPs, irrespective of the market condition. It may happen that sometime the investor can purchase more units in low prices and sometimes less units in high prices. But at the end of the investment tenure, the prices will be averaged out. This helps in gaining profit in a long term.

For example – Priya purchased 4 units of mutual fund. The purchase prices of all the units will not be the same but there won’t be much difference in the prices. While if the same purchases are done for a long period of time, say 5 years or 10 years, she would see a significant difference in the prices of the units. A SIP will gain the full benefit of rupee cost, averaging in long term, to ensure that the costs of units averaged out to an overall advantage.

blue and yellow graph on stock market monitor
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Compounding

In SIP, investors earn a profit on the profit earned. The longer you stay invested through SIP, the more will be the growth of your wealth. It grows your wealth by multi-folds. It works well in long-term investments.

There are SIP calculators which can help in ascertaining the profits, on the basis of invested amounts. One such calculator is available from Groww: https://groww.in/calculators/sip-calculator/

TAX DEDUCTION UNDER SIP

In India, people always complain about paying tax as it takes up a huge part of their income. People who don’t know about SIP try to evade tax in order to get out of this tax-paying system, which is illegal. Legal actions could be taken against them. But the people who know about it play safe by tax planning. By investing in SIP, investors get tax relief of some amount. It acts as a huge relief to the investors.

SIP is not completely tax deductible, but a portion of it surely is. Let’s understand its conditions.

There is an Equity-Linked Saving Scheme – ELSS. It is popular under Section 80C of the Income Tax Act, for a tax deduction of up to Rs 1,50,000. One can save the tax amount of around Rs. 46,000 a year by investing in this scheme. However, if you invest in any other scheme, you will have to pay the tax at the time of the redemption of your investment.

HOW TO START INVESTING IN SIP?

You just need to have your KYC done. After that if you can start SIP online or through an agent of any investment firm.

Nowadays, there are many applications and websites available for all types of investments. You just have to provide them with essential documents like ID proof, address, etc. Then link your bank account with these apps, select your plan, and voila!! It’s done. Some of these apps are – ETMONEY, Groww, Paytm Money, etc.

If you have any questions, please ask in the comments. We’ll try our best to answer them all. I hope this article has added some value to you.

7 thoughts on “SIP: The Power of Investments & Compounding”

  1. Investment through SIP explained so well, had some queries about the same but after reading ur blog it’s all clear. 👏👏

  2. Indeed this article has added value but I will appreciate if it is clarified how profit is earned on profit if money is invested in Mutual Funds or in Gold. What are the options to invest in Gold using SIP?

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