India’s economy has been on the rise, and with it, the interest of investors in investment options has also surged. Among the myriad of choices, one stands out for its ease of access and impressive returns – the SIP investment.
Systematic Investment Plans (SIPs) have become a popular choice for novice and seasoned investors alike. But what makes SIPs stand out in the crowded Indian investment landscape? This article delves into five compelling reasons that contribute to the outstanding performance growth of SIPs in India.
The Principle of Regular Investing
The bedrock of SIP is the principle of regular investing. It’s a simple yet powerful concept that you should know before you open a Demat account. SIP is the investment of a fixed amount of money at regular intervals. But how does this contribute to SIP’s growth?
- Consistency: Regular investments, regardless of market conditions, promote disciplined investing. This consistency helps accumulate wealth in the long run, leading to growth in SIPs.
- Ease of investment: With SIPs, you don’t need a large lump sum to start investing. Even with a small amount, you can start your investment journey. The ease of investment attracts more individuals, contributing to the growth of SIPs.
- Mitigating market volatility: Regular investments help mitigate the risk associated with market volatility. When the market dips, you buy more units, and when the market is high, you buy fewer units. This reduces the average cost per unit over time, enhancing the performance of SIPs.
The Power of Compounding
The power of compounding is another crucial factor contributing to SIPs’ growth
- Accelerated growth: Compounding refers to the process of earning interest on your initial investment and the accumulated interest. Over time, this leads to exponential growth of your investment.
- Long-term advantage: The benefits of compounding are most evident over the long term. The longer your money is invested, the more time it has to grow.
Consider the case of Preeti. She started her SIP investment with INR 10,000 per month at an annual return rate of 12%. After ten years, she would accumulate around INR 23.5 lakh, of which approximately INR 8.5 lakh is just the returns generated due to compounding.
Benefits of Rupee Cost Averaging
Rupee cost averaging plays a significant role in SIPs. Simply put, it involves investing fixed amount regularly, irrespective of the share price. So how does this benefit SIP?
- Minimising market timing: It can be challenging to time the market perfectly. With rupee cost averaging, the focus shifts from timing the market to investing regularly, thereby minimising the risk.
- Smoothing out the investment cost: By investing the same amount regularly, you buy more shares when prices are low and fewer when prices are high. This averages out the cost of your investment over time.
For instance, if Rahul decides to invest INR 2000 every month, he will purchase more units when the price is low and fewer units when the price is high. Over time, this averages out the cost of his investment, ensuring a lower average cost per unit.
Flexibility of SIP Investments
One of the significant advantages of SIPs is their flexibility. This flexibility extends to multiple aspects of investment, contributing to the growth and performance of SIPs.
- Adjustment of SIP amount: Investors have the freedom to increase or decrease the SIP amount as per their financial capability.
- Skipping an instalment: In case of financial stress, investors have the option to skip a SIP instalment without any penalty.
Diversification in SIPs
Diversification is a strategy that involves spreading investments across various financial instruments to reduce risk. SIPs inherently provide this diversification, which contributes to their growth.
- Investment in different assets: SIPs allow investment in different asset classes, such as equity, debt, and gold, reducing the overall risk.
- Fund diversification: SIP investors can choose to invest in different funds, spreading the risk and increasing the potential for higher returns.
For example, Karan has an SIP where he invests in both equity and debt funds. This diversification reduces the risk associated with market fluctuations, thereby increasing the growth potential.
Conclusion
SIP investment in India is seeing impressive growth, backed by compelling reasons. The principle of regular investing, the power of compounding, the benefits of rupee cost averaging, flexibility, and diversification are pivotal to this growth.
If you’re planning to open Demat account and start your investment journey, SIPs could be a good start. With a clear understanding of these factors, you can make informed decisions and potentially see your wealth grow over time.
Disclaimer: Investing in SIPs involves a certain level of risk, and the performance may vary based on market conditions. Always consider seeking advice from a financial advisor before making any investment decisions.