SIP is a process of investing where investors can make a systematic investment in the markets. SIPs allow you to invest a fixed amount of money in Mutual Funds periodically. SIPs are very flexible in nature- the investor can increase or decrease the sum of money to be invested anytime they want. It is one of the best investing options and the safest one for beginners who are not well versed with the financial markets.
When an investor invests via SIPs- The money automatically gets debited from your bank account on the specified time. The investor doesn’t need any expertise of timing the market in case of SIPs. An investor should have a set goal and purpose for the SIPs and accordingly choose the mutual fund schemes.
Benefits of SIPs:
- Rupee Cost Averaging: An investor doesn’t need to time the market or be an expert in the financial market as SIPs stagger the investment to enter the market at different levels and provide the benefit of Rupee Cost Averaging. This reduces the investment cost and minimises risk.
- Discipline: SIP is a very convenient and hassle-free method of investing. An investor can start investing money in mutual funds through SIPs with a minimum amount of Rs. 500. The investor can authorise the bank for auto debiting the money from their account for SIPs each month.
- Power of Compounding: Wealth accumulation happens when an investor invests regularly. Even a small amount invested regularly can increase over a period of time. Investing periodically creates long term wealth as compared to partial investments.
- Inculcates Saving Habit: SIPs help to inculcate saving habit as an investor is required to invest a fixed sum of money every month. The investor needs to make sure that there is enough money in his bank account for the auto debit.
- Easy Withdrawal Process: SIPs in mutual funds can be withdrawn easily without any hassle, the withdrawal will be credited back to the investor’s bank account in three working days.
Mistakes to avoid when investing through SIPs:
- Choosing Dividend Plans: Many investors choose dividend plan or growth plan when they invest in mutual funds. In case of dividend plans, TDS is deducted on Dividends and Dividend Income is taxed as per the Income Tax Slab instead of LTCG in case of Growth Plans.
- SettingUnrealistic Goals: New investors set unrealistic goals which are difficult or rather impossible to achieve. 50% or 100% return instead of 12-15% returns is unrealistic.
- Not to Boost SIPs: When an investor has a financial high time, he should put in a lumpsum into the SIPs. Mutual fund schemes allow you to put a lumpsum amounts in the investment which helps in boosting the portfolio and get higher returns.
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