Mutual Fund SIP: Investors have understood the importance of building wealth for future use through the Systematic Investment Plan (SIP) route. SIP is a way to save and invest systematically at a defined interval, which could be daily, weekly or monthly. When you start a SIP in mutual funds, you basically allow the fund house to automatically deduct the SIP amount from your bank account and invest in the chosen fund at the chosen date.
But why SIP? Personal Finance experts believe that biggest advantage of SIP is that it helps in building wealth through a systematic and consistent approach.
Anurag Garg, CEO and Founder, Nivesh.com, suggests one should think of long term while starting SIPs.
For example, Gupta told FE Online, a monthly SIP of Rs. 10,000 over a period of 15 years (at an assumed return of 12%pa) will give a wealth of Rs. 50 lakh and the same amount will become almost Rs. One crore in 20 years.
Gupta said it is a myth that SIPs are good only for equity funds. SIPs can be started in any type of fund, even debt and gold funds.
“One can start SIP for a vacation next year or for retirement, which could be 20 years away.
SIPs also help in taking benefit of market volatility as units are invested at different price points and the cost keeps getting lower on average over a period. That results in superior returns over a longer period,” said Gupta.
Importance of SIP for middle-class businessmen
For middle-class businessmen, it is important to build wealth, which is separate from their core business. Since external situation has become very volatile and dynamic.
Gupta said there is a tendency among businessmen to plough back their surpluses into the business, which is not a good strategy in current times. They need to invest surpluses in multiple other investment options.
“For example, we suggested a corporate client of ours to start SIP from their business surpluses since they had good cash flows. So they could take money out of business systematically every month and create a decent corpus, which can then be used for new business expansion or could be useful in a crisis situation like the current times. And they were very happy with the outcome and have increased the SIP over period. They do take out money from time to time when required,” said Gupta.
“However, one needs to ensure that SIPs are done in debt or hybrid funds rather than aggressive funds, since the money could be required anytime. The businessmen could also go for a combination of debt and equity, where the base corpus in invested in debt funds and incremental returns are invested in equity for overall higher and tax efficient returns,” he added.