What is the role of SIP in financial planning?

Systematic Investment Plans or SIP investments have been getting a lot of traction among Indian investors. The main reasons for this increasing popularity of SIPs are the flexibility offered by this investment approach and rising income levels in India.

Undoubtedly, when it comes to wealth creation, the SIP approach can yield potentially phenomenal results while helping investors stay consistent and disciplined in their investments.
In this article, we will discuss the crucial role SIP investments can play in financial planning and help investors meet specific objectives.

• Table of contents

1. What is SIP?
2. Benefits of Investing through SIP
3. Role of SIP in financial planning

What is SIP?

SIP or Systematic Investment Plan is similar to traditional Recurring Deposits. One main difference between the two is that SIPs are market linked. Meaning, SIP investments allow individuals to invest a specific sum of money in an underlying mutual fund scheme at a pre-decided date of a month. Moreover, investors can also choose the period of investing from quarterly, monthly, weekly, or even daily. However, most salaried investors opt for the monthly SIP investment strategy.

As we can see, SIPs help investors to invest through small, regular instalments rather than investing a lump sum amount. The freedom to invest smaller amounts is one of the main popularity drivers of SIPs in India. To effectively plan your investments, you can use an SIP return calculator. This tool can help you estimate the potential returns on your SIP investments based on your monthly contribution, investment duration and expected returns. You can also adjust the various parameters to arrive at a combination that suits your goals.

Let us look at some more benefits of SIP investments:

Benefits of Investing through SIP

• Flexibility: A Systematic Investment Plan provides you with flexibility of tenure as well as flexibility of investment. Meaning, you can choose the monthly amount you want to invest in a mutual fund scheme as well as the tenure for this investment. The best part is that you do not have to attempt to time the market while investing via SIPs because of the phenomenon of rupee-cost averaging.
• Low starting amount: Unlike a lumpsum investment, an SIP doesn’t require you to commit a large amount to start with. You can begin an SIP with an amount as low as Rs. 100. SIPs, therefore, allow investors to invest however much they can part with while honouring other financial obligations.
• Goal-oriented investments: You can create multiple SIPs each targeted at a specific financial goal. For example, you can invest in different SIPs for marriage expenses, buying a home, paying for children’s education, and so on. Each SIP is structured to optimise the return potential depending on your unique goal and risk appetite.
• Rupee-cost averaging: SIP investments play a crucial role in financial planning because of rupee-cost averaging benefits. When investing through an SIP, an investor will buy fewer units when the market is higher and more units when the market is lower. The rupee-cost averaging phenomenon ensures that your investment is able to mitigate market volatility and generate significant returns over the long term.
• Ease of investing: A common man with limited knowledge about the stock market or mutual funds can also safely invest via SIPs. Setting up an SIP can be done easily online or offline and using a One Time Mandate can automate the periodic investment process. This helps investors adopt a disciplined approach to investing and stay regular with their SIP contributions.
• Power of compounding: The power of compounding is often referred to as the “eighth wonder of the world”. This phenomenon ensures that you earn interest on interest potentially leading to a substantial corpus over a long term horizon. Potentially exponential returns can be achieved once investors understand the significance of compounding and the benefits of staying invested for longer.

Role of SIP in financial planning

• SIP investments can play multiple roles in financial planning as they help you in potentially creating wealth as well as mitigating risks such as short-term market volatility.
• Investing through SIPs instills a habit of disciplined investing in an investor.
• SIPs can also be tailored to specific financial goals such as buying a house, marriage expenditure, children’s education etc.

Conclusion

Systematic Investment Plan offers a structured approach for investors to meet key financial goals with the disciplined habit of regular investments. Investments made for long duration can yield substantial returns making SIPs an appropriate choice for Indian investors who are focused on financial planning. Moreover, SIPs minimising your risk and can help you meet specific financial goals. With a little patience and diligence, you can start your SIP journey today and make confident strides towards financial independence.

FAQs:

What exactly is a Systematic Investment Plan (SIP)?

SIP is a disciplined investment approach where investors contribute a fixed amount regularly into mutual funds. It promotes consistent investing and harnesses the power of compounding.

How does SIP help in mitigating the impact of market volatility?

SIP allows investors to buy more units when prices are low and fewer units when prices are high, averaging out the cost of investment over time and reducing the impact of market fluctuations.

What factors should I consider when choosing SIPs for my financial goals?

Consider your investment horizon, risk tolerance, and financial goals. Choose SIPs that align with your overall financial plan.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.