Reported by: banking|Updated: June 8, 2016
An SIP is a periodic mandate that is given to the mutual fund to deduct a fixed amount from your bank account at a designated date. For example, if you decide to invest Rs 10,000 in a mutual fund through a monthly SIP, the fund company will use the ECS facility to deduct that amount from your bank account at a pre-decided date every month.
Every personal finance and investment expert will tell you that the best way of investing in an equity linked savings scheme (ELSS) is through systematic investment plans (SIP). SIPs are touted to be the wealth-generating way of investing for the long-term. And there is good reason to believe in this method of investing, especially for tax-saving mutual funds that provide the dual benefit of saving taxes and building long-term wealth.
SIPs are beneficial for their own reasons, but also because investing in lump sum has many pitfalls. When you invest lump sum in an equity mutual fund, you run the risk of catching a market peak. What this means is that you might invest on a day when the market is at a high. The stocks markets are volatile and if they go down after you’ve made a lump sum investment, you will see a major erosion in your invested amount. This will lead to a monetary loss and turn you away from equity and away from creating wealth over the long-term.
The way out of this is SIPs. Apart from the fact that they help beat anxiety, the four major benefits of SIPs are as follows:
Rupee cost averaging
Unlike a lump sum investment where you invest at only one level of the market, SIPs allow you to invest at different levels. The equity markets will invariably be at different levels on the designated date of your monthly SIP, allowing you to average out your cost of acquisition. When the markets will be low, you will be able to get more units. And vice versa. This way, you average unit price throughout the year would be averaged out.
Investing in equity mutual funds can be tricky because the stock markets are volatile. Investors tend to shy away from equity because of the ups and downs they witness. But in doing so, they give up on the opportunity to generate high returns over the long-term. Equity has proven to be the best-performing asset class over periods of 10-15 years, which is when the magic of compounding interest starts to show. But to get the best of this, you need to not only invest regularly but also stay invested.
Small amounts and big gains
SIPs allow investors to invest small amounts every month. Most ELSS funds accept investments of Rs 500 to Rs 1,000 a month. This is how small saving can lead to higher returns in the long-term. The amounts that you invest in ELSS funds will not only lead to tax saving, but a regular investment will grow to become a large corpus after a few years.
Through an ELSS fund, you get the services of a professional fund manager at a very nominal fee. You don’t need to pick shares or sectors to invest in, the fund company’s research and analysis team does that work for you. You don’t need to open a demat account or go to a stock broker to get exposure to the equity markets; an ELSS fund helps you do that easily. Furthermore, with an ECS mandate, you can automate your savings plan through SIPs. These conveniences make ELSS funds a great investment option for exposure to equity.
These are the four major reasons to start investing in ELSS funds through SIPs to not only save taxes but build wealth over the long-term.
(ClearTax, founded by Archit Gupta, Raja Ram Gupta, Srivatsan Chari and Ankit Solanki, aims to simplify financial lives of Indian taxpayers, both individuals and businesses, especially in e-filing tax returns. ClearTax was Y-Combinator’s first India focused investment.)