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Benefits Of Long-Term SIP

Benefits Of A Long-Term SIP For Achieving Your Financial Goals

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Systematic Investment Plans (SIPs) are generally very flexible regarding investment duration, except for the Equity Linked Saving Scheme (ELSS), which has a three-year lock-in period. In all other schemes, you can withdraw your invested money or stop your SIP anytime you want. However, sticking to your investment for the long term can offer several benefits. A long-term SIP can help achieve important milestones like retirement and home ownership, among others. Let's explore how SIPs work and why they are ideal for long-term investing.

What is an SIP?

An SIP is an investment made into a mutual fund scheme at regular intervals. SIPs allow you to invest weekly, monthly, quarterly, or even annually for as long as you want. The money invested over time is allocated to different securities according to the scheme’s investment objectives. In most mutual fund schemes, you can start an SIP with an investment capital of as low as Rs 500.

How do long-term sips help with financial goals?

A long-term SIP can offer numerous advantages and help you achieve your financial goals in the following ways:

  1. SIPs offer the power of compounding  

When you invest in mutual funds, you benefit from the power of compounding. Thanks to compounding, the returns generated on your invested capital are reinvested in the market to earn better returns. This helps you earn more.

The true potential of compounding can be seen in long-term investments. The longer you stay invested, the more times your profits are reinvested into the market. Over time, this can potentially enhance your overall gains.

  1. SIPs let you benefit from rupee cost-averaging

A mutual fund scheme's Net Asset Value (NAV) fluctuates daily. When you invest a fixed amount through an SIP at regular intervals, you end up buying more units of the fund when prices are low and fewer units when prices increase.

For instance, if the NAV is Rs 2 and you invest 5000, you will get 2500 units. However, if the NAV is Rs 5, you will get only 1000 units for an investment of Rs 5000.

Also known as rupee cost averaging, this phenomenon helps balance out the costs of investment over time. Over a longer period, the effects of rupee cost averaging tend to become more pronounced. This, along with the power of compounding, adds to the potential growth of your investment over time.

  1. SIPs lower the impact of market volatility

Sudden highs and lows in the prices of stocks and other securities can create market volatility, which can impact your investment returns. Predicting market volatility and timing your investments can be difficult. Instead, investing regularly through a long-term SIP is a lot more convenient, and it reduces the risk of investing a large sum of money at an inopportune time.

SIPs allow you to spread your money across different market conditions over the years, which helps mitigate the impact of market ups and downs.

  1. SIPs promote disciplined investments

Long-term SIPs promote disciplined investing by encouraging consistency. Setting up an automated SIP ensures that you invest your money at your chosen frequency without fail. For example, setting up an SIP at the beginning of each month ensures that your money is invested towards your future goals before you spend it on other things. This disciplined approach helps you accumulate wealth over the years, which can be used to achieve your long-term financial goals.

  1. Long-term SIPs maximise tax benefits

The ELSS is a mutual fund scheme that allows you to claim a tax deduction of up to Rs 1.5 lakh per annum under Section 80C of the Income Tax Act, 1961. Investing in an ELSS through a long-term SIP can help you maximise tax benefits year after year. The savings you make through tax deductions can be further invested in mutual funds to contribute towards your future financial goals. This strategy not only reduces your taxable income but also helps you build wealth over time.

How to select the best SIP for long-term financial goals?

You can follow these steps to choose the best SIP for your long-term goals:

  1. Research well and select a fund that aligns with your financial goals and risk appetite. You can use a long-term SIP calculator to compare different funds.
  2. Look for a fund with a diversified portfolio to lower risk. It is also important for you to create a portfolio of diversified mutual funds to spread risk.
  3. Regularly review your investments over the years to assess their performance and make adjustments if needed.
  4. Do not be afraid to seek help from a financial advisor if necessary to ensure your investments stay on track and aligned with your goals.

Conclusion

A long-term SIP can offer many benefits, but it is crucial to note that a long investment horizon does not guarantee returns. Several factors can impact your fund's performance over time. Therefore, it is essential to conduct thorough research and make educated, informed decisions when selecting and managing your investments.

 

An investor education initiative by Edelweiss Mutual Fund

 

All Mutual Fund Investors have to go through a one-time KYC process. Investors should deal only with Registered Mutual Fund (RMF). For more info on KYC, RMF and procedure to lodge/redress any complaints, visit - https://www.edelweissmf.com/kyc-norms  

 

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS. READ ALL SCHEME-RELATED DOCUMENTS CAREFULLY

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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.