Have you ever been curious about how to begin your investment journey with limited funds? Or perhaps you are looking for a way to invest constantly without any hassle of timing the market? Here’s where Systematic Investment Plans (SIPs) can help.
By investing small amounts periodically, you can take advantage of the power of compounding and prepare for a robust financial future. Discussed here ways an SIP can play an integral role in financial planning for young professionals.
1) Importance of starting early
Beginning your SIPs early can make a considerable difference to your financial growth. The compounding effect works best when investments are performed over a longer duration. By beginning early, young professionals can accumulate a considerable corpus by the time they reach their goals. For example, using a mutual fund calculator, you can see how a small amount invested regularly can grow considerably over time owing to compound interest. The earlier you begin, the more time your money gets to grow, which can result in greater wealth accumulation than beginning later in life. Moreover, beginning early endows the flexibility to step up your SIP amount gradually as your income grows.
2) Aligning SIPs with financial goals
SIPs are versatile and can be aligned with distinct goals such as purchasing a home, financing higher education or planning a vacation trip. It is crucial to figure out your short-term and long-term goals and select the correct SIP mutual fund schemes that line up with these objectives. For short-term goals, debt or hybrid mutual fund schemes may be favourable, while equity mutual funds are often recommended for long-term goals owing to their potential to yield higher returns. Whether you are planning for retirement or saving for a down payment on a house, SIPs can assist you in systematically attaining these financial goals. By mapping your SIPs to specific goals, you can track your progress and remain motivated to continue investing.
3) Choosing the right mutual funds
Selecting the right mutual funds is essential for the success of your SIP investments. Factors you must consider are the fund’s previous performance, expense ratio and the fund manager’s track record. Diversifying your investments through distinct mutual funds, such as debt, equity and hybrid funds, can help balance returns and risk. Equity funds tend to offer higher returns but come with higher risk, while debt funds are usually safer with more stable returns. It is advisable to get in touch with a financial professional to choose the most favourable funds depending on your risk tolerance level and goals. A well-selected portfolio can enhance the SIP's performance and help you attain your objectives efficiently.
4) Tax benefits of SIPs
Investing in SIPs can even offer tax benefits, especially via Equity-Linked Savings Schemes (ELSS). Under Section 80C, investments up to ₹1.50 lakh in ELSS funds qualify for tax deductions. This dual benefit of potential wealth creation and tax saving makes SIPs an enticing option for young professionals looking to optimise their tax liability. ELSS funds have a lock-in period of three years, which is shorter than other tax-saving instruments. This makes them an attractive and flexible option for tax-conscious investors. By investing in ELSS via SIPs, you can disseminate your investment over the years and lower the burden of making a lump sum investment at the end of the financial year.
5) Automating investments for consistency
One of the prudent features of SIP is the potential to automate your investments. By setting up an automatic debit from your bank account, you ensure your investments are disciplined and consistent. This automation eliminates the temptation to time the market, which can be a common mistake among investors. Consistent investing through SIPs assists in averaging out the investment cost over time, commonly called rupee cost averaging. This strategy lowers the effect of market volatility and assists in accumulating more units when prices are low. Automation even makes it simpler to stick to your investment plan without the need for constant assessment and manual transactions.
6) Adapting SIPs during market volatility
Market volatility is inevitable, but SIPs can help you manage such scenarios. During market downturns, the fixed investment amount purchases more mutual fund units and during market upswings, it purchases fewer units. This approach assists in averaging the buying cost over time and potentially lowers the effect of market volatility. It is essential to remain invested and avoid withdrawing during market downturns to maximise the benefits of SIPs. Long-term investors can benefit from market volatility by continuing their SIPs for the long term. Always remember, remaining committed to your SIPs during both bad and good market phases can assist attain your financial goals effectively.
Ending note
SIPs play a crucial role in financial planning for young professionals. They promote disciplined investing, offer compounding benefits, and provide flexibility to align with distinct goals. By choosing the correct mutual funds, leveraging tax benefits, automating investments, and remaining resilient during market volatility, SIPs can considerably enhance your financial health. So, do not procrastinate; begin with investments early, and remain consistent for a prosperous financial future.
(This article is part of DMCL Consumer Connect Initiative, a paid publication programme. DMCL claims no editorial involvement and assumes no responsibility, liability or claims for any errors or omissions in the content of the article. The DMCL Editorial team is not responsible for this content.)
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