What are SIPs and how do they work?
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What are SIPs and How Do They Work?

  • Highlights

  • SIPs compound the interest year on year

  • You can get benefits due to rupee cost averaging

  • SIPs allow you to select the tenor of your choice

  • SIPs also offer easy access to your funds

An SIP or a Systematic Investment Plan allows you to invest a fixed amount regularly in a mutual fund scheme based on your financial goals. The SIP interest rate goes up to 22%, making it an excellent investment instrument. Besides, investing in SIPs such as those that Bajaj Finserv offers is easy. You can expect a tidy sum without taking on the stress associated with investing in securities.

The best part about investing in SIPsis that there is no need for you to make a lump sum investment. Instead, you can invest a fixed amount each month. All you need to do is talk to your financial planner or portfolio manager to select the best mutual funds for SIP. This will ensurethat it offers you substantial returns over time.

Follow this complete guide to SIPs and understand how anSIPworks can help you maximise your earnings.

Power of compounding

Compounding is the process where the interest earned in the first year is added to your base amount, thereby increasing it in the next year. This method helps your corpus grow exponentially, and offers almost double the returns as compared to simple interest. The effect of compounding is highest when you opt for anSIP with a long tenor of about 5 years.

Rupee cost averaging

This is the process of investing a sum of money at regular intervals and buying securities each month according to market conditions. The aim of this method is to buy more when prices are low and fewer when prices are high. Over a long period, this system cancels the impact of market highs and lows, thereby giving you better returns.

Investing on a timely basis

SIPs allow you to invest a fixed sum of money on a timely basis, usually monthly or quarterly. However, depending on your income, you can also invest on a weekly or even on an annual basis. This helps you invest regularly and develop an investment habit.

5 Reasons why you should invest in SIPs

Choosing a tenor of your choice

As an investor you may seek a mid-length tenor to save enough to meet a specific need, or you may want to invest in the long term to create wealth. The good part about investing in an SIP is that you can stay invested for as long as you want to. So, whether it is 6 months or 20 years, you can choose a tenor as per your financial goals. However, remember that the longer you invest in SIPs, the higher your gains will be.

Make use of an SIP calculator such as this one offered by Bajaj Finserv, and see for yourself how investing for a longer period offers better returns.

Now that you know how anSIP works, here are some of the benefits of SIP investment which you can enjoy.
- Enjoy high returns without the hassle associated with investing in securities.
- You can invest an amount as low as Rs.500. You don’t have to save first before investing.
- You can claim Exempt, Exempt, Exempt tax benefit under Section 80C of the Income Tax Act.
- With no lock-in period (unless you choose ELSS-backed SIPs), this instrument offers superior liquidity.
- Investing in mutual funds via SIPs offers better results than investing a lump sum due to rupee cost averaging.

In these ways, investing in a SIP can be ideal for you. However, before investing ensure that you are aware of the benefits, as well as the associated charges. This will ensure that the SIP matches your requirements.

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