8 Benefits of Using SIP in Mutual Funds to Build Wealth

A systematic investment plan (SIP) makes investing accessible and flexible for all investors, regardless of their income level. SIPs allow you to invest regularly in various types of mutual funds, including equity funds, debt funds, hybrid funds, sectoral funds, index funds, and funds of funds. You can select the amount and frequency of the SIP as per your preference and affordability.

Investors can start investing in mutual funds with a small amount such as ₹250 to ₹500, depending on the fund house rules.

Let’s explore the top 8 benefits of investing in mutual funds via SIP.

Low Entry Barrier

One of the advantages of investing via SIP is that you don't need a large sum of money to start investing. You can begin with SIPs of as little as ₹500 per month, depending on the scheme's minimum investment requirements.

Compounding Effect

Often called the eighth wonder of the world, compounding helps your investments grow significantly over the long term through SIPs. Each SIP instalment purchases mutual fund units at the applicable NAV. In mutual funds with a growth option, returns, if any, remain invested in the scheme, allowing the potential benefits of compounding over time. However, returns are not guaranteed.

Rupee Cost Averaging

Rupee cost averaging is a benefit of investing in mutual funds via SIP and is tied to the net asset value (NAV), which is the per-unit value of a mutual fund scheme, calculated daily on business days. When you invest a fixed amount, like ₹1,000, the NAV determines how many units you get. A low NAV gets you more units, and a high NAV gets you fewer. This can help spread purchases across different market levels, but it does not guarantee profits or protect against losses.

Tax Benefits

Tax benefits are one of the features that attract investors to Equity-Linked Savings Schemes (ELSS). Under the Old Tax Regime, ELSS mutual fund investments are eligible for tax deductions of up to ₹1.5 lakh under Section 80C of the Income Tax Act, subject to the overall deduction limit and applicable conditions. This can potentially offer a dual advantage, i.e market-linked returns and tax deductions.

For example, if you invest a total of ₹1.5 lakh in ELSS funds in a financial year, you can claim a deduction on the eligible amount, subject to the overall Section 80C limit and other applicable conditions.

Just keep in mind that with an ELSS SIP, each monthly SIP instalment remains locked in for three years from the date of allotment of the units purchased through that instalment, and Section 80C deductions apply only if you choose the Old Tax Regime.

Flexibility

SIPs are flexible; you can choose the amount and frequency of your investment. Additionally, step-up SIPs allow you to increase your investment amount at regular intervals. This is ideal for young professionals who expect their income to rise over the years.

Diversification

Investing in mutual funds allows you to invest in a mix of asset classes, including equities, bonds, and even commodities like gold. This diversification helps to balance out the risks and offers a safety net during market volatility. By spreading your investments across various sectors, this reduces the overreliance on a single sector or a few stocks.

Liquidity

Ideally, you must hold your mutual fund investments for the long term to build wealth and gain capital appreciation, though you can choose to withdraw your mutual fund investment since there is no lock-in period.

Unlike tax-saving ELSS funds, which have a three-year lock-in, most open-ended mutual fund SIPs allow you to withdraw your money quickly. This gives you a level of liquidity that you might not find in some other tax-saving investment options such as Fixed Deposits and NPS (National Pension System).

Goal-Oriented Investment

Through SIPs, you can set financial goals and work towards them systematically. Whether it's buying a home, funding your child's education, or planning for retirement, SIPs offer a structured way to achieve these milestones.

You can accumulate significant wealth over time through steady and disciplined investing in SIPs. The sooner you start your SIP journey, the quicker you'll grow your wealth.

FAQs

What is a SIP in mutual funds?

A SIP (Systematic Investment Plan) allows you to invest a fixed amount in mutual funds regularly, such as every month.

What is the minimum amount required to start a SIP?

You can start a SIP with as little as ₹250 to ₹500 per month, depending on the mutual fund scheme.

What are the main benefits of investing through SIP?

SIPs offer benefits such as affordable investing, compounding, rupee cost averaging, flexibility, and diversification.

Can I withdraw my money from mutual funds anytime?

You can withdraw money from most open-ended mutual funds, but ELSS funds have a three-year lock-in period for each investment.