New Delhi [India], March 1: A Systematic Investment Plan or SIP continues to be one of the best investment options for retail investors looking to build wealth over the long term in a disciplined manner. While there is no assurance of guaranteed returns, an SIP as an investment approach has stood the test of time and weathered many market ups and downs. With already two months into 2024, here are some of the key reasons why SIP mode of investment should remain your preferred choice:

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Averages out market volatility

One of the biggest advantages of an SIP is that it averages out the cost of units over a period of time. When the markets are down, your SIP units get purchased at a lower price. And when markets are up, you get fewer units. This averages out the entry price and removes the concern of market timing. Trying to time the market yourself can be very difficult and you may end up missing out on potential upside if you do not invest during periods of growth. SIP ensures regular investments are made regardless of market movements.

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Disciplined savings approach

An SIP enforces financial discipline by requiring fixed regular investments even during periods of market weakness. Many investors tend to postpone investments when markets are falling, precisely when they should be investing more. An SIP takes this emotional decision making out of the equation by automatically deducting the amount from your bank account each month. This encourages habits of regular disciplined savings and investments. Staying invested through thick and thin is crucial to achieving long term goals through equity investments.

Power of compounding works better

An SIP allows you to take advantage of compounding returns over longer periods. The growth on your earlier investments gets compounded when you continuously invest via SIP for 5,10 or 20 years. Compounding magnifies your returns exponentially the longer your investment horizon. A 20-year SIP can generate significantly higher returns than a one-time lumpsum investment made 20 years ago, even if both amounts invested are the same. SIP accelerates the compounding effect by continuously investing smaller amounts regularly. Use SIP Calculator to see how your investment will be compounded over the years

Hedges inflation risk

Investing in equities provides protection against inflation erosion of your purchasing power over the long run. But it's difficult to time the markets to deploy lumpsum amounts perfectly to fight inflation. SIP allows you to steadily accumulate units in growth assets as inflation rises year after year. Your monthly investments will keep buying more units every time prices increase. So the number of units you own keeps rising as inflation compounds. This provides an inflation adjusted return which lumpsum investment may not be able to match.

Suitable for all goals and budgets

Whether you are saving for long term goals like child's education, retirement or short-term goals like a vacation, an SIP offers flexibility across budget sizes and timeframes. You can start investing even with small monthly amounts as low as Rs.500 through SIPs. This makes equity investments accessible to all income groups. Goals 10-15 years away are well suited for market linked equity SIPs which have the potential to generate higher returns than other savings options.

Ending note

Investment planning using an SIP continues to remain a prudent and steady strategy to accumulate wealth via equities regardless of gyrations in the capital markets. Automated deductions take the emotion out and enforce discipline. By staying invested through inevitable downturns, SIPs are poised to generate superior returns compared to any other mode of investment once the investment horizon exceeds 5-7 years.

With discipline and patience, SIP investors stand to reap rich rewards in the coming decade too thanks to the power of compounding. Those seeking steady wealth creation should strongly prefer SIPs and continue with their plans undeterred in 2024.

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