10 Reasons Why SIP Investments Are Perfect for Young Investors

Young individuals tend to have a lot on their plate. They juggle their career, personal life, family commitments, and whatnot. Balancing these is already hard, and throw investing in the mix? Things start to get even more hectic. Thankfully, we have SIPs to make that last part easier. Systematic Investment Plans (SIPs) are a way to invest in mutual funds. They allow you to invest a fixed amount regularly, and slowly build wealth to realise your financial dreams. 

This approach is gaining more and more popularity among investors for several reasons, but the popularity of sip can mainly be credited to accessibility and ease of investing. That‘s why sip is best for those who want to start small and reap big rewards in the long term. So why is sip a good investment for young investors? We’ve got 10 reasons why! Take a look! 

1. Start Early, Reap More Rewards

So what’s the advantage of starting early? Well, the longer you stay invested, the more time you give compounding interest to work its magic. Compound interest is earned on both the principal amount, as well as the interest earned on the previous period. That means if you invest Rs. 100 at 10% compound interest, in the first year you will earn Rs. 10. In the second year however, the compound interest will be calculated on Rs. 100 + Rs. 10, that is Rs. 110. So in the second year, you’ll earn Rs. 11. This process will continue till you stay invested, and it will allow you to earn interest on interest. Take a look at this example to understand what a difference starting early can make. Suppose you want to retire by 60. You start investing 5,000 every month and expect your investment to return at 12%. Let’s see the impact of two different starting points:

• If you start at age 25, your investing period will be 35 years, and by 60, you will have amassed Rs. 3,24,76,345.
• Now if you start investing a little late, say at 40, your investment period will be only 20 years. Despite the same monthly investment and rate of return, by the time you reach 60, your investment will grow to around Rs. 49,95,740. Not a small sum, but the difference between the two starting points is huge. In this case, a 15 year gap means a difference of over six times the amount.

Another advantage of starting your investment planning journey early is that you can afford to take more risks and invest in equity products such as stocks and equity mutual fund SIPs. This is because in the short-term equity instruments can be volatile, but over the long-term they stabilise and have the potential to provide higher returns. An individual starting their retirement planning late cannot afford to take many risks because the main goal at that point is wealth preservation. So their exposure to equity is limited and they generally invest in options that offer low to moderate returns. Starting early, however, can help you create wealth. 

2. Low Entry Barrier 

A big factor that has contributed to the popularity of SIPs is accessibility. It has dispelled the notion that investing is something only wealthy people can do. With an SIP, you can start investing in mutual funds with as little as Rs. 500 per month. This is especially important for young investors who don’t have a lot of disposable income. The low entry barrier allows an early starting point, which as you can see in the first point is crucial. 

3. Diversification Made Easy

An investor who mainly invests in stocks maintains a diverse portfolio by investing in a variety of stocks across different companies, sectors, and industries. They do this because it mitigates risk, and should any single stock perform poorly, the impact on the overall portfolio is minimised. With a mutual fund SIP, you can enjoy the benefits of diversification, without the hassle of managing multiple individual investments yourself. Every rupee you contribute gets invested in a diversified portfolio of assets chosen by professional fund managers. 

4. Disciplined Investing Habit

Discipline is an important virtue of successful investors. With SIPs one has to make fixed, regular payments, which helps instil discipline in young investors. It requires you to make a budget and regularly save funds for investment purposes. Over time disciplined savings become a habit and help you realise your long-term financial dreams. This is made even easier by SIPs, as you don’t have to manually invest every month, but the money gets automatically deducted from your linked bank account. 

5. Rupee Cost Averaging

One of the biggest challenges any investor faces is timing the market. Of course, you would want to buy when the price is as low as possible and sell when the price has peaked. But the problem that comes with timing the market is that it’s incredibly difficult to predict the moments when prices will rise or fall. You may wait too long for the price to drop even further, only to find out that the market has bounced back. Similarly, you may miss an opportunity to sell at the peak because you’re waiting for prices to go even higher, only to see them go down afterwards. One may get a bet or two right, but playing this game and winning consistently is nearly impossible. Mutual fund SIPs eliminate the need to time the market with rupee cost averaging. When you invest in a mutual fund through an SIP, you invest at different points in time, regardless of whether the market is up or down, and without being swayed by emotions.

The Net Asset Value (NAV) of the fund constantly changes. It may be low one month, and higher the next. When the NAV of a mutual fund is low, those who invest through SIPs will buy more units for the same fixed monthly amount. When the NAV is higher in another month, investors will buy fewer units. Over time, rupee cost averaging lowers the average per unit cost of your mutual fund investment, which means higher returns. Simply contributing regularly allows you to effectively manage the market’s ups and downs.

6. Flexibility and Convenience

Investing in a mutual fund SIP is very easy! You can get started from the comfort of your home by selecting a suitable mutual fund, setting up your SIP preferences, and completing the KYC. And the convenience doesn’t end there. SIP investments are automatic, so you don’t have to worry about remembering to invest every month. The money will get deducted from your linked bank account automatically without you having to do anything manually. SIPs are also highly flexible. You can alter the investment amount or temporarily pause it as per your financial situation. 

For example, you can start low, and as your career progresses and you get promotions you can increase the amount you regularly contribute. Similarly, if you are met with unexpected expenses, you have the option to decrease or pause your SIP temporarily until you are ready to continue regular contributions. The duration you can pause your investment differs from fund house to fund house, but generally, Asset Management Companies allow pauses of up to three months, six months, or sometimes even a year. You can also control the frequency of your contributions, like weekly, monthly, quarterly, or semi-annually. The flexibility offered by SIPs is especially important for young investors as their financial situation undergoes frequent changes.

7. Professional Management

Another significant advantage of SIPs is that they are managed by professional fund managers. These highly skilled professionals are at the top of their field with years of experience and expertise in the financial world. They work with highly trained teams of analysts who conduct in-depth research and market monitoring to identify risks and new investment opportunities. When you invest in a mutual fund, your money is managed by these professionals who have vast amounts of knowledge and experience. 

Young investors often have many commitments which leave them with limited time to actively manage their investments. The process of conducting thorough research and analysis can demand a lot of time and effort, and matching the skill and experience of a professional fund manager can be a tough task for those new to the world of investing.

8. Tax Benefits

Mutual funds get taxed based on the type of fund and the holding period of the investment. For example, a debt mutual fund has different taxation rules compared to an equity mutual fund. Taxation also depends on how long the investment was held. Two types of taxes are levied on this basis – Short-term capital gains tax (STCG Tax) and Long-term capital gains tax (LTCG Tax). 

For example, if you hold your equity mutual fund investment long enough for the gains to be classified as long-term capital gains, you will be charged LTCG tax. You’ll be taxed at 10% on the gains, with the first Rs. 1 lakh exempt from taxation each year. On the other hand, if you hold it for the short term, you’ll be taxed at 15%. You can also specifically invest in a tax saving mutual fund, called Equity Linked Savings Scheme (ELSS) to get tax benefits.

Investing in ELSS can help you claim a tax deduction of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act, 1961. As the name suggests, these mutual funds mainly invest in equity instruments. These funds have a lock-in period of 3 years, during which you cannot redeem your investments. 

Remember that the three year lock-in period should be used only for the purposes of saving tax. If you are investing in ELSS you should do so with a long-term mindset because equity comes with significant market risk in the short-term. In the long term, you can ride out the market fluctuations and accumulate wealth.

Tax planning is a major part of financial planning, so if you are thinking about investing to maximise your tax savings, always consult with a financial planner before making a decision. A SIP planner can assess your financial situation, such as income, investment horizon, financial goals and tax bracket, and recommend the most suitable SIP investment options for optimising tax efficiency without compromising your other goals. 

9. Achieving Long-Term Goals

We have already seen how compounding interest makes SIPs an excellent tool for realising long-term financial dreams. For many young investors, financial goals like buying a house, funding children’s higher education, and building a retirement corpus may seem like a distant dream, but SIPs allow you to slowly and effectively work towards these goals. All an SIP takes is making fixed, regular payments each month. Commit to this simple habit and you can free up mental energy and time to focus on your career or business. As your income increases you can increase your contributions to achieve your goals faster. But the key here yet again is making an early start. 

10. Psychological Benefits

Here are some of the many psychological benefits of investing in a mutual fund SIP:

• The mutual fund industry in India is growing rapidly. With a growing number of investors, the Securities and Exchange Board of India (SEBI) has made strict rules to make sure the investor’s interests are protected. 
• SEBI and AMFI (Association of Mutual Funds in India) also make sure the integrity and stability of the mutual fund industry are upheld. Their regulation eliminates worries about unethical practices, fraudulent schemes, and misinformation.
• You can also track your investment online or through apps any time you want. AMCs also release fact sheets that provide detailed information about mutual funds, such as performance metrics, portfolio allocation, and fund manager communication. It’s easy to stay informed about your investment, which fills you with confidence and peace of mind.
• Since you are committing to making regular and fixed payments each month, you don’t have to worry about timing the market either. You can simply let rupee cost averaging do its thing.
• Knowing your hard-earned money is in the hands of an experienced professional is also reassuring and gives a sense of security.
• SIPs do not take a lot of time and effort. They allow you to focus on other important things in life such as advancing in your career, spending time with family and friends, and pursuing hobbies.
• Unlike stock investing, where investors have to actively monitor market fluctuations, news, and individual stock performance, investing through SIPs is a more passive approach. SIP investors have to review the fund performance once or twice every 6 months, quarter, or month, which can save them time and effort.
• Knowing the fact that you are taking steps towards a financially secure future also helps reduce financial stress and anxiety. 

Conclusion:

From compound interest and easy accessibility to diversification and professional management, SIP offers many benefits. It is an excellent option for young investors for several reasons, but it’s mainly because young investors have the gift of time on their side, and time is what allows compounding interest to work its magic. SIP removes financial constraints and allows young investors to start small and increase contributions as their financial situation improves. It also offers flexibility, tax deductions, and several psychological benefits. 

All these factors can help young individuals efficiently build wealth over time.

Your investments should always be aligned with your financial situation, goals, investment horizon, and risk tolerance. Before making a decision, you should consider consulting with a best sip planner. An SIP planner can assess the above factors and based on them make a personalised investment plan for you. They can guide you on different types of funds, fund managers, risk-adjusted ratios, expense ratios, and other technical aspects to help you make informed investment decisions. An SIP planner can also monitor your portfolio and recommend changes as your financial situation, the fund’s performance, or the market conditions change.

Don’t delay, start your SIP today!