Why so many financial advisors and mutual fund distributors consider SIP as the best investment strategy?

When you talk to most mutual fund distributors or financial advisors, you are most likely to come across one common recommendation: start an SIP in a mutual fund scheme. Why do they so commonly recommend this? Is SIP so good?

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The English translation of the article is as under:

Why so many financial advisors and mutual fund distributors consider SIP as the best investment strategy?

When you talk to most mutual fund distributors or financial advisors, you are most likely to come across one common recommendation: start an SIP in a mutual fund scheme. Why do they so commonly recommend this? Is SIP so good?

Well, there are many arguments and counterarguments regarding the merits of SIP. Some tend to indicate that investment through SIP may result into higher returns as compared to lump sum investing and there are arguments against this point. According to me, it is a fruitless exercise to try and figure out which strategy would result into higher returns. It is not the rate of return, but the amount accumulated for a goal that matters to an investor.

Given this, the discussion must shift to the amount required for the goal and the time available for such accumulation. With this information in hand, one has to plan to ensure enough amount is available at the time of the requirement.

There are three approaches that one may adopt:

1.     Investing lump sum

2.     Investing small amounts on a regular basis

3.     A combination of the above two

As we know, most of us often do not have large lump sum amounts available for investment and that most of us earn, spend and save on a regular basis. Due to this situation, regular investing becomes a better option, which helps us channelize our regular savings into productive investments.

SIP is not about earning higher returns, but about getting into a discipline of investing on a regular basis. It is this discipline that helps us accumulate large sums over long periods. Remember the old saying,

Every drop makes an ocean

Small amounts invested over a period have the power to help one reach one’s financial goals. This discipline is similar to the advice most seasoned cricketers give young batsmen – keep taking one and two runs and don’t rely heavily on the fours and sixes, keep rotating the strike. These runs add up to many over the course of a match.

SIP allows you to buy a diversified portfolio through investing small amounts on a regular basis. We have already seen the benefit of diversification earlier. Add to that the other benefit offered by SIP – Rupee cost averaging, which reduces the cost of buying the units. If you keep your money invested for long periods, the power of compounding sets in, helping you create a corpus enough to take care of your financial goals and your financial future.

All the best! Save regularly, in a disciplined way through an SIP.

-       Amit Trivedi