Why SIP Investment Is Highly Recommended for Millennials

Today’s youth are fast learners. They understand the importance of savings and are usually seen investing in some or the other financial scheme for long term capital gains. When you are young, you can take added risk with your finances. In most cases, young investors do not have any existing liabilities or financial commitments. This gives them the upper hand of playing aggressively when it comes to strategizing investments.

Earlier, people only had conservative investment avenues to choose from. The problem with conservative schemes was the although they offered fixed interest rates, these interest rates on offer were generally on the lower end. It was almost impossible for individuals to target long term goals like buying a house, building a retirement corpus, send their children overseas for foreign education, etc. Thanks to the introduction of mutual fund schemes, investors now have the opportunity to witness their small investment amounts grow and succeed in wealth creation. Millennials with a moderate to high risk appetite keen on creating wealth over the long term can consider investing in market linked schemes like mutual funds.

For those who are new to mutual funds, these are a pool of professionally managed funds where the fund manager has the responsibility of buying and selling securities in quantum with the scheme’s investment objective. A mutual fund aims are generating capital appreciation by investing in a diversified portfolio of securities. Mutual fund investors get an opportunity of generating profits by investing in various sectors and industries which otherwise would not have been possible. Asset Management Companies and fund houses owning mutual funds collect money from investors sharing a common investment objective and invest this pool of funds across the various economies, currencies, asset classes and money market instruments.

What is SIP?

The term SIP is almost synonymous with mutual funds that new investors often confuse SIP as mutual fund schemes. A Systematic Investment Plan, abbreviated as SIP, is an easy and hassle free way to continue investing in mutual funds for a longer period. Earlier, mutual fund investors only had the option of making a onetime lumpsum investment. The problem with lumpsum investments is that your entire investment amount is exposed to market volatility right from the beginning of the investment cycle. On the other hand, SIP gives investors the option of making small systematic investments are periodic intervals.

Why should millennials start a SIP in mutual funds?

Young earners seeking investment in mutual funds via SIP must be KYC compliant. To start a mutual fund SIP, investors have to complete a one time mandate with their bank. Once they are done deciding the monthly SIP investment amount, every month on a fixed date the decided amount with be auto debited from their savings account and electronically transferred to your mutual fund portfolio. Investors will be allotted units in quantum with the SIP investment amount and depending on the fund’s current NAV (net asset value).

SIP investments have their own perks. For example, if you invest in equity funds and have an investment horizon of five years and start a SIP in mutual funds, you can benefit from power of compounding. When you earn interest on the interest earned from the principal investment amount, it is referred to as compounding. Through systematic investing, it is now possible for investors to target their life’s long term financial goals. Millennials have the advantage of starting early and benefiting by having more years in hand to invest and give themselves an opportunity to create wealth.