SIPs vs traditional savings: Why SIPs are the future of investing - World News Network

ATK
New Delhi [India], December 11: Planning for a secure financial future is a key responsibility, and the way you save and invest plays a crucial role in achieving it. Traditional saving methods like Fixed Deposits (FDs) and savings accounts have long been favoured due to their low risk and predictable returns. However, as investment strategies evolve, Systematic Investment Plans (SIPs) are gaining popularity. This shift raises an important question: Are SIPs set to become the future of investing and surpass the traditional ways of saving? Let’s delve into the details below.
Understanding SIPs
An SIP brings a disciplined approach to building wealth through mutual fund investments. It allows you to invest a fixed amount regularly, say monthly or quarterly, into a chosen mutual fund. This approach not only instils a disciplined investing habit but also leverages the power of rupee-cost averaging to mitigate the impact of market volatility.
To plan your SIP investments better, you can use an SIP calculator available online on various financial platforms. It helps you estimate future returns based on your monthly investment, tenure, and expected return rate. The tool is completely free and allows you to visualise your long-term financial growth in just a few seconds.
Understanding traditional savings
Take a detailed look below at some of the traditional saving methods:
* Fixed deposits: FDs are time-bound savings instruments that offer higher interest rates compared to regular savings accounts. The interest rate remains fixed throughout the term of the deposit, which can range from 7 days to 10 years. However, early withdrawal of funds from an FD usually attracts a penalty, which varies depending on the bank and the tenure of the deposit.
* Recurring Deposits (RDs): It is a structured savings plan where a fixed sum is invested periodically and at a predetermined interest rate. This encourages disciplined saving and is suitable for individuals who cannot afford a lump-sum investment. Like FDs, they offer fixed returns but lack liquidity.
* Savings accounts: They offer liquidity and safety for your funds, with the added benefit of earning interest. Interest rates on these accounts generally range from 3% to 6% annually, varying among banks.
How SIPs provide a better alternative to traditional savings
An SIP offers several advantages over traditional savings methods, such as:
Flexibility and accessibility: You can start SIPs with as little as Rs500 per month, and the investment can be increased as per your financial capacity.
Higher returns: SIPs, particularly those in equity mutual funds, are linked to market performance. Although they come with market risk, their long-term growth potential significantly exceeds that of traditional savings methods.
Rupee-cost averaging: As the stock market fluctuates, SIPs benefit from rupee-cost averaging, meaning that when prices are high, fewer units are bought, and when prices are low, more units are accumulated. Over time, this averaging of the per unit cost leads to substantial growth compared to traditional savings methods.
Diversification: SIPs inherently offer diversification by investing in a mix of stocks, bonds, or other asset classes, depending on the mutual fund chosen. This helps reduce risk and optimise returns, as poor performance in one sector or security can be offset by gains in another.
Multiple types of SIPs are available: Regular SIPs let you invest a fixed amount periodically, while top-up SIPs enable you to increase your investment as your financial capacity improves. Flexi SIPs offer flexibility in how much you invest each time, and with trigger SIPs, investments are automatically executed based on set triggers. With such options, SIPs are adaptable and address the needs of both conservative and aggressive investors.
Conclusion
While traditional savings methods remain useful for conservative investors or those seeking short-term financial stability, SIPs represent the future of wealth creation. They provide higher growth potential, affordability, rupee-cost averaging, and diversification, all while promoting disciplined investing. Best of all, you can easily invest in SIP plans online and start investing for your future with just a few clicks.
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