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Systematic Investment Plan: Equity funds SIP can help you beat inflation, create wealth: It’s not too late-Make it today !
One of the few investment avenues that has the capacity to beat inflation comprehensively in the long run is equity.
From keeping the money saved in lockers and investing in gold, Indian investors have become more financially savvy to invest their hard-earned money in financial assets.
From keeping the money saved in lockers and investing in gold, Indian investors have become more financially savvy to invest their hard-earned money in financial assets.
With predominantly conservative mentality, Indian investors first moved to Fixed Deposits (FD) and secured small saving instruments offered by Post Office, like – Post Office Time Deposits, Recurring Deposit, Monthly Income Scheme (MIS), National Savings Certificate (NSC), Kisan Vikas Patra (KVP) etc.
However, with the key policy rates currently kept very low by the Reserve Bank of India (RBI), the interest rates offered by fixed income instruments have not only become unattractive, but also fail to beat the rate of inflation on many occasions.
Whenever the rate of interest lags the inflation rate, the money invested by fixed-income investors loses its purchasing power over time, even as the capital invested remains stable. After paying tax on the interest earned, such investors suffer further loss in purchasing power of the capital invested on maturity.
As a result, many of the fixed-income investors, having some risk tolerance capacity, are exploring other investment options with tax efficiency and the capacity of beating inflation in the long term.
One of the few investment avenues that has the capacity to beat inflation comprehensively in the long run is equity. But to invest in direct equity, a person should have time, knowledge and interest to study the financial health of companies and track the equity markets.
Moreover, to lower the risks through diversification, one needs to invest big amounts to purchase the shares of many good companies operating in unrelated sectors.
To overcome the constraints of time, experience and large capital, as well as to lower the market risks further, the best way to enter the equity market is through the SIP (Systematic Investment Plan) route in equity-oriented Mutual Funds (MFs).
By investing a small amount through monthly SIP, a person may get a portion of a diversified portfolio of equity-oriented MF schemes managed by professional fund managers. Moreover, with the same amount of money getting invested in high, low and average markets, the overall market risks of such investors become average.
With a higher number of units acquired during low-market investments, the returns generally become higher for SIP investors compared to lump sum investors.
As equities have the capability of generating inflation-beating superior long-term return, as well as with a lower tax rate of 10 per cent on long-term capital gain (LTCG) in excess of Rs 1 lakh on total redemption made in a financial year, the investors may not only beat inflation, but may also create wealth in long run through consistent investments in all market cycles.
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