6 ways mutual fund SIPs may help you beat inflation


Systematic Investment Plan (SIP) offers a disciplined approach to investors amidst market volatility and inflation. It enables rupee cost averaging, compounding effects, diversified portfolios, and long-term horizons, providing a valuable tool for financial growth and stability. However, one must remember SIP can be an effective tool to create wealth but there is no guarantee to generate returns.

SIP enforces financial discipline. By committing to invest a fixed sum of money regularly, you develop a habit of saving and investing.

The biggest hurdle for an investor is how to create wealth without being affected by the market volatility. We have seen indices touching record highs in the recent past. Much to the chagrin of small savers, sky-high inflation is eating into the savings of low- and middle-income families. Which road is to be taken or which financial instrument is to be chosen for earning an extra buck is a big worry for many.

The simple and proven answer to these queries is the Systematic Investment Plan (SIP) of a mutual fund (MF) scheme. SIP is a robust strategy that may help savers beat inflation and may grow their money. However, it’s important to note that SIP can be an effective tool to create wealth but there is no guarantee to generate returns.

Here are some advantages of SIPs:

1) Steady Investment

SIP enforces financial discipline. By committing to invest a fixed sum of money regularly, you develop a habit of saving and investing. For the beginners and young investors, SIP is best suited to serve their goals as one need not have to wait for an investible surplus to begin an MF investment.

This consistent approach may help investors to generate inflation beating returns. While the value of money decreases over a period of time due to inflation, SIP investment may grow steadily.

2) Rupee Cost Averaging

Essentially, SIP is an investment strategy that doesn’t rely on timing the market. Instead, it allows you to purchase more units of a mutual fund when asset prices are low and lesser units when asset prices are high. This concept, known as rupee cost averaging, mitigates the risks associated with market volatility. This process effectively reduces the investors’ average cost of buying each MF unit.

3) The Power of Compounding

The power of compounding is one of the most remarkable features of SIP. Over time, this compounding effect may substantially increase the value of one’s portfolio. Inflation may nibble away at your money, but compounding ensures that your investments have the potential to outpace inflation and may grow wealth exponentially.

4) Diversified Portfolio

SIPs allow investors to subscribe to a diverse range of MF schemes such as equity, debt, ETF and hybrid funds. Diversification spreads risk across various asset classes, reducing the impact of inflation on the overall portfolio. While equities tend to generally outperform inflation in the long run, debt funds may provide stability in a portfolio. A well-structured SIP portfolio may help you combat inflation effectively.

5) Long-term Horizon

There is no permanent cure for inflation and market volatility. Both reappear periodically and unexpectedly. So, starting a SIP with a long-term horizon is ideal for beating these cyclical phenomena.

By staying invested for an extended period, you give your money more time to grow and recover from temporary shocks. The compounding effect is more potent over the longer durations. It makes SIP an ideal choice for those who wish to contain capital erosion and withstand the test of time.

6) Top-up Facility

If you feel that your investment is not sufficient to meet the future demands, you can opt for periodic top-ups. As a result, when your income increases you can increase the SIP contribution proportionately.

According to the data by AMFI, in the past seven years, SIP / month has risen by 25% CAGR to 19200 crore / month as on 29-Feb-24. Fund houses offers the facility to start SIPs with small amounts.

Overall, SIPs are a valuable tool for anyone looking to build a strong financial future. They promote disciplined saving, rupee-cost averaging, and benefit from compounding, making them a great way to grow your wealth gradually and achieve your long-term financial goals. So, start your SIP journey today and let your money work harder to beat inflation and market downturns.

(The author, RK Jha, is CEO & MD at LIC Mutual Fund Asset Management. Views are own)

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

Roy Walsh

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