SIP vs Traditional Savings: Why Millennials Should Choose SIPs

As millennials take on new responsibilities and financial commitments, the choice between SIPs and traditional savings becomes more significant. While traditional bank deposits are among the safest options in the country, they often struggle to keep pace with inflation. In this context, mutual fund SIPs offer a compelling alternative to conventional investment options such as savings accounts, fixed deposits, and recurring deposits.

In this article, we will explore the concept of SIPs in detail, highlight the key differences between SIPs and traditional investments, and discuss why SIPs might be a more advantageous choice. Read along.

Understanding SIP

SIP (Systematic Investment Plan) is a mode of investment for Mutual Funds that allows investors to invest a fixed amount at regular intervals in a scheme of their choice. The frequency of an SIP can be weekly, monthly, quarterly, or annually. This helps investors develop a disciplined investment habit and accumulate a significant amount of wealth over time.

One of the key advantages of SIP investment is the concept of rupee cost averaging, which averages out the effects of volatile market conditions. This approach reduces the impact of market fluctuations, allowing investors to mitigate volatility risk to a certain extent.

Traditional Investments

Traditional investments are referred to as savings accounts, recurring deposits, fixed deposits, and other low-risk instruments offered by banks and financial institutions. Such investments are known for their stable and predictable returns, low risks, and liquidity. While they are considerably safe, they typically offer lower returns compared to market-linked investment options.

SIP vs. Traditional Investments: Key Differences

Go through the following points to understand the key differences between SIPs and traditional investments such as FDs and RDs:

Why Millennials Should Choose SIPs?

Here are some of the key reasons why millennials should consider investing in a Systematic Investment Plan over traditional investment options:

1. Higher Growth Potential

Equity Mutual Funds, which predominantly invest in equities and equity-related investments in the stock market, offer higher growth potential compared to traditional investment options. They can easily outperform fixed-income investments over time, making them a perfect investment option, especially for millennials.

2. Discipline in Savings

Starting an SIP and continuing it for a considerable period of time will help you to develop a disciplined savings habit. This can turn out to be a lifesaver, especially during emergencies. Moreover, as a millennial, you can achieve your goals and objectives faster and in a seamless manner by staying committed to regular investments.

3. Flexibility and Convenience

Investors can start their SIP with an amount as low as ₹100 per month. This makes them accessible to millennial investors who might not have sufficient funds for mutual fund investments. As their income grows, they can increase their SIP contributions. Additionally, they have the flexibility to skip one or two installments if needed.

4. Rupee Cost Averaging

One of the prime benefits of investing in a Systematic Investment Plan is the rupee cost averaging. Investing a fixed sum regularly allows you to buy more units when the markets are down and fewer units when the markets are up. This phenomenon helps in averaging out the price fluctuations and volatility allowing investors to lower their cost of investing over time.

5. Diversification

Mutual Funds invest in numerous securities across asset classes depending on the objective of the scheme. This makes a mutual fund SIP one of the best investment options for those seeking diversification while taking exposure to the stock market.

Conclusion

To sum up, a mutual fund SIP is a compelling alternative to traditional investment options like FDs and RDs. It can help millennial Investors maximise their returns and fulfill their financial objectives through a disciplined approach. To make an informed decision, it is essential to understand your risk appetite and select a mutual fund scheme accordingly. Moreover, try to gain more financial knowledge or consult an investment advisor.

Frequently Asked Questions

1. Are SIPs better than traditional savings methods?

Yes, a mutual fund SIP can be a better investment option compared to many traditional investments. The reasons include higher returns, professional management, diversified portfolio, tax benefits, compounding benefits, greater flexibility, and much more.

2. Can I lose money in a SIP Plan?

Yes, you could make losses in the short term, especially if the market is down. However, when your fund shows negative returns, it's better to stay invested rather than make a hasty withdrawal. When the market becomes bullish, your investment is likely to recover and generate positive returns once more.

3. Are traditional saving methods completely risk-free?

No, traditional investment options come with lower risk but they are not entirely risk-free. Your bank deposits are insured up to ₹5 lakhs by DICGC; any amount beyond that is not covered.

4. Why do people prefer SIP investments?

People prefer mutual fund SIPs for several reasons, which include- the potential for higher returns, diversified portfolio, professional management, discipline in Investments, tax benefits, and more.

Disclaimer: This article is a promotional feature and does not have journalistic/editorial involvement of Hindustan Times. The content may be for information and awareness purposes and does not constitute any financial advice.