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Because the investments happen systematically, SIPs also have the advantage of dollar cost averaging. Dollar cost averaging is the natural advantage of investing an equal amount into an investment over time, regardless of price fluctuations. When asset prices are down, the equal amount invested means a greater amount of the asset can be purchased than when prices move higher. For long-term investors, this strategy reduces the risk of timing the market and allows them to ease into large positions with low average prices, especially during volatile periods.
Disciplined Long-Term Savings: Let’s face it, saving for the long-term is difficult. An SIP reduces the day-to-day decision making that usually hurts long-term savings plans. This way, investors save for the long-term without the hassle.
Long-Term Gains: Capital gains taxes can cripple your investment returns. Luckily, with SIPs the long-term perspective allows investors to be taxed at long-term capital gains rates instead of short-term. For a single male earning between $39,000 and $89,000, for example, short-term capital gains are 25% of investment income, while long-term capital gains are only 15%.
Stability Regardless of Leadership: Like CEOs, mutual fund managers come and go. For an SIP investor a mutual fund with strong performance, regardless of management change, is essential. Managers may have strategies that perform brilliantly in one market environment but that cannot be adapted when the market environment changes. By not relying upon the genius of one man, but rather relying upon the strength of a system, the SIP investor can smooth out investment performance and ensure long-term gains are there when needed.
Asset Turnover and Consistency of Performance: SIP investors should focus on stable and consistent performance across long periods of time. The mutual funds should not have high turnover rates because this metric implies that the fund managers are more focused on short-term trades rather than long-term investments. Further, high turnover rates can suggest that the fund managers are missing out on a large number of investments, trading out of them before they have to be reported to their investors. Both of these options are negatives for SIP investors.
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