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MUTUAL FUNDS – Systematic Investment Plan (SIP)
Systematic Investment Plan (SIP) is an investment route offered by Mutual Funds wherein one can invest a fixed amount in a Mutual Fund Scheme at regular intervals– say once a month or once a quarter, instead of making a lump-sum investment. A SIP is a type of investment that helps you save and grow your money over time. Instead of investing a large sum of money all at once, with a SIP, you invest small amounts regularly. The installment amount could be as little as Rs. 100 per month and is similar to a recurring deposit. It’s convenient as you can give your bank standing instructions to debit the amount every month.
SIPs are a convenient and flexible way to invest in mutual funds. You can choose how much you want to invest, how often you want to invest, and for how long you want to continue investing. You can easily set up a SIP and have the investment amount automatically deducted from your bank account each month, so you don’t have to worry about making manual investments. Hence, SIPs are a great option for anyone who wants to invest in mutual funds, but doesn’t have a large sum of money to invest all at once.
SIP has been gaining popularity among Indian MF investors, as it helps in investing in a disciplined manner without worrying about market volatility and timing the market. Systematic Investment Plans offered by Mutual Funds are easily the best way to enter the world of investments for the long term. It is very important to invest for the long-term which means that you should start investing early, in order to maximize the end returns. So your mantra should be – Start Early, Invest Regularly to get the best out of your investments.
Benefits of SIPs
Here are some of the key benefits of SIPs:
1. Rupee Cost Averaging
Rupee Cost Averaging is a term inspired by the approach of Dollar Cost Averaging or DCA. Rupee Cost Averaging allows you to invest small amounts regularly, which helps you average out the cost of your investment over time. Let’s understand this with an example:
You invest 1000 rupees in shares of ABC Ltd. which was worth 10 shares (Rs. 100 per share). However, as the price of the shares increase, they got expensive. So when you invested 1000 rupees next month, you ended up buying only 8 shares for the same price. The consecutive month, the price decreased and you got 12 shares for the same price. Hence, when the markets were expensive, you bought fewer shares and when the markets were cheap, you got more shares at the discounted price. This means you averaged out the cost of your investment, by simply following a disciplined strategy of investing the same amount every month.
SIPs also work on the foundation of this approach. Hence, investing in SIPs can give you an edge in averaging out your investments without having to worry about the timing the market.
2. Investment Discipline
SIPs encourage a disciplined approach to invest by requiring you to set aside a fixed amount of money on a monthly basis. This helps you build a disciplined habit of saving and investing, which is critical for long-term financial success. Investing discipline also enables you to reap the benefits of wealth-compounding over decades better than the benefits you would get through lump sum investing.
3. Convenience
SIPs are easy to set up and manage. Moreover, the mandate allows the investment amount to be automatically deducted from your bank account each month. Hence, you don’t have to worry about making manual investments. This makes SIPs a convenient option for individuals who are busy or who don’t have the time to manage their investments actively.
4. Flexibility
SIPs offer you the flexibility to choose the amount you want to invest, the frequency of investment, and the duration of the investment. This allows individuals to tailor their investments to meet their specific financial goals and needs. In India, you can start a SIP with as low as ₹500 a month.
5. Cost-effective
Investing through SIPs is cost-effective, as the investment amount is small and the investment management fees are spread over a longer period, reducing the impact of fees on overall returns.
6. Diversification
As the aphorism goes, “Do not put all your eggs in one basket”. SIPs allow individuals to invest in a diversified portfolio of securities, reducing the risk of investing in a single security. This is because mutual funds invest in a variety of stocks and bonds, which helps to balance the portfolio and reduce the risk of losses due to market volatility.
7. Professional management
Mutual Funds are managed by trained professionals with several years of industry experience. SIPs provide access to professional investment management, which can help individuals make informed investment decisions and achieve their financial goals.
8. Long-term benefits
SIPs are a great option for long-term investment, as they allow individuals to invest regularly over an extended period of time, taking advantage of the power of compounding. This means that the returns on your investments are reinvested, resulting in exponential growth over time.
How does a SIP work?
Let’s understand how a SIP works and how to set up your SIP mandate:
1. Choose a mutual fund scheme
The first step to setting up your SIP is to choose a mutual fund scheme. Remember to research well and choose a scheme that aligns with your financial goals and risk tolerance. There are various types of mutual funds, including equity funds, debt funds, and balanced funds, each with its own set of benefits and risks.
2. Set up the SIP
Once you have chosen a mutual fund scheme, you can set up the SIP by filling out a form and providing the required personal and financial information. You will also need to provide your bank account details for automatic deductions.
3. Determine the investment amount and frequency
You will need to decide how much you want to invest each month and how often you want to make the investment. Most SIPs are set up to invest monthly, but you can also choose to invest quarterly, bi-annually, or annually, depending on your preferences.
4. Start investing
Once you have set up the SIP, the investment amount will be automatically deducted from your bank account each month and invested in the chosen mutual fund scheme.
5. Track your investments
You can track your investments and monitor their performance through your mutual fund account or the fund’s website. You can also make changes to your SIP, such as increasing or decreasing the investment amount or stopping the SIP mandate altogether, at any time.
Now that we know how SIP operates, let’s move on to understand different types of SIPs.
Types of SIP
1. Regular SIP
A Regular SIP is the most common type of Systematic Investment Plan, where you invest a fixed amount of money at regular intervals, usually monthly. The investment amount and frequency can be changed over time, but the investment duration remains fixed. For example, you may start by investing INR 5000 per month for five years. This type of SIP is ideal for people looking to create a disciplined savings habit and invest in a long-term investment strategy.
2. Flexi SIP
A Flexi SIP is a more flexible version of a regular SIP, where you can change the investment amount and frequency based on your financial situation and goals. This type of SIP allows you to increase or decrease the investment amount as needed, making it ideal for people who want more control over their investments. For example, you may want to increase your investment amount during times of high disposable income or decrease it during times of financial stress.
3. Top-Up SIP
A Top-Up SIP is a type of SIP that allows you to increase the investment amount with each instalment. This type of SIP is designed to take advantage of the power of compounding, as the larger investment amounts will earn more returns over time. For example, you may start with an investment of INR 5000 per month and gradually increase it by 10% or INR 500 each year.
4. Trigger SIP
A Trigger SIP is a type of SIP that is triggered by certain market conditions or events. This type of SIP is ideal for people who want to take advantage of market opportunities and invest more during periods of low market prices. For example, you may set up a trigger SIP that automatically invests a larger amount during market downturns.
5. Perpetual SIP
A Perpetual SIP is a type of SIP that has no fixed end date and continues until you choose to stop it. This type of SIP is ideal for people who want to create a long-term investment strategy and build wealth over time. With a perpetual SIP, you can invest a small amount each month, gradually increasing your investment to benefit from the power of compounding.
Things to consider before starting a SIP
SIPs allow you to invest small amounts regularly, making it easier to discipline your investment habit and leverage the power of compounding. However, before investing in SIPs, it is important to consider several factors to ensure that you are making the best investment decision for your specific financial situation.
1. Investment Goals
The first step in investing in SIPs is to establish your investment goals. This includes determining the amount of money you want to save, the time frame for your investment, and the type of return you are looking for. This will help you to choose the right type of SIP and mutual fund for your specific financial situation.
To estimate the amount of returns you can get by investing in a particular fund, try out our SIP calculator. It gives you a more accurate estimate, since it considers factors like rolling returns,
2. Investment Horizon
It is important to consider the length of your investment horizon when choosing a SIP. Usually, SIPs are designed for long-term investment, and the longer your investment horizon, the more time your money has to grow. For instance, if you are saving for retirement, you may have a longer investment horizon compared to someone saving for a short-term goal, such as a down payment on a house or an international vacation.
3. Risk Tolerance
The next step is to assess your risk tolerance. This refers to your willingness and ability to take on risk in pursuit of higher returns. Different mutual funds have different levels of risk and return, and it is crucial to choose a fund that aligns with your risk tolerance. For example, if you have a low risk tolerance, you may want to consider investing in a more conservative fund, such as a debt fund, while if you have a high risk tolerance, you may want to consider investing in an equity fund.
4. Investment Amount
It is important to determine how much you can afford to invest each month. SIPs are usually designed to be affordable, with most plans allowing you to invest as little as ₹500 per month. However, it is important to ensure that you are investing an amount you can afford to set aside each month without sacrificing your financial stability.
5. Fund Selection
Once you have determined your investment goals, risk tolerance, and investment amount, it is time to choose a mutual fund for your SIP. There are many different types of mutual funds available, like equity funds, debt funds, and balanced funds, each with its own unique investment strategy and risk-return profile. It is important to choose a fund that aligns with your investment goals and risk tolerance.
6. Fund Manager
The fund manager is responsible for managing the mutual fund and making investment decisions on behalf of the investors. It is important to research the fund manager’s profile, track record and investment style to ensure that you are comfortable with their approach to investing. You can find information on the fund manager and their performance by reading the fund’s prospectus or checking the fund’s performance history.
7. Expense Ratio
The expense ratio is the annual fee that mutual funds charge for managing your investment. It is important to consider the expense ratio when choosing a mutual fund, as high fees can eat into your returns over time. You can find information about the expense ratio in the fund’s prospectus or by checking the fund’s performance history.
8. Tax Implications
It is important to consider the tax implications of investing in SIPs. The tax liability involved in mutual fund investments varies depending on the type of fund and the length of the investment. It is important to consult a financial advisor or tax professional to determine the best approach for your specific financial situation.
Disclaimer : Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
