Gone are the days when people believed that mutual funds are only for people who can make a one-time investment. With the SIP becoming an increasingly popular way of bearing the fruits of mutual funds, people with as less as Rs. 100 can start investing in a mutual fund.
However, while some know what a SIP is, some still confuse SIP with being a mutual fund scheme and keep asking questions such as “How to invest in a SIP?” So, without wasting any more time, let’s understand SIP’s details and why this investment option is often referred to as the most effective method of investing in mutual funds.
What is SIP?
SIP (Systematic Investment Plan) is a strategy through which one can invest small amounts in his chosen mutual fund scheme at regular intervals. It can be made weekly, monthly, or quarterly, as decided by the investor when activating a SIP. Moreover, once activated, the sum will keep getting deducted from your bank account as per your preferred time interval.
Types of SIP
This investment strategy can be categorized into the below-mentioned forms:
This SIP type provides the investors with a flexibility wherein they can increase their periodical investments when their income rises. This SIP type helps make the most out of the assets as they invest in high-performing funds and have a huge corpus to achieve financial objectives.
In the perpetual SIP plan, the investors can keep on investing without any end date. Generally, when signing a SIP mandate, the investors get an option to choose the end date, like after a period of 1 year, 3 years, 5 years, etc. Therefore, with the perpetual SIP plan, the investors get the option to redeem the scheme after closing and can quickly get closer to their financial goal.
With the flexible SIP plan, the investors can increase or decrease their investment sum according to their income. Therefore, if a person is unsure about his income in the long term or faces a cash crunch, he can skip some installments until his financial condition is normalized.
How Does SIP work?
The investor first chooses a mutual fund scheme, decides the investment amount and a time interval. Once he signs the mandate form, the sum will start to get auto-debited from the bank account at the set time interval. This sum will be used to allocate some mutual fund units in your name depending on the NAV of that fund.
With every installment you make, you earn additional units in your account as per the market rate. It is entirely on the investor if he wants to debit the returns at the end of the tenure or get them at periodic intervals.
Let’s take an example to understand the process better.
Suppose you have kept aside a sum of Rs. 2 lakhs to invest in the mutual funds. Now, you will be given two options. First is the one-time investment plan, where you will be asked to support the entire amount in your preferred mutual fund scheme. Second, you will be given the option of the Systematic Investment Plan or SIP. Here, you will have to decide the sum you want to pay. Let’s say you choose Rs. 1000. This sum will be auto-debited from your bank account and credited to your mutual fund account at a fixed date after a specific period.
Why Should You Invest Through SIP?
Based on the age-old adage, “Save first, spend next”, SIP is the best way to enjoy mutual funds’ benefits. Apart from the flexibility where you get to make investments weekly, monthly, or quarterly, you can begin with investments as low as Rs. 100. Some other reasons why you should consider investing through SIP are:
Effect of Compounding
In the case of compound interest, the interest earned becomes a part of your base capital, and the interest you keep on making is calculated on the increased capital every time. Therefore, investors can watch their money grow exponentially with the effect of compounding.
Rupee Cost Averaging Factor
With the SIP, the investors can get the advantage of the rupee cost averaging factor. As the money invested in SIP’s case remains constant for a long period, the rupee cost averaging factor helps the investors take advantage of the volatile nature of the market. To make it simple, you can buy more units during a slump and avail lesser units when the market price increases, therefore, lowering the average cost of a unit in the long run.
Use it as an emergency fund
A person can stop his SIP investments whenever he wants and use the fund gathered for an emergency. Moreover, he can redeem the investment once again, provided he opts for a SIP plan where there is no fixed tenure.
Become a disciplined investor from an early age
The SIP investment can instill financial awareness in a person. He will know that he has an investment to make after a time interval and, therefore, set his expenditures accordingly. Moreover, seeing his hard-earned money grow exponentially will help him to save more and set a financial goal early in life.
With the SIP, it is not required for the investors to possess high-end knowledge about the market or spend time analyzing the rates daily. Since the amount gets debited from your bank account and credited to your mutual fund account automatically, all you need to do is ensure that you have a sufficient balance in your account.
How to Begin with SIP Investments?
Following some easy steps will ensure that you set a realistic financial goal and reach your goal faster. The steps include:
- Set a financial objective: The investor should make sure that the financial goals are specific as well as realistic
- Decide the tenure: The investor must decide when he needs the money; this will serve as the investment tenure.
- Figure out the amount: After you are done with the amount you need after a given term, it is time you calculate the amount that will help you achieve that goal. Also, decide whether you want to invest on a weekly, monthly, or quarterly basis.
- Choose a plan: Choose a plan that you think has offered higher returns over time. However, it is always advised that you consult an advisor before opting for a program.
Factors to look out for when choosing the best mutual fund for SIP
Before you choose a mutual fund scheme, it is essential that you lookout for some criteria to make sure that you earn the maximum returns. Some of these factors are:
- A fund with Rs. 500 crore asset size: A fund with Rs. 500 crore assets under management can be a wise option to choose. It is not that a fund that does not possess this asset size will be bad, but it will not be a prudent choice if you lack risk-appetite.
- The reputation of the fund house: Reputation plays a significant role while selecting a mutual fund scheme as it conveys how they have been handling market volatility without the investors feeling any impact of the fluctuations.
A mutual fund has always been a bewildering concept for people as it deals with market volatility. However, with the advent of SIPs, people have slowly become accustomed to mutual funds and are understanding its benefits. Moreover, as the risks involved are significantly less than lumpsum investments, SIPs ensure the investors better results in the long run.