It’s everyone’s desire to have the good things in life, buying an exotic car, a beautiful home, and an exclusive vacation to someplace around the world. Achieving these desires will require doing something extra. Investing through a Systematic Investment Plan (SIP) in mutual funds is a viable option to go forward with. So, let's have a look at what SIP means, how it functions, and be of help to you in achieving goals.
What exactly is SIP?
A systematic investment plan is a system of investment that can be used in order to save money while also reducing the risk of investing. The system is often used by investors in order to reduce the chance of making bad investment decisions. These mutual funds can be used to invest in shares, bonds, and a variety of other financial instruments.
How does SIP function?
A systematic Investment Plan or SIP is a way of investing in stocks. The investor makes it a habit to invest a fixed amount of money at regular intervals and in the same proportion to various stocks. This helps the investor diversify among various stocks with less risk as compared to putting all their money into one stock. The maths behind the Systematic Investment Plan is simple. The investor gets to decide how much he wants to put in his investment every month and how long he wants to save. The systematic investment plan does not just depend on market timing but works with all time frames to reduce risks of volatility and maximize returns. It can be beneficial for those who are passively invested in their investments.
Investing in a SIP has a number of advantages
1. Compounding power:
Compounding is an investment concept in which money earned on the investment is reinvested and thus also earns interest. Compound interest can be thought of as having multiple rates. Compound interest is the root of wealth for most people, because it enables investors to earn interest on their money over time, rather than only when they take it out of the account. To understand why compounding makes such a big difference, consider how much an investor would need to earn just by saving some amount per day in order to become a millionaire at age sixty-five.
2. Low Initial Investment:
With just Rs. 500 per month, you can start investing in mutual funds using the systematic investment plan (SIP). This can be an affordable way to invest each month without hurting your monthly expenses. Over time as your income increases your investment can also be increased through the step up feature. Mutual fund houses allow investors to top up their SIPs regularly. So, even if you start with Rs. 500 or Rs. 1,000 each month, you can increase your investment as time goes on.
3. The average Cost of a Rupee:
Rupee cost averaging is when you purchase more units of a mutual fund when the Net Asset Value (NAV) is low and fewer units when the NAV is high. This takes your purchase costs and averages them out over the course of the investment period. You don’t need to worry about market timing when you invest through a SIP.
4. Convenience:
SIP can be a convenient mode of investing. You may not have the time for extensive market research and analysis to adjust or balance your portfolio. So, once you have decided a good fund, you can give standing instructions to the bank and let the SIP take care of your monthly investments for you.
How to Start SIP Investment
1. Complete your KYC
Make sure you complete your KYC documentation with your fund house before you start investing. Identity proof, address proof and photograph are the usual documents required. These days, e-KYC is being accepted by most AMC's. The process can be completed online without having to visit the AMC office.
2. Set your investment goals
Before investing in SIPs, you should first figure out what you want to achieve with your money. Every mutual fund is designed to help you reach a specific goal, so it's important to identify yours. Once you know your goals, you can look for funds that will help you achieve them.
3. Choose the SIP
Select a fund and fill in the parameters for a Systematic Investment Plan (SIP). This includes information such as:
The length of your investment
Frequency of investments (monthly, quarterly, semi-annually, etc.)
The amount you want to invest
Fill in your details as regards to your goals and financial posture.
Where to Invest: SIP or Lump Sum
There are two ways mutual funds can be acquired: it’s either as a SIP or as a lump amount. A lump sum investment entails putting aside a specific amount of money at once for a mutual.
Which is better? Here are some points to consider:
1. Amount of money
SIPs are a good investment option if you have a limited amount of money to invest. You can commence your investment with as low as Rs. 500 each month. It doesn’t matter whether you have Rs. 500 or Rs. 1,000 to invest each month – you can get started right away!
2. Experience
Lump sum investments are when you invest all of your money at once. You have to be careful when you do this, because you could make a lot of money if the market goes up, but you could also lose a lot if it takes a downturn. This is a good strategy for experienced investors who have a lot of money to spare, but if you're new to investing, it's best to stick with instalments over time instead. That way, you minimise your risk and still get to grow your money.
3. Investment disciple
Investment discipline is key to success in the long run. When you decide to invest a fixed amount of money each month, you can make sure that your investment progresses steadily and fulfils your investment goals. It may seem like a slow process, but when you look back after a while, you'll be glad you invested steadily over time. SIP investing can help you build a large corpus slowly and steadily.
4. Customize SIP
Salary earners prefer their SIP investment to be conducted. In this case, salary earners can fulfill their commitment as they receive their paychecks monthly.
5. Frequency of SIP
You can start your SIP at any time and at any interval (weekly, fortnightly, quarterly, or semi- annual) which implies. You can also embark on a futuristic investment without setting out a specific time of completion.
- Perpetual SIP: You can simply move a fixed amount into the mutual fund on a regular basis for as long as you desire using this option. Instruct your bank to disburse your fund on a specific day towards your investment and it will be done seamlessly.
- Step-up SIP: If you started your SIP investment with Rs.1000 monthly and you desire an increase of the same amount each year, you’ll first invest monthly, Rs.1000 and the second year Rs.2000.
