A Systematic Investment Plan or SIP is a way to invest money in mutual funds. Think of it like a piggy bank, but instead of putting money into the bank at home, you send a small amount regularly to a mutual fund company. This company then uses your money along with money from others to invest in various things like companies, government projects or other opportunities.
Setting up a SIP is easy and once it’s set up, the investment process is automatic. This means you don’t have to remember to make the investment each time; the money is automatically transferred from your bank account to the mutual fund. Let’s find out what they are, how they work and how to get started with your first SIP investment.
What Is An SIP?
An SIP is a method of investing a fixed amount of money regularly in a mutual fund scheme. It is designed to help you save regularly with the option to start with a small amount of capital. It allows you to buy units of a mutual fund at regular intervals (for example, monthly) to build a financial portfolio and achieve investment goals over a period of time.
How Do SIPs Work?
SIPs work on a simple principle; regular investments that bring financial discipline to your life. Here’s how they function:
1. Regular Investments: You commit to an amount that will be invested regularly, which could be either monthly or over a period of time. This systematic approach helps in building a habit of saving and investing, thus helping you build your financial discipline.
2. Automatic Payments: SIPs often use automated payment setups, such as auto-debits from a bank account as mandated by the Securities Exchange Board of India (SEBI). This ensures that the investments are made regularly without your need to manually transfer funds each time your installment is due.
3. Compounding Benefits: With SIPs, the investment amount accumulates and grows over time due to the compounding effect. As more units of the mutual fund are bought at different rates and more frequently, it improves the ability to earn returns on the money that was invested earlier.
4. Rupee Cost Averaging: This is another advantage of SIPs where the investment buys more units when the price is low and fewer units when the price is high. This averaging out of costs reduces the risk of investing a large amount at the wrong time.
5. Flexible and Small Amounts: SIPs allow flexibility in the amount being invested, which can be as low as a few hundred rupees, making it accessible for almost everyone. This flexibility extends to being able to stop the plan as needed without any major financial repercussions.
Why Should I Consider An SIP Investment Over Other Forms Of Investment?
You should choose an SIP over other forms of investment for the following reasons:
1. Discipline In Saving: SIPs bring financial discipline through regular investments. By committing to invest a fixed sum every month, you build a saving habit, which is essential for long-term financial planning.
2. Rupee Cost Averaging: By investing a fixed amount at regular intervals, regardless of the market condition, you buy more units when prices are low and fewer when prices are high. This strategy is known as rupee cost averaging. It can lower the average cost of your investments over time, reducing the risk of entering the market.
3. Lower Financial Barrier: You can start investing with relatively small amounts, making it easier for individuals who may not have large sums of money available for investing. This accessibility makes SIPs an attractive option for young investors and those just starting their financial journeys.
4. Compounding Benefits: Since SIPs involve regular investments over long periods, they have the power of compounding, where your returns start generating returns. Over time, this effect can significantly increase the value of your investment, helping you build a substantial amount of wealth over time.
5. Flexibility: They offer the flexibility to choose the amount and the frequency of investment. You can also adjust these parameters as your financial situation changes. Moreover, SIPs can be started or stopped at any time without any penalty, offering flexibility that is not always available in other investment types.
6. Reduces Emotional Investing: By automating the investment process, SIPs help you avoid making impulsive decisions based on market highs and lows. This way of investing helps in maintaining a long-term perspective and avoiding pitfalls of emotional investing.
7. Diversification: When investing through SIPs in mutual funds, your money is typically spread across a diverse set of securities, providing a natural diversification of risk. This diversification helps in reducing the impact of volatility on your overall portfolio.
How Do I Start A Mutual Fund SIP Plan?
To start a Mutual Fund SIP plan, you can follow these steps:
1. Necessary Documents: You must have all the required documents, including ID proof, PAN card, address proof, bank account details and any other relevant Know Your Customer (KYC) norms.
2. KYC Process: Before investing in an SIP, it is important to comply with the KYC norms as mandated by Securities Exchange Bank of India (SEBI). You can do this by filling out the application form at an authorised bank or post office or through an online application.
3. Register For An SIP: Now you have to choose a broker or an broking application to register for an SIP. This will give you access to a variety of investment plans to suit your needs and risk profile.
4. Determine SIP Amount And Its Start Date: You can decide on the amount you want to invest in the scheme, taking into account your financial capability and investment objectives. Next, you select a start date for your first SIP installment.
5. Submit Application: Once you’ve selected the mutual fund company and the SIP plan, you can start the SIP by submitting the form, either online or offline depending on the fund house. The submission can be done online with an online Demat account or offline through post offices or your bank.
How Much Money Do I Need To Start A SIP?
In India, the Securities and Exchange Board of India (SEBI) mandates that mutual funds offer a minimum monthly investment amount of ₹500 for Systematic Investment Plans (SIPs).
What Are The Risks Involved With SIP Investments?
While SIPs offer many benefits, they also come with certain risks. Here are some of the key risks involved:
1. Market Risk: SIPs invest in mutual funds, which in turn invest in various market instruments such as stocks, bonds and other securities. Therefore, the value of your investment in a SIP is directly affected by fluctuations in the market. Economic downturns, volatility in the stock market, changes in interest rates and other economic factors can impact the performance of the mutual funds your SIP is invested in.
2. Performance Risk: The returns on SIPs are not guaranteed and are subject to the performance of the mutual fund scheme selected. If the fund doesn’t perform well due to poor management market conditions, the expected returns might not be achieved.
3. Inflation Risk: If the return on your SIP investments does not keep pace with inflation, it could erode away the purchasing power of your money.
4. Liquidity Risk: While SIPs in open-ended funds are generally considered liquid, certain funds, such as close ended funds, may impose limitations on the ease with which investments can be withdrawn. For example, some funds may have exit loads or penalties for withdrawals within a certain period, which can affect liquidity.
5. Interest Rate Risk: This is relevant for SIPs in debt funds. Any changes in interest rates affect the prices of bonds inversely i.e., when interest rates rise, bond prices typically fall, affecting the net asset value (NAV) of debt funds. This can lead to fluctuating returns in case of debt mutual funds.
Can I Withdraw My Money From A SIP Anytime?
Yes, you can withdraw money from your SIP anytime, subject to a few exceptions. For example, ELSS funds or Equity Linked Savings Scheme have a lock-in period of three years. This means that you cannot redeem your investments before the completion of this lock-in period.
How Long Should I Invest In An SIP?
There is no such minimum threshold limit for how long you should invest in SIPs. However, it is recommended to invest for a minimum of five years. This allows the power of compounding to work its magic and generate long-term returns.
What Should I Do If The Market Is Performing Poorly?
If the stock market is performing poorly, the best thing that you can do is to avoid panic selling. Selling stocks when the overall market is down can lead to locking in losses. Instead, you can focus on the long-term and resist the urge to time the market.
How Do I Choose The Right Mutual Fund For My SIP?
You can choose the right mutual fund for your SIP in the following ways:
1. Investment Objective: First, you must determine your financial goals and risk tolerance. Choose the mutual fund schemes that match with your goals.
2. Fund Performance: You can analyse the fund’s historical returns, consistency and performance after adjusting for risks (say inflation). Look for funds that have outperformed their benchmarks over the long term.
3. Fund type: Now, it’s time to select the fund category (e.g., equity, debt, hybrid or some other type) based on your risk profile and investment objectives.
4. Expense ratio: Finally, you can compare the expense ratios of different funds, as lower fees lead to higher long-term returns.
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Wrapping Up
The key part of a SIP is that it’s regular—usually monthly. It’s like subscribing to your favorite music or video streaming service, but instead of music or videos, you’re regularly investing a fixed amount of money. And the earlier you start, the better, because your money has more time to grow. It’s like planting a tree; the sooner you plant it, the bigger it grows.
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DISCLAIMER: Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors. Investments in securities market are subject to market risks. Read all the related documents carefully before investing. The securities quoted are for illustration only and are not recommendatory.
