A systematic Investment Plan (SIP) is just one of the ways through which you can invest in mutual funds. A mutual fund is a way in which a large number of people who are willing to contribute small amounts come together. The amount collected by all of them will be handed over to the Fund Manager to manage and generate returns for you. Through your single investment in mutual funds, you actually invest in multiple companies. That means a mutual fund is a group of investments packaged into a single investment.
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What is SIP in Mutual Funds?
SIP is a way to invest in mutual funds, and it is not an investment in itself. But, because of its popularity among the people, they take SIP as an investment only, but it is not so. SIP is a way only by which you can enter into an investment that is Mutual Fund and actually, a mutual fund is an investment tool.
Through SIP, you can invest a fixed and small amount at regular intervals in mutual funds. Investing small amounts at regular intervals will not cause a financial burden on you and that is the beauty of this mode of investment. Along with the regular investment, you can invest lump sum amounts in one go as well through SIP. So, it can be a magnificent tool of investment to manage your personal finances.
What is the process of SIP?
Before starting an investment in a mutual fund through SIP mode you should know what is the process of SIP and its characteristics
Decide the date for investment monthly
Before starting an investment in a Mutual Fund through the systematic investment plan (SIP) method, you have to choose a specific date for your investment. Money will get auto-debited from your savings account on that specific date every month. So you should be careful while choosing the date and choose the date on which you are sure that money will be available in your account.
Professional employees who use to get their salary after the 5th of every month must not choose their auto-debit date for a systematic investment plan before the 5th of every month. Because there may be a possibility in any month that you may remain with a Nil balance in your savings account in the last days of the month.
The same thing applies to the employees who receive their salary on the 1st of every month like Government employees. They must choose an auto debit date after the 5th of every month. The reason is very simple: in the month of April, which is the start of the financial year, your salary is credited into your account after the 3rd or 4th of April only. So if you would have chosen an auto debit date on the 1st of every month then in the month of April there is a chance that you may default on an investment plan payment because of late crediting of salary into account.
Select the amount you can invest monthly
You have to select the amount which you want to invest and the same amount will be auto-debited from your account every month. When choosing the amount, you should be careful enough and not choose the amount which you cannot afford in the long term. Because if you do that, it can cause a financial burden on you tomorrow, so it is better to invest small amounts regularly. After all, what is the use of future wealth if you have spoiled your present life?
Define the Time Period for which you can invest
Tenure is the duration of a systematic investment plan (SIP) for which you will remain invested. Select the tenure carefully and should try not to exit the investment before expiring the tenure. If you are earning well and can save a small amount for your future, it is advised to go for long-term investment through a systematic investment plan (SIP). Here, long-term investment means a minimum period of 7 to 10 years. Because in the long term the power of compounding will create wonders with your money.
Select the scheme meeting your financial goals
Every mutual fund has different types of schemes to cater to every type of financial need of investors. The selection of a mutual fund scheme depends on your financial needs and requirements. If you are a risk-avoidant, you can go for index funds, but, if you can absorb some risk with your investment you can opt for equity funds. If you have a surplus amount and don’t need that money for some time you can park your money in liquid funds.
How does SIP work?
Once you have selected the date and amount with specified tenure, you are ready to go for investment. Your account will be debited with a fixed amount every month. If you keep on investing small but regular amounts, the money will get accumulated over the period. You will be allotted units each month based on the Net Asset Value (NAV) of the unit on the particular day of investment. With the passage of time, the number of units getting credited to your account will keep on increasing. Return of your portfolio directly depends on the number of units you held multiplied by the Net Asset Value of one unit on that day when you place a request for Redemption/withdrawal.
Advantage of SIP
It has many advantages in terms of Returns to the investors and they are:
Smooth and Transparent Process
Starting a SIP and investing in it is very simple and with technological advancement, it is now available at your fingertips. You can invest in a mutual fund with a mobile application in just 4-5 clicks. You have to give consent for auto debit only once and from the next time onwards money will get auto-debited from the account on the specific date. The redemption process of a systematic investment plan (SIP) is also very easy and your amount gets credited to your savings bank within 2 days only.
Make you financially Disciplined
Investment through a systematic investment plan (SIP) will inculcate the essence of financial discipline for an investor. The auto debit of the amount at the selected date will reflect in the financial behavior of an investor. Disciplined Financial behavior of yours will surely get attracted more investment thereby creating more avenues to generate wealth.
Easy to enter and Exit
You can enter and exit systematic investment plans (SIP) at any time as per your financial need and requirements. The process of exiting any scheme is very simple and you can discontinue easily except in some cases where mutual fund houses have some rules to keep the money invested for a specific duration like in ELSS funds. You cannot redeem ELSS funds before maturity but, yes you can stop further investment in that fund whenever you want.
Wonders of compounding
Albert Einstein termed Compounding the eighth wonder of the world. Small but regular investments over the long term generate high returns because compounding does wonders for your money. The longer the term of investment higher will be the returns you get.
Rupee cost averaging
This mode of investment also helps You to mitigate the risk of market volatility. If you had invested when the market was on an uptrend, you will be allotted less number of units. But if you had invested when the market was down, you would have got more units. That means in the bad time, you will be allotted more units which in turn reduces the cost per unit for you. Over the period of time, the units get accumulated and generate magnificent returns for you.
Types of Systematic Investment Plan (SIP)
SIP in itself is a type of investment method to Mutual Fund but it is also categorized into various types:
Regular SIP
It is the most popular and known type of systematic investment plan. You have to fix every detail, amount, tenure, and date of investment before starting the systematic investment plan itself. You cannot change much in that after starting the systematic investment plan except the dates of the investment
Step Up SIP
In recent times, mutual funds have started giving the option of Step Up SIP which is an advanced and effective method in terms of investment. This method is best for investors receiving regular payouts like salary and who want to increase their investment in the future. In the case of salaried and professional people, they get a hike in salary because of various actions like allowances and Job appraisals. Inflation is also increasing year by year and to beat the inflation increase in investment is necessary.
Now an investor has two options in front of him, the first one is to start a new systematic investment plan (SIP) and the second is to invest in the already going systematic investment plan (SIP). For diversification purposes, we should not have more Mutual Funds in our portfolio as it is not a good indicator. In that case, it is better to invest in an already ongoing systematic investment plan (SIP), and stepping up SIP gives us this option. We can decide the amount to be increased at regular intervals in the same scheme. Mutual Fund will debit the increased amount at the free fixed interval automatically.
For example, you are investing 2000 Rs in a mutual fund scheme through SIP mode and want to increase the investment by 10% every year in the month of April. So, next April mutual funds will automatically debit your account with 2200 (2000+ 200 i.e. 10% of the amount). And it will keep on increasing your investment by 10% every year.
Flexible SIP
As the name suggests, it is flexible and means you can change the amount of investment as and when you require it. It is best for people who do not receive regular payout life, self-employed persons. If in any month you think that you cannot invest the decided amount, you can inform the mutual fund house to decrease the amount or skip the installment for that particular month.
But you have to inform the mutual fund well in advance so that they can take action. Some people use this method to beat market volatility by closely watching the market. If you think that the market is down and you will receive more units against your investment, you can increase the investment amount to get more units. In this way, you can take advantage and increase your Returns in the long term. In this way with an increased investment every year you can reach your financial goal early.
Perpetual SIP
This type of SIP has only a start date and no end date. So in a regular SIP, if you do not mention/specify your end date it will automatically get converted to a perpetual SIP.
8 Reasons to invest in SIP
A systematic Investment Plan (SIP) has many advantages in terms of Return for the investors and they are:
- The power of compounding can create wonders with your money in the long term.
- Rupee cost Averaging which will reduce the average cost of holding per unit for you.
- Can start investment with a minimum amount of Rs 500.
- A smoother and more transparent process makes it easy for the investor to transact and redeem.
- Easily redeemable process and you will get credited your account with the redeemed amount in just 2 days.
- Inculcate financial discipline in you which is a must to create wealth.
- Generate high returns with low investment in the long term, hence suitable for every class of people.
- It has less effect of market volatility on your investment thereby generating more returns than the market for its investors.
Who can start a SIP
SIP is a mode of investment and everybody can start it to save for the future. People who are getting regular monthly payouts like salaried people and professional people can go for a regular or flexible type of SIP. While a self-employed person can opt for a flexible SIP or lump sum investment.
How to exit a Systematic Investment Plan (SIP)
Exiting or discontinuing the systematic investment plan is a very simple and quick process. You can stop further investment in the scheme whenever you require depending on your need in three simple clicks. Now you can withdraw the entire amount to your bank or else can keep the amount in the scheme without further investment. This already invested amount will keep on increasing in its value because the Net Asset Value of the unit increases over the period of time. And your Returns are directly proportional to the net asset value of a unit. You can redeem and switch out from the scheme in two ways
First is by Unit: in which you have the option to withdraw all available units in your portfolio at once or you can select the number of units you want to redeem based on your fund requirements
The second is by amount: in which you have the option to withdraw all the available money based on your returns in your portfolio at once or you can select the amount you want to withdraw based on your needs.
Bottom Line
It is an excellent way to start your investment journey with mutual funds when you are not willing to expose yourself to the risks associated with the market directly. Choosing the SIP mode to invest in mutual funds is one of the greatest ways to enter the ocean of investment. It can create wonders for your investment provided you remain invested for the long term.