By Shashank Suresh
Everyone has ambitions and objectives, such as a new vehicle, a larger house, or a family vacation to an exotic location. However, you can only attain your goals if you work hard to make them a reality. Using a Systematic Investment Plan (SIP) to invest in mutual funds might be a straightforward approach to help you accomplish your objectives. So, let’s have a look at what SIP stands for, how they operate, and how they may help you.
What is SIP?
A Systematic Investment Plan (or SIP) is a mutual fund investment that allows you to invest over time. It is a systematic technique of investing set sums of money regularly, as the name implies. This can be done on a monthly, quarterly, or semi-annual basis, for example. It may be simpler to accomplish your financial objectives if you invest consistently in this manner.
How does SIP work?
When you engage in a SIP, you invest a certain amount of money over a set period. You can buy a specified number of fund units with this amount. If you do this for a long period, you will invest in the fund at both highs and lows. To put it another way, you don’t have to time the market to earn money.
Market timing may be dangerous since one might make a mistake and invest at the wrong moment. This element of uncertainty is removed with SIP investing. You can opt to automate your investments once you’ve chosen the investment duration and frequency.
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Benefits of SIP
- Power of Compounding
When you invest over a lengthy period, you will be able to tap into the power of compounding. When opposed to a lump-sum investment, the rupee cost averaging phenomenon will ensure that you obtain greater returns.
- Higher returns than RD
ELSS mutual funds have the potential to outperform bank FDs, PPFs, and other traditional investment alternatives in terms of returns.
- Convenience
A SIP allows you to invest systematically and progressively. Instead of making a one-time commitment, you can invest little sums at regular periods with a SIP.
- Acts as an Emergency Fund
You have complete control over when and how you terminate your SIPs, and the fund company does not influence the matter. You may also withdraw your money at any moment (if there is no lock-in period).
- Become a disciplined investor
Investing with a systematic investment plan (SIP) will help you be more disciplined in your financial management. You won’t have to deal with the inconvenience of manually investing every month if you use automatic payments.
- Rupee Cost Averaging
The stock market is volatile, and investing through a systematic investment plan (SIP) allows you to buy more units during a downturn and fewer units during a boom, lowering your cost per unit over time.
How to start a SIP investment
1) Complete your KYC
Before investors may begin investing, each fund institution asks them to complete the KYC paperwork procedure. You must provide evidence of identification, proof of address, and a picture. The e-KYC option is now accepted as well. Without having to go to the AMC, you may complete the formalities online.
2) Set your investment goals
The first step is to figure out what you want to achieve with SIP investing. Make a list of your financial objectives. This is important since each mutual fund has a distinct goal in mind. Determine your objectives and seek out funding to assist you in achieving them.
3) Choose the SIP
Select the SIP settings once you’ve chosen a fund. Complete the blanks for questions such as:
• Investment tenure
• Investment frequency (monthly, quarterly, semi-annually, etc.)
• Investment amount
Based on your goals and financial condition, fill in the appropriate details.
SIP vs. Lump sum: where to invest
Mutual funds may be purchased in two ways: as a SIP or as a lump payment. A lump sum investment is when you put a big quantity of money into a mutual fund all at once. So, which is better: a SIP or a lump sum investment? Here are some particular factors to consider while making your selection.
1) Experience
A lump sum investment is when you invest all of your money at once. This implies that to optimize your gains, you must invest at the correct time. If the market does well, you can earn good returns. The negative is that if the market suddenly swings downwards, you might lose a lot of money. For experienced investors with a big sum of money, this may be a viable approach. If you’re a novice investor, though, sticking to SIP investments can help you avoid taking excessive risks.
2) Investment discipline
SIP investments help investors manage their money better in the long run. You may manage your money in a way that will allow you to fulfill your commitment if you invest a set amount of money each month. Your progress may appear gradual at first, but you will have put in a significant amount of effort when you look back after a period. The SIP mode might let you build up a big corpus over time.
Because most investors do not have a significant quantity of money to invest continuously, this investment discipline does not exist for lump-sum investments. You may select between SIP and lump sum investments depending on your investment size, risk appetite, and experience. Experts, on the other hand, typically advise investors to invest through SIPs rather than lump sums.
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How to Customize SIP
Several investors, particularly paid individuals, prefer the monthly SIP investing arrangement. Individuals may deposit the SIP amount straight into the fund when they get their monthly paychecks. There are, however, a variety of alternative solutions available to you.
- Perpetual SIP
You may transfer a predetermined amount into the mutual fund regularly for as long as you wish using this option. Give your bank account a standing instruction, and the money will be sent on a particular day. If you have a major financial objective in the future and want to build a substantial corpus, this might be a suitable option.
- Frequency of SIP
SIPs are available from mutual fund firms on a weekly, fortnightly, quarterly, or semi-annual basis. You can also invest for the future without committing to a certain time frame. The ‘Perpetual SIP’ option allows you to do this.
- Step-up SIP
You may ‘step-up’ or raise your SIP investments regularly using the step-up SIP option. Assume you begin a SIP with a monthly investment of Rs. 1,000. You can tell the SIP to be increased by a specific amount or percentage. So, if you want to increase your investment by Rs. 1,000 per year, you’ll have to invest Rs. 1,000 per month the first year, Rs. 2,000 per month the second year, and so on.
Stepping up your investments in this way has two advantages:
• You can earn a greater corpus over the investing period; and
• You can achieve your goals sooner.
Based on your investment objectives and budget, choose the frequency and amount. of step-ups. An online step-up calculator can help you figure out how your assets will grow over time