A systematic investment plan (SIP) is a popular way of investing in mutual funds in India. It allows you to invest a fixed amount of money at regular intervals in a mutual fund scheme of your choice. SIPs can help you achieve your financial goals by creating a habit of saving and investing, and by benefiting from the power of compounding and rupee cost averaging.
In this article, we will explain how SIP works, what are its benefits, and how to choose the best SIP plans for your needs.
How SIP Mutual Fund Works?
SIP is a simple and convenient mode of investment. You can start a SIP with an amount as low as Rs. 500 per month (Rs 100 per month in case of few schemes). You can choose the frequency of your SIP as weekly, monthly, quarterly, semi-annually, or annually, depending on your cash flow and preference. You can also choose the date of your SIP instalment and link your bank account with the mutual fund for automatic debit.
When you register a SIP, you are using your capital to buy units of a mutual fund scheme. These units are sold to you on a net asset value (NAV). Think of NAV as the purchase price of any goods and services. If you pay Rs 10 for a pen, then the pen’s NAV is Rs 10. Similarly, mutual fund units are also bought and sold on the basis of NAV.
The NAV of a SIP mutual fund scheme changes every day, depending on the market value of its underlying assets. This means that sometimes you may get more units for the same amount of money, and sometimes less. This is where rupee cost averaging comes into play.
Rupee cost averaging is a technique that reduces the impact of market fluctuations on your investment. It means that you buy more units when the NAV is low, and less units when the NAV is high. This way, you average out the cost of your investment over time, and reduce the risk of timing the market.
Another benefit of SIP is the power of compounding. Compounding means that you earn returns not only on your principal amount (actual investment) but also on the gains on the principal amount i.e. your money grows over time as the money you invest earns returns. And the returns also earn returns .
The longer you stay invested through SIP, the more you benefit from compounding. For example, if you invest Rs 10,000 per month for 10 years at 12% p.a., you will have a corpus of Rs 23.08 lakh at the end of 10 years. But if you invest for 20 years, you will have a corpus of Rs 99.22 lakh at the end of 20 years .
Benefits of SIP
SIP offers many benefits to investors, such as:
- Disciplined investing: SIP helps you develop a habit of saving and investing regularly, which is essential for achieving long-term financial goals.
- Convenience: SIP is easy to start and stop. You can register online or offline, and choose the amount, frequency and date of your SIP instalment. You can also modify or cancel your SIP anytime.
- Flexibility: SIP allows you to invest in any mutual fund scheme of your choice, across different categories and asset classes. You can also start multiple SIPs for different goals and time horizons.
- Affordability: SIP enables you to invest in small amounts, which may not be possible if you invest in lump sum. You can also benefit from economies of scale, as mutual funds charge lower expense ratio for larger corpus.
- Diversification: SIP helps you diversify your portfolio across different schemes and asset classes, which reduces your overall risk and enhances your returns potential.
- Goal-based investing: SIP helps you plan and invest for your specific financial goals, such as buying a house, car, education, retirement etc. You can calculate how much you need to invest per month to achieve your desired goal amount by using online SIP calculators.
- Top-up facility: Some mutual funds offer top-up facility for SIPs, which lets you increase your SIP amount by a fixed percentage or amount every year or at pre-defined intervals . This helps you save more in tandem with rising income and inflation.
How to choose the best SIP plans?
There is no one-size-fits-all answer to this question, as different investors may have different risk profiles, goals and preferences. However, some general factors that you should consider while choosing a SIP plan are:
- Assess your risk appetite and investment horizon. Different mutual fund schemes have different levels of risk and return potential. You should choose a scheme that matches your risk profile and suits your investment objective and time frame. For example, if you are a conservative investor who wants to save for retirement in 20 years, you may opt for a balanced or hybrid fund that invests in both equity and debt. If you are an aggressive investor who wants to grow your wealth in 5 years, you may choose a diversified equity fund that invests in various sectors and companies.
- Do your research and compare different schemes. Once you have decided on the type of scheme that suits your needs, you should do some homework and compare the performance, portfolio, expense ratio, exit load, and other features of different schemes in that category. You can use online tools and websites to compare various parameters and ratings of different schemes. You should also read the scheme information document (SID) and key information memorandum (KIM) of the scheme that you are interested in to understand its investment strategy, risks, fees, and other details.
- Choose a suitable SIP amount and frequency. The next step is to decide how much money you want to invest in a SIP and how often. You should choose an amount that is affordable and comfortable for you, and that can help you achieve your financial goals. You should also choose a frequency that matches your cash flow and convenience. You can start a SIP with as low as Rs 500 per month, and you can choose to invest monthly, quarterly, or even daily.
- Fill up the application form and submit the required documents. To start a SIP, you need to fill up an application form with your personal and bank details, and choose the scheme, amount, frequency, date, and duration of your SIP. You also need to submit some documents such as PAN card, Aadhaar card, cancelled cheque, etc., for KYC verification and mandate registration. You can either fill up a physical form or do it online through the website or app of the mutual fund house or an online platform.
- Monitor and review your SIP periodically. Once you have started your SIP, you should not forget about it. You should monitor its performance and review it periodically to see if it is on track to achieve your goals. You should also check if there are any changes in the scheme’s strategy, portfolio, performance, or risk profile that may affect your investment. If needed, you can make changes in your SIP amount, frequency, date, or duration, or switch to another scheme that suits your needs better.
A systematic investment plan (SIP) is a popular way of investing in mutual funds in India. It allows you to invest a fixed amount of money at regular intervals in a mutual fund scheme of your choice. SIPs can help you achieve your financial goals by creating a habit of saving and investing, and by benefiting from the power of compounding and rupee cost averaging.
