Over the last few years, Systematic Investment Plans (SIPs) have gained tremendous popularity. Demonetisation played a critical role in helping investors notice the power of SIPs and discover what is a mutual fund.
In addition, the campaign by Association of Mutual Funds in India called ‘Mutual Fund Sahi Hai’ also contributed to the fame of SIPs and mutual funds.
However, many investors are still unaware how SIP investments work. They consider SIPs as a standalone product and use mutual funds and SIPs interchangeably.
In reality, SIP is only a tool that can help you invest in mutual funds’ schemes. Generally, most mutual fund advisors do not advise investors to invest in lumpsum. For any investor who is faced with a question of how to invest in mutual funds, SIPs can be a better way to invest.
In this guide, we help you learn all there is to know about SIP investments.
What is an SIP?
A SIP permits you to invest a fixed amount repeatedly in a mutual fund scheme, typically an equity mutual fund scheme. It works on the simple principle of investing regularly to build long-term wealth.
This works differently than a lumpsum investment, which is a one-time investment option when you have a significant disposable income at hand.
Why Should I Start an SIP?
While comparing SIP v/s Lumpsum many investors prefer a SIP as it can help in managing market volatility. It allows you to invest regularly without worrying about the index level, market sentiments, etc.
Since you are investing in a disciplined and phased manner, you can manage your finances effectively. With automated payments, you do not need to remember payment dates, as the pre-determined amount is deducted from the account on the given date.
What are the Additional Benefits of Investing in SIP?
SIPs help you to maximise your returns and average your purchase cost through a concept called rupee cost averaging. This means averaging out the cost at which you buy units of a mutual fund.
When you invest at frequent intervals, irrespective of the market conditions, you receive fewer units when the market is high, and more units when the market is low.
SIPs force you to pledge cash at market lows even when other investors are exiting, and thus works in your favour in the long-term.
Another benefit offered by SIPs is the power of compounding. When you earn returns on top of the profits made by your investment, your money starts compounding. For example, you begin a SIP of Rs. 1,000 with a tenure of 20 years and an expected return of 15% p.a. your money could grow to Rs.15 lakhs approximately.
How Much do I Need for Investing in SIP?
You can start investing in SIP with an amount as low as Rs.500. Over a period of time, you can increase your monthly instalments by a factor of 15%.
Can I Customise my SIP?
Yes, you can. Many fund houses let you invest monthly, bi-monthly and fortnightly as per your convenience. Besides this, you can increase the amount of your SIPs through Step-up SIPs.
‘Alert SIP’ is another form of the regular SIP, which can send you an alert when the markets are down so you can purchase more units.
Lastly — ‘Perpetual SIPs’, where you need not choose the end date of the SIP. You can simply stop the SIPs by sending a written communication in black and white to the fund house.
Conclusion – Guide to SIP Investment
You can accomplish your financial goals by investing in SIPs, which are light on your wallet and can effectively even-out the volatility of the markets.