As the financial market is full of risk and volatility, finding an investment that is risk-free and promises a good return can be a challenging experience.
However, there are many investment vehicles out there that offer higher returns with a low risk of losing capital. And SIP is one such investment.
Whether you’re a new or experienced investor, you might have surely heard of all the advantages of investing in this investment vehicle.
This investment plan allows you to invest in a disciplined and regular manner, even with a small amount of capital.
If you’re still unsure and searching out for What is SIP? Read this article till the end to understand the topic more precisely. So let’s start!
What Is SIP?
The Systematic Investment Plan (SIP) is the best and safest way to invest in mutual funds consistently and systematically.
A SIP is based on the basic principle of investing on a regular basis, allowing you to accumulate money over a long time.
This investment plan allows you to invest a fixed sum of money every quarter, month, or week. You can start with as low as Rs. 500.
A SIP, unlike a lump sum investment, allows you to spread your money out over time. As a result, you don’t need a large sum of money to invest in mutual fund schemes through SIPs.
You’ll have to set aside a specific amount at regular intervals when you invest through a SIP, which helps you achieve your financial objectives over time.
How Does SIP Work?
After understanding what is SIP, let’s move forward to how does it work? As discussed earlier, this investment vehicle is a great way of investing a fixed amount in a mutual fund scheme on a regular basis.
SIP allows investors to acquire mutual fund units on a set date each month in order to create a savings strategy for themselves.
The primary benefit of systematic investment plans is that they eliminate the need to time the market.
Rather than trying to time the market, investing every month will ensure that you are invested at both the high and low points of the market, allowing you to make the most of an investment opportunity.
For instance, an investor buys more units when the market is down, while they purchase fewer units when the market is rising.
As the Net Asset Value of all equity funds changes regularly, the purchase cost may vary from one installment to another.
On the other hand, an investor can invest a pre-determined fixed amount in a SIP facility every month or quarterly through post-dated checks or the ECS (auto-debit) feature.
Meanwhile, Investors must complete an application form as well as a SIP mandate form, on which they must state their preferred date (on which the amount will be debited).
Advantages of Investing in SIP:
With SIP Investments, you can magnify your chances of getting higher returns in the long run. Additionally, the best part is you can start with a low initial investment.
That’s not it! There are several other benefits of investing in mutual fund SIP, so let’s start now!
With SIP, you’ll not need to worry about investing a large sum of money; instead, you can start with as low as Rs.500 per month.
Meanwhile, there are some mutual fund houses that offer you to start with Rs 100. Apart from this, it is one of the simplest ways to invest in mutual fund investments, as you can do it so online without the need of any stockbroker.
Rupee Cost Averaging:
SIPs can help you invest in equity funds by avoiding market volatility. Regular investing guarantees that the average purchase price is equalized over time; it is called Rupee cost averaging.
For instance, you get fewer units when the markets rise and more units when the markets fall. This lowers your risk and guarantees that you buy assets at a lower average cost per unit.
Power of Compounding:
When you invest regularly in a Systematic Investment Plan for the long term, you will benefit from compounding.
In simple words, you’ll not just earn returns on your principal amount but also on profits on the principal amount.
For instance, you invested Rs 500 every month on equity mutual funds at a return of 10% per annum. After a year, when you get your return, it will again be re-invested in the scheme. It means you’ll now earn on Rs 550, not on Rs 500.
Act as an Emergency Fund:
The best part of investing in a systematic investment plan (SIP) is that you can use it at any time in case of an emergency. In addition, you can stop your monthly SIP anytime.
You can redeem your investment anytime before the end date. However, you’ll be subjected to pay charges if there is a lock-in period.
Help Investors in Becoming More Disciplined:
Investing in mutual funds SIP will make an investor more disciplined in terms of managing investments. By opting for auto-debit payments, you’ll not need to worry about investing every month.
What Are The Types of SIPs?
There are majorly four types of SIPs. All these types are focused on long-term capital gains. That’s why experienced investors use it for long-term wealth creation.
So, let’s discuss the types of SIPs in brief:
Top-up, also known as Step-up SIP, lets investors increase their investment amount at regular intervals. When you increase your investment, your income will also grow simultaneously.
With top-up SIP, you can create significant wealth and achieve your financial goals even faster with the power of compounding.
In this type of SIP, you can change your monthly investment amount anytime. It further allows your SIP mutual fund houses to stop your installment if you face any money-related problems.
Additionally, in case you have surplus money in your bank account, you can also increase the amount of your installment for a specific duration.
When filling out the application form, you must have to mention the tenure of your investment. If you fail to do so, your SIP will become perpetual, meaning it will continue for tenure until you stop it.
If you’re an experienced investor who has enough knowledge about stock market risks, you can go for Trigger SIP.
It can aid you in setting the SIP start date after a specific event occurs. For example, you can set a trigger for a particular market event. However, it is not recommended for beginner investors.
How To Start Investing In SIP?
After understanding the topic -What is SIP? It’s time to start investing in it. So, here’s a step-by-step guide to getting started.
Setup Your Investment Objectives:
Before investing in any mutual fund scheme, it is important to understand your risk appetite and set investment goals. If you want good returns, you’ll need to take more risks.
SIP investments can help you achieve your long-term financial goals, such as children’s higher education, buying a new house, or retirement planning. If you set up your goals in advance, you can choose the right portfolio more wisely.
Determine How to Invest:
Determining how to invest in SIPs is the most crucial part. You can invest in them in two ways: Offline and Online.
In the offline process, you’ll need to submit a physical application with a copy of your KYC documents to the Asset Management Company (AMC). The other supporting documents include a canceled cheque and residential proof.
In the online process, you’ll need to worry about standing in a long queue. It will typically take a few minutes.
All you have to do is to visit the website of a reliable investing platform and follow their instruction to invest in SIPs.
Choose A Mutual Fund:
When you opt to invest in SIPs, you’ll have plenty of mutual funds to choose from. However, you should choose a preferred mutual fund scheme on the basis of your risk appetite and personal financial goals.
Before choosing any fund, consider its performance in the last few years.
Choose A Date of SIP:
As you know, the SIP amount will automatically be debited from your bank account, so choosing a preferred date is crucial. Most fund houses offer the following dates for monthly installments- 1, 5, 10, 15, 20, and 28.
Decide The Duration:
It is important to decide the duration of your investment. First, set up your financial objectives and calculate the duration at which they will be achieved.
Invest Until The End Date:
As mentioned above, SIP investment is best for achieving long-term objectives. So, it is not necessary to check the daily performance of your funds.
So, staying invested until the end date will not only help you get significant returns but will also aid you in becoming more disciplined and focused.
As we have come to an end of our topic – What is SIP? hope you all understood it better. Here’s a quick summary of this topic –
SIP can be an excellent way to create wealth with small and regular investments. Investing in mutual funds via SIP is an ideal choice for investors who want to save before spending and are on their way to becoming disciplined investors.
On the other hand, the major drawback of SIP is its long-term nature. You’ll need to invest your capital for a long-time to get considerable returns.
However, if you’re an aggressive investor looking for quick profits in the short run, then you should try your hand at Forex trading. So, start trading the Forex market with InvestBy today!
Is It Safe to Invest in SIP?
Yes, it is considered the safest way to invest in mutual funds. However, as a financial instrument, it is subject to market fluctuations. So, it is important to consult a financial advisor first before investing in it.
Is SIP Tax-free?
It is one of the few best tax-saving financial instruments with good returns. When you invest in ELSS through SIP, you can claim up to Rs 15,00,000 under 80C of the Income Tax Act.
What is the Average Return on SIP?
The average return on your investment may vary depending on various factors. For instance, the expected average return on large-cap equities is 12-18%, while it’s 14-17% for mid-cap.
For better assistance, read all scheme related documents carefully before choosing a particular fund.
What If SIP is Not Paid?
You’ll not penalize for not paying your monthly installments. However, if you fail to pay your installments for three consecutive months, your SIP will automatically be canceled.
What is Blue Chip Fund?
Large Cap funds are also known as blue-chip funds. These funds majorly invest in equities of large-cap companies.