SIP: Everything you need to know

[ecis2016.org] Check this comprehensive guide if you are planning to invest in Systematic Investment Plan or SIP.

What is an SIP?

SIP full form is Systematic Investment Plan. SIP means a mutual fund feature that allows investors to invest in a more methodical and disciplined manner. SIP gives many people investing in mutual funds the opportunity to get first-hand experience with how mutual fund investing works.

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An investor has the ability, via the SIP option, to invest a certain amount of money in the mutual fund scheme of their choice at predefined intervals. The pre-defined SIP periods can be on a weekly, monthly, quarterly, semi-annually, or yearly basis, and the predetermined amount of money can be as little as Rs. 500. The simplicity and ease of use that SIP provides, and the fact that it enables investors to make smaller deposits over a longer period, have contributed to its widespread popularity. 

The investor can invest in a time-bound way without worrying about the dynamics of the market and stands to gain in the long-term owing to the power of compounding as well as average costs when they choose the SIP path to invest.

How does SIP work? 

The fundamentals of systematic investing are straightforward. Investing in a fund or other investment is done by regular and periodic purchases of its securities. A predetermined sum is taken out of the user’s account regularly and invested in various mutual funds. Because of the adaptable nature of these plans, the users are free to alter the amount they contribute to the plan at any time, as well as to withdraw entirely if they so want.

In general, SIPs are passive investments because once you put money into them, you keep investing in them, no matter what happens to the stock market. As a result, you must monitor your SIP’s capital accumulation. You may want to rethink your investing strategy after you’ve reached a particular amount or are nearing retirement. Increasing your returns by switching to an actively managed strategy or investment might be an option for you. However, you should always consult a financial expert or other specialists to identify the best course of action for your particular circumstances.

What does NAV mean in SIP?

NAV is the price at which investors acquire or sell units of a mutual fund. The NAV of the majority of mutual funds is updated daily after business hours. All mutual fund trades only occur at the current NAV. Every time you invest through a SIP installment, your purchase price will equal the current NAV.

The two guiding concepts for SIPs

Rupee Cost Averaging

By removing the element of speculation around market performance, SIPs help you avoid market volatility. Investing consistently assures that, over time, the average price of a transaction will level off. When the markets increase, you get fewer units, and when the markets decrease, you receive more units. This reduces your risk and assures you buy assets at a reduced per-unit average cost. 

Let’s have a look at an example to understand Rupee Cost Averaging better. Let’s say you decide to invest Rs 2,500 per month in a systematic investment plan (SIP) in an equity fund. The stock market is notorious for its extreme volatility, and as a result, the Net Asset Value (NAV) of equities funds is constantly shifting. This indicates that you will not be able to make investments each month at the same NAV. Your systematic investment plan, or SIP, might look something like this if you invest Rs 2,500 each month of a given year.

Compounding

Due to the power of compounding, saving a small amount of money consistently over long periods has an exponential effect on your investment. Compounding is a procedure in which the interest generated on the principal amount is reinvested so that from that point forward, the extra interest also earns interest. Your investment will create revenues not just from the original principal invested but also from the interest gained throughout the ensuing time. Regular investments made over extended periods provide bigger returns and profits as shown in the table below. 

Types of SIP 

Let’s have a look at the different kinds of SIPs, which are as follows:

• Top-up SIP

Top-Up SIPs let you raise your SIP contributions at predetermined periods. The Top-Up SIP is so named because you can raise your SIP payments as your income rises. As a result of the power of compounding, the top-up SIP allows you to amass a substantial corpus over time and achieve your financial objectives more quickly.

Top-up SIP example:

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Aakash wants to begin a monthly SIP to grow his retirement fund. He intends to invest Rs 20,000 per month for 20 years in a multi-cap fund and anticipates a minimum annual return of 11%. By investing Rs 20,000 every month and assuming an annual return of 11 per cent, Aakash would be able to generate a corpus of around Rs 1.75 crores from an initial investment of Rs 48 lakhs.

What if Aakash chooses to top-up his monthly SIP contribution by 10 per cent annually? With an investment of Rs 93.60 lakhs, he may amass a corpus of around Rs 2.82 crore. By raising the monthly SIP contribution by merely 10 per cent per year, an extra corpus of over Rs 1 crore can be established.

• Flexible SIP

The flexible SIP enables you to alter the monthly amount deducted by your mutual fund company for your SIP payments. If you are experiencing a financial shortage, this feature allows you to inform the mutual fund company that you want to suspend your SIP contributions until further notice. In addition, if you have excess funds in your bank account, you may boost your SIP payments for a certain period.

• Perpetual SIP

When you complete the SIP application form, you must pick the SIP duration. If you don’t provide a duration for your SIP, it will be in effect in perpetuity. You may discontinue your SIP at any time by telling the mutual fund firm that you no longer want to invest. If you don’t want to restrict your SIP contributions to a certain period, you may choose the “perpetual SIP” option in the SIP application.

• Trigger SIP

If you are acquainted with stock market moves, you may choose the trigger SIP. It allows you to change the SIP start date or redeem your SIP after the designated event has occurred. You may set a trigger for a fortunate stock market occurrence, a NAV (Net Asset Value) or an index level. However, you must only choose the trigger SIP if you are familiar with the fluctuations of the stock market.

What documents are required to open an SIP?

A PAN card, an address proof (driving license/bank statement/utility bill), a passport-sized picture, and a chequebook are all you need to open an SIP online. 

The chequebook will be useful for providing your bank information. An Aadhar number is not required, although it would streamline the procedure. 

Once your KYC verification is complete, you can begin investing in SIP online by connecting your bank account to your investment account.

Ways to invest in a SIP

When making their first investment, first-time investors often struggle to choose whether they should make a one-time commitment or an SIP investment.

• One-Time SIP 

When you choose to make an investment using this strategy, you will be required to make a lump sum single payment of a sizable amount of money. You should choose the one-time investment mode if you already possess cash that is available for investment. 

• The monthly SIP

The monthly SIP involves investing a certain amount of money in a mutual fund at predetermined periods. You should choose this option if you anticipate receiving consistent sums of cash in the foreseeable future. The monthly SIP plan is often recommended for first-time participants.

Why should you consider investing in SIP mutual funds?

People should put their money into SIP mutual funds because the idea of SIPs is predicated on the maxim “Save First, Spend Next.” Instead of making a single commitment, you can use a systematic investment strategy to invest small sums of money at regular intervals (weekly, monthly, or quarterly).

# 1 Power of Compounding 

When you spread out your investments over a significant amount of time, you get the benefit of rupee cost averaging. When compared to making a single investment, this guarantees that you will get significantly higher returns on your money.

#2 As little as Rs 500 per month is required

Start investing in SIP with as little as Rs 500. When you have a better understanding of what mutual funds are capable of doing, you will be able to raise the amount of money you invest in a systematic investment plan each month.

#3 Road to becoming a diligent investor

Managing your money responsibly will become second nature when you start investing with a systematic investment plan (SIP). You may avoid the headache of manually investing each month if you choose to make your contributions using an automatic payment system instead.

#4 Higher returns by a factor of two than RD

ELSS mutual funds have the potential to deliver returns that are much greater than those of bank fixed deposits, the public provident fund, and other conventional investment choices.

#5 Serves as a fund for emergencies

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Your systematic investment plan (SIP) can be terminated whenever you choose, and the fund company has no influence in the matter. In addition, you can withdraw your money at any moment (if there is no lock-in period).

Who should consider investing via SIP?

Investors who are new to the world of mutual funds can choose to start their journey by setting up a systematic investment plan (SIP). This is an excellent option for those who have a consistent source of money, such as a salary. By starting a systematic investment plan (SIP), you will have the ability to invest a predetermined amount of your monthly income in a mutual fund. Because of this, you will be required to put away a certain amount at certain intervals, which will help you develop a long-term sense of financial discipline.

How to decide which mutual funds are the best SIP investments?

You will be able to find out all there is to know about the mutual funds you have chosen, including their historical returns, on the internet. Having said that, you are obligated to check that the chosen fund satisfies the requirements listed below.

#1 Risk tolerance

It is crucial that you only invest in those funds whose risk level fits within your risk appetite if you want your investments to be successful. If you are an investor who does not like taking risks, you must put your money into funds that carry very little or no risk at all.

#2 Asset size

When choosing a fund, an asset size of at least Rs. 500 crore may be a useful benchmark. This does not imply that any funds with a corpus lower than this one are undesirable, but investing in them is not recommended unless you are ready to accept some level of risk.

#3 Fund house

When selecting a plan, it is crucial to take into consideration the fund house’s reputation since it provides insight into how well they have navigated market highs and lows while shielding their clients from the negative effects of such changes.

Which SIP is the best for me?

Before choosing the SIP that best fits your profile, you must comprehend your cash flow. As a salaried employee, saving via a monthly SIP is appropriate since you get your pay on fixed dates, allowing you to invest consistently. Consider investing through a weekly SIP if you wish to acquire fund units more regularly and optimise the cost of acquisition to the maximum extent. If you get quarterly or semiannual performance-based incentive payments, you may choose to invest through a quarterly or semiannual SIP.

How to choose mutual funds for a SIP?

Every mutual fund plan has a list of goals to pursue. Consequently, the risk profiles of mutual fund schemes differ. You must evaluate your needs and risk tolerance. You may only invest in funds whose aims and risk levels fit your profile. You must evaluate the fund from several perspectives, including previous performance, expense ratio, and financial parameters.

The most effective method to invest in SIPs

#1 Make a plan for your investments

Each and every mutual fund is created to accomplish a certain goal. You need to do an analysis of your needs and choose the fund that is compatible with the objectives and level of risk you have set for yourself.

#2 Choose between SIP or lump sum

Investing in mutual funds can be done in one of two ways: with a single payment known as a lump sum investment or with a systematic investment plan over the years. You must first consider your profile before deciding whether to invest in a lump amount or via a systematic investment plan (SIP).

#3 The regularity of your SIP breaks

Investing in systematic investment plans (SIPs) can be done on a daily, weekly, monthly, or quarterly basis using the services provided by mutual fund institutions. It is to your advantage to have a SIP that lasts for as long as possible. It is highly recommended that you keep up with your SIP for as long as you can. Even if you don’t make any more investments, you can still let the ones you’ve already made sit there earning interest. In this approach, you provide your investment with the opportunity to accrue considerable additional value over time.

How can I calculate SIP returns? 

To estimate the future profits that your SIP investment will generate, you must complete the procedures outlined below:

• Go to any SIP calculator page online.
• Input your desired SIP amount.
• Enter your SIP’s duration.
• Move the sliding scale and enter the projected rate of return

The SIP calculator will calculate the anticipated return on your SIP investment after you’ve provided the information above.

How can SIP mutual funds be redeemed online?

You may redeem your SIP investments online by going into your fund house investment account and stop your SIP by filing a “Terminate SIP form.” If you do not cancel your SIP, the fund units will be purchased on the following SIP payment date. If you do not want to discontinue your SIP, you may immediately redeem the fund units acquired via SIP by submitting a redemption request. Your transaction will be executed at the current NAV.

How can the SIP amount be increased?

Consider investing through top-up SIPs if you want to automate the increase of your SIP amount. These SIPs automatically raise your SIP amount at specified intervals; all you need to do is maintain a sufficient balance on the scheduled dates. Some fund companies prohibit SIP revisions. In this situation, you may start a new SIP with the desired investment amount. If your fund house allows you to add funds to your SIP, you may do so by logging into your fund house-held investing account.

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