Systematic investment Plan or SIP is an easy way to invest in mutual funds. Through SIP, the investor can invest a regular sum of money at regular intervals. It is a disciplined method of investing which inculcates financial discipline among the investors. This discipline ensures investors to achieve financial goals and create wealth.
You have multiple SIP options such as quarterly, monthly, weekly or daily. In SIP, a fixed amount is auto debited from your linked savings account and invested in the fund of your choice. The number of units are allotted at the current market price. If the market is down, you will be allotted more units and vice versa.
SIPs can help you to even out the market volatility. Time in the market is more important than timing the market. With SIP investments, you will invest a specific amount on a periodic basis which reduces the risk associated with equity markets. It has been historically proven that in the long run equities have the potential to outperform other asset classes such as debt, gold, even real estate and give inflation beating returns.
SIPs lets you invest in smaller amounts at regular intervals. Hence, it is easy on the pocket. For e.g. an SIP of Rs.1,000 is easier on pockets than investing a lumpsum of Rs. 12,000 in a year. Also, the minimum SIP amount is far less than minimum lumpsum amount. The minimum SIP amount starts from Rs.100 or Rs. 500 while the Minimum lumpsum amount for many funds starts at Rs.5,000.
One of the most important advantage of SIP over lump sum investment is rupee cost averaging. Due to rupee cost averaging, you are allotted more mutual fund units when the markets are low and vice versa. Thus it averages the cost of your investments. This also instils a sense of discipline.
SIPs can help you to compound your wealth better than lump sum investment. It is because you are investing a specific sum of money every month and the returns are calculated on the initial investment as well as the returns on the preceding investments. For e.g. if you invest Rs.10,000 every month at 12% rate of return for 10 years, you can accumulate Rs. 23 lakh. The corpus would grow to Rs. 98 lakh and Rs.3.50 crore in 20 and 30 years. The total amount invested during the 10 years, 20 years and 30 years was just Rs. 12 lakh, 24 lakh and Rs. 36 lakh. Thus we see that the power of compounding was the highest at 30 years.
SIPs are effective for goal planning whether it is long term or short term financial goals. Typically, investors invest in equity markets to make quick bucks. But equity market is a great investment option to invest for long term financial goals such as buying a house, buying a dream car etc. You can effectively achieve your financial goals by opting for SIPs as you will be disciplined and won’t be budged by market swings.
Despite the many advantages of SIPs, there are still many questions running in the investor’s mind.
Some of these questions are:
When can I start an SIP?
You can start an SIP any time you want. Talk to your financial advisor or else set up an SIP by visiting your investment portal or the website of any fund house. With technology, it is very easy to set up an easy. It may take 10-20 days to register your SIP mandate before your first SIP investment takes place.
Can I change the SIP amount?
You can increase or decrease the SIP amount very easily. With online sites you the option to revise the SIP amount instantly. Fund houses don’t levy any penalty for changing the SIP amount or stopping the SIPs. Many fund houses have top up SIP facility with the help of which you can increase your SIP amount on a periodic basis. However, it is also suggested that you increase your SIP investment on a periodic basis and as and when your salary increases. However, the SIP amount is less the mandated amount put earlier while opening the SIP.
Can I invest lumpsum in a scheme in which there is an SIP running?
Of course. You can add lumpsum investment to the scheme where you have an existing SIP. You can either invest in under the same folio or create a different folio under the same fund. It has no effect on the SIP and the SIP goes on as planned. Investing lumpsum can help you to achieve the financial goal tagged with the fund at a faster pace.
For how long should I invest in an SIP?
Many fund houses have a minimum SIP period of six months and no maximum tenure. Fund houses have perpetual SIPs that does not have an end date. The investment tenure of the SIP should be based on your financial goals. If you want to achieve a financial goal after 10 years, then the SIP should be around 10 years. It is better to link every SIP with a goal which will help you to stay invested till you reach the goal.
Are SIP mutual funds are different from lump sum mutual funds?
This is a common misconception among mutual fund investors. They believe that SIP mutual funds are less risky than lumpsum mutual funds. While SIPs average your investment costs but it is no different from lumspum investment. SIPs are just a route to invest in mutual funds. Lumpsum investments tend to do well when the market is on a rise and SIP investments perform better during market lows.
By now, all your doubts regarding mutual funds must have been cleared. Invest in mutual funds through SIPs and take the first step towards fulfilling your financial goals.mutual funds, SIp
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