Is a SIP right for your financial plan? Should you invest in Systematic Investment Plans for the next few years? A SIP will allow you to invest a regular, fixed sum in mutual funds. Apart from averaging out the purchase costs and maximising the returns on the investment, a SIP will add financial discipline to your life. SIP adds certainty to the process of investment by taking out variables like market conditions and index levels. For example – when people have time to invest a fixed amount per month, they have to check the market trends, and if the index seems optimistic, then they might want to revisit the initial amount of investment. Getting a SIP will put an end to the entire mutual fund predicament that investors go through. You can begin investing via SIP with a small amount of INR 500 only. It makes investment simpler for everyone including those, who do not keep regular tabs on market trends.
Here are the different features that make SIPs a good route:
If the investor could always pick the correct time to buy and sell, investing would become much simpler and more rewarding. Unfortunately, accurately timing the market consistently is close to impossible for most investors. Even the market veterans usually get hit by a bad market sooner or later. Under such uncertain circumstances, SIP leverages an automatic market-timing mechanism – Rupee Cost Averaging (RCA) – that can eliminate the necessity to time each and every investment. Simply speaking, with a mechanism like the RCA, you don’t have to worry about the different interest rates and share price trends. The basic idea is to purchase more units during a low NAV and fewer units when it is high without manual intervention.
The RCA does not guarantee profits. However, coupling the RCA with a long-term investment period reduces the risks of investment. It can smoothen out the ups and downs of the market. If you are ready for investing in the market in a disciplined and time-bound manner, the RCA can be an efficient instrument for wealth accumulation.
Another significant advantage of SIPs is the power of compounding. When an individual invests for an extended period, the amount earns returns. Then it earns returns on the initial returns, and that is the beauty of compounding. Ultimately, an SIP helps the investor achieve long-term financial growth by allowing him to invest small amounts in a regular, systematic manner.
Several fund houses allow their investors to invest the fixed amount fortnightly, bimonthly or monthly. Step-up SIP schemes enable investors to increase their monthly investments periodically. Another popular form is the “Alert SIP” that sends alerts to the investors whenever the market is not doing well, and there is a chance to buy more units. The traditional “perpetual SIP” schemes allow the investors to stop the SIP any time. The investors need to send a written communication with the fund house since there is no stipulated date of the SIP. Check out other such benefits here!
Investments in tax-saving mutual funds or Equity Linked Savings Schemes (ELSS) qualify for tax deduction under Section 80C. You can choose to invest in ELSS via an SIP. ELSS is a diversified mutual fund equity scheme. People interested in income tax can benefit significantly by investing in ELSS through SIPs.
Investing via an SIP is an easy process if you have the right guidance. Here are simple steps that can help you invest through a SIP:
Step 1: Determine your investment objective and risk appetite
Before investing, figure out your objectives. Why do you want to invest? Do you want to save for your retirement, your kid’s education, planning a foreign vacation or buying a new car? What is the time frame that you have for achieving these objectives? The answers to these questions will help you understand where to invest, what strategy might yield you the optimal returns and the right balance of equities and debts funds to include in your portfolio.
Next, you must determine your risk tolerance. Do you depend on your savings to fund all your expenses? How comfortable are you with taking losses on your investments? Higher the financial obligation of the investor, lower is their risk tolerance. Similarly, aged individuals could have lower risk appetite than the younger ones.
Once you have the answers to both these questions above, the next step is to find the right mutual fund for your investment. There are hundreds of mutual fund schemes in the market. You can speak to your investment advisor or search online to find the right schemes for you.
Step 2: Prepare necessary documents
Keep scanned copies of your PAN card, Address proof, photograph and cheque handy. Keeping your Aadhaar number within reach will also help, although it isn’t mandatory. Once you have these, you are ready to complete your KYC. Mutual Fund KYC is an additional step that needs to be done for the first time investor, even if you have done your KYC with your Bank. This is a one-time verification that will allow you to invest in mutual funds and stock markets in the future.
Step 3: Start investing
Once you finish your KYC, you can visit the website of any fund house you wish to invest in. Look for the “Register” or “New Investor” link. It may be easier for you to invest in mutual funds via your Bank, as most Banks offer schemes from many fund houses at one place. Most banks also offer an online investment facility through which you can invest in mutual funds on the go.
The exact amount of investment will depend on the individual and his or her financial plans. As we have mentioned before, you can begin your SIP investment with just INR 1000 per month. The amount varies by scheme and fund-house – some schemes allow you to invest with INR 100 as well.
The power of compounding ensures that the earlier you start investing, the more you gain at the end of the term. Let us work with an example here –
Mr Gupta begins by investing INR 5,000 per month from the age of 20 and continues to invest the same amount for the next 15 years. At the age of 35 he stops investing, but lets the already invested amount stay invested. Whereas, Mr Mathur begins investing INR 12,000 from the age of 35 and continues to invest the same sum for the next 25 years. Let us assume that both earn a return of 12% per annum on their respective investments throughout. Who earns more by the time they are 60?
Although most would assume it would be Mr Mathur, early age and an extended period give Mr Gupta the edge. When they retire at 60, Mr Gupta would have accumulated INR 4.28 crs, and Mr Mathur would have earned only INR 2.3 crs. This is despite Mr Mathur having invested 4 times more (₹36 lakhs) than Mr Gupta (₹9 lakhs). The secret? At the age of 35, Mr Gupta had already built up a sizeable corpus of ₹25.2 lakhs whereas Mr Mathur had nothing. This amount continued to grow over the next 25 years ensuring that Mr Gupta’s corpus became twice that of Mr Mathur.
This example shows that you should begin investing in SIPs as early as possible, irrespective of how much or how frequently you can invest. However, always ensure that you invest in a diversified bouquet of funds – a combination of equity and debt, and also a mixture of large cap, small cap and mid-cap. Diversification will ensure that you continue to earn returns appropriate to your risk appetite while also cushioning you from downturns in any particular sector.