A five minute guide to Systematic Investment Plan (SIP)
The popularity of SIPs or Systematic Investment Plans has gone up in the last few years. Thanks to demonetization, many individuals discovered the charm of SIP and mutual funds. Amfi’s Mutual Fund Sahi Hai campaign also helped popularizing the concept of SIP and mutual funds. However, many investors, including those who have already made SIP investments in mutual funds, are often confused about SIPs.
Many investors think that an SIP is a product. It is not uncommon to come across a query – can I invest in an SIP to achieve my goal? An SIP and mutual fund schemes are not synonyms. An SIP is a mere tool that helps you to invest regularly in a mutual fund schemes, mostly in equity mutual fund schemes. An SIP helps you to stagger your investments in equity mutual fund schemes over a period. Most mutual fund advisors do not recommend investing a lump sum in equity mutual funds. They believe that staggering investments over a period, depending on the quantum of money, is a better way to invest in equity mutual funds and avoid catching the market at a certain level. Also, it is a convenient tool for salaried investors to regularly invest in mutual funds.
Here’s a quick guide to SIPs and how you can use them to invest in equity mutual fund schemes to create wealth over a long period to achieve your long-term financial goals.
What is an SIP?
An SIP or a Systematic Investment Plan allows an investor to invest a fixed amount regularly in a mutual fund scheme, typically an equity mutual fund scheme.
Why you should do a SIP?
One, it imparts financial discipline to your life. Two, it helps you to invest regularly without wrestling with market mood, index level, etc. For example, if you are supposed to put a fixed amount every month in a mutual fund scheme, you need to find time to do it. When you have the time, you might be worried about market conditions and think of postponing your investments. Or you might be thinking of investing more if the mood is optimistic. SIP puts an end to all these predicaments. The money is automatically invested regularly in a scheme without any effort on your part.
What are the other benefits of SIPs?
SIPs help you to average your purchase cost and maximize returns. When you invest regularly over a period irrespective of the market conditions, you would get more units when the market is low and fewer units when the market is high. This averages out the purchase cost of your mutual fund units.
Another benefit, called the eighth wonder of the world by some, is the power of compounding. When you invest over a long period and earn returns on the returns earned by your investment, your money would start compounding. This helps you to build a large corpus that helps you to achieve your long-term financial goals with regular small investments.
How much money do I need to start an SIP?
You can start investing in a mutual fund scheme via SIP with a minimum of Rs 1,000.
Can I customize my SIP?
Yes, you can. Though the most popular SIP is investing a fixed amount every month, investors can customize the way they put money via SIPs. Many fund houses allow investors to invest monthly, bi-monthly and fortnightly, according to their convenience.
Apart from this, Step-up SIPs allow investors to increase the SIP amount periodically. ‘Alert SIP’ is another form of the regular systematic investment plan which sends an alert to the investor to buy more when the markets are down.
In case of the ‘perpetual SIPs,’ investors don’t have to choose the end date of the SIP. Once the goal is met, the investors can stop the SIP by sending a written communication to the fund house.
Source : Economic Times