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Systematic Investment Plan, commonly referred to as an SIP, allows you to invest regularly a fixed sum in your favorite mutual fund scheme/s. In SIP, a fixed amount is deducted from your savings account every month and directed towards the mutual fund you choose to invest in.
The popularity of SIPs or Systematic Investment Plans has gone up in the last few years. Many individuals discovered the charm of SIP and mutual funds. However, many investors, including those who have already made SIP investments in mutual funds, are often confused about SIPs.
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 lumpsum 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.
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.
SIPs help you to average your purchase cost and maximise 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. This helps you to build a large corpus that helps you to achieve your long-term financial goals with regular small investments.
SIPs are of 4 types and a short description of each of these is given below:
This SIP type allows you to increase your investment amount periodically. This also means that you can make the most of your SIP mutual fund investment by contributing to well-performing mutual fund schemes at certain intervals. You can increase your investment amount when your income increases.
This SIP type allows you to increase as well as decrease your investment amount as per the cash flow you have. This way you can skip one or more payments when you face cash crunch due to any reason. Likewise, you can make a bigger contribution to your SIP account when you receive a bonus or an additional income.
SIP investments are, generally, for a fixed period of 1 year, 3 years, or 5 years. A SIP mutual fund is referred to as Perpetual SIP if you do not mention the end date in the mandate date. This SIP types allows you to redeem your funds whenever required or, particularly, when you have achieved your financial goals. However, it is advisable to set an end date for your SIP contribution so as to build a disciplined, goal-based investment.
This SIP type is ideal for investors with limited knowledge of the financial market. You are allowed to set NAV, index level, SIP start date or event, etc. Since this SIP mutual fund type encourages speculation, it is not desirable or much recommended.
You can start investing in a mutual fund scheme via SIP with a minimum of Rs 500.
While choosing the SIP plan, there are many different aspects that should be kept in mind. However, if one wants to invest on SIP, here are some of the important points that should be considered.
For how long one wants to invest in SIP matters a lot from the perspective of tax, risk, and returns. It is always suggested to invest in Sip for a longer tenure in order to gain the maximum return on investment. Before zeroing in on the SIP plan it is important to consider 5 years reference point and check the performance of the fund across markets.
While choosing the SIP plan, it is very important to check the reputation of the fund house in order to know that whether the funds will be able to handle the market fluctuations without letting the investors face the loss.
asset size can be considered as an appropriate benchmark while choosing the
fund. However, it doesn’t mean that the funds below this asset size are bad,
but it may not perform as good as the funds above this asset size.
SIPs are not a risky investment, but the mutual fund scheme in which they invest could carry a greater amount of risk than an investor can handle.
It is often observed that many investors invest a very small amount via a SIP. It is fine to begin with a small amount in the beginning, however, the investment amount should be gradually increased to reap in substantial gains. Similarly, many investors begin a SIP investment with considerably huge amounts. This approach must be avoided and huge sums must be invested once the investor has enough confidence about the performance of the fund. An investor should always try to invest an amount optimal according to their financial position and investment objectives.
Investors often withdraw their investment as soon as it starts giving a decent return, failing to realise that the value of a SIP investment also depends on the SIP time period. A SIP investment is capable of giving its maximum returns over a long tenure. Thus, it is advisable to remain invested for at least 3-5 years in order to earn some real good returns.
Another mistake which investors often end up committing is they fail to increase the SIP amount with time. With an increase in disposable income, an investor should increase the SIP contribution in order to continue receiving inflation-beating returns. This must be done when an investor is confident about the fund’s performance.
SIPs are among the easiest and safest ways to invest in mutual fund schemes. It removes the risk of buying at the wrong time when markets are high or not buying when markets are cheap. SIP ensures that you invest through different markets, therefore, minimizing timing risk. The inherent risk involved in mutual fund investing comes from the investments the fund makes. There are high-risk investments that offer the potential for high rewards, and low-risk investments that keep the investment safe but offer returns at a far lower rate.
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