How to Invest In Systematic Investment Plan (SIP)

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EXPLORE FUNDS
How to Invest In SIP
EXPLORE FUNDS
4 mins
19 January 2024

The trends of financial investment change over time. In the last decade, Systematic Investment Plans (SIPs) have emerged as one of the most popular modes of investment, as they provide steady returns over a long period of time. Various investors are now considering investing through SIPs as a mode to gain attractive returns.

What is Systematic Investment Plan?

A Systematic Investment Plan (SIP) is a disciplined approach to mutual fund investing. It involves committing to investing a fixed amount at regular intervals, typically monthly or quarterly, in a chosen mutual fund scheme. SIPs offer several advantages, including affordability, as they enable individuals to start with small investments, making mutual funds accessible. They employ rupee cost averaging, reducing the impact of market volatility by buying more units when prices are low and fewer when prices are high. SIPs also harness the power of compounding, with reinvested returns generating additional returns over time. They provide flexibility to adjust contributions as goals change and access to diversified portfolios, making them an effective tool for long-term wealth creation.

How does SIP work?

  • Regular Investments: SIP involves making fixed, regular investments in mutual funds at predetermined intervals. Investors choose the frequency—monthly, quarterly, or annually.
  • Rupee Cost Averaging: SIP follows the rupee cost averaging strategy, lessening the impact of market volatility. More units are bought when markets are low, and fewer units when markets are high.
  • Convenience and Discipline: Auto-debit from the investor's bank account ensures convenience and disciplined investing. The automated process eliminates the need for constant manual intervention.
  • Flexible Investment Amounts: Investors can choose the amount for each SIP installment, accommodating different financial capacities and goals. This flexibility makes SIP adaptable to various investment objectives.
  • Power of Compounding: SIP leverages the power of compounding, enabling returns on both the principal and accumulated interest over time. Compounding significantly enhances long-term investment growth.

How to Invest in SIP in India?

Here is a step-by-step process on how to invest in SIPs:

  • Set your financial goals:
    While investing, it is important to set your financial goals and investment timeline. Without a goal in mind you will be tempted to redeem your investment sooner thereby nullifying the effects of SIP. A well-defined goal will motivate you to accumulate your investments over time to capitalize on the compounding benefits of SIP.
  • Decide your investment horizon:
    Merely deciding your financial goals is not enough. You need to calculate the actual monetary value of your goals. Determining the investment corpus will help you plan the amount of investment and the time needed to achieve it. Be transparent about your investment capacity. Use the Bajaj Finserv SIP calculator for better planning of your investments.
  • Consider your risk appetite:
    Mutual funds are designed to cater to all types of investors. You have an option of choosing from high risk equity funds, moderate risk balanced funds and low risk debt funds. Your risk appetite mainly depends on your liabilities. Consider all facts affecting your risk-taking capacity before making any investment decision.
  • Decide your mode of investment:
    There are two modes of investing in SIPs - offline and online. Offline modes consist of investing through mutual fund agents, financial institutes, and corporate agents. They involve a lot of paperwork and are often time consuming. Online modes are fast and convenient due to minimal paperwork involved. Online avenues of investing are online MF agents, share broking portals and through financial institutes.
  • Arrange your KYC documents:
    To start investing in mutual funds through SIPs you need to submit your KYC documents. The required documents are a photo identity proof, address proof, cancelled cheque and photograph of the investor.
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Lump Sum Vs SIP: Which plan Is better?

The choice between Lump Sum and Systematic Investment Plan (SIP) depends on individual financial goals, risk tolerance, and circumstances. Lump Sum involves investing a significant amount all at once, suitable for those with surplus funds or specific investment opportunities. SIP, on the other hand, promotes disciplined, periodic investments, ideal for risk-averse investors or those looking to mitigate market volatility through rupee cost averaging. SIPs are conducive for long-term wealth creation and goal-based savings, while Lump Sum may offer more immediate returns but entails higher risk. Ultimately, the better plan depends on one's financial objectives, investment horizon, and risk appetite. Diversifying between both strategies is also a viable approach.

How to set SIP goals?

Setting SIP (Systematic Investment Plan) goals is a crucial step in effective financial planning. To do so, follow these steps:

  1. Define Objectives: Clearly articulate your financial goals, whether it's retirement planning, buying a house, education, or wealth accumulation.
  2. Quantify Goals: Assign a specific monetary value and timeline to each goal, making them measurable and achievable.
  3. Assess Risk Tolerance: Evaluate your risk appetite to determine the appropriate mix of equity and debt mutual funds within your SIP portfolio.
  4. Consider Inflation: Account for inflation when setting goals to ensure your future purchasing power is maintained.
  5. Regular Review: Periodically review and adjust your SIP contributions and investment choices to stay on track with your goals, considering changes in financial circumstances and market conditions.
  6. Professional Guidance: If needed, seek advice from a financial advisor to tailor your SIP goals based on your unique situation.

By setting well-defined, quantifiable, and adaptable SIP goals, you can work toward achieving your financial aspirations with discipline and confidence.

How Much You Should Invest in SIP

  • There is no limit to the amount you can invest in a SIP. The minimum amount that you can invest can be as low as Rs. 100 per month.
  • The ideal amount to invest in an SIP will differ from investor to investor, depending upon a number of factors such as their financial goals, investment horizon, and risk appetite.
  • You can use an SIP calculator to estimate the potential future value of your monthly investments. To use this functionality, you need to provide 3 key inputs: the amount you want to invest, the number of years for which you want to stay invested, and the expected rate of return.

Features of SIP Investment

SIP, or Systematic Investment Plan, offers several distinct features:

  • Regular Investment: SIP allows you to invest a fixed amount of money at regular intervals, typically monthly. This promotes discipline and helps you build wealth over time.
  • Affordable: You can start SIP investments with a relatively small amount, making it accessible to a wide range of investors.
  • Rupee Cost Averaging: SIP spreads your investment over time, so you buy more units when prices are low and fewer when they're high, potentially reducing the impact of market volatility.
  • Flexibility: You can choose the SIP amount, investment frequency, and the mutual fund scheme that aligns with your financial goals and risk tolerance.

Benefits of investing in mutual funds via SIP

  • Rupee Cost Averaging: SIP allows you to buy more units when prices are low and fewer when they're high, reducing the risk of making poor investment decisions based on market fluctuations.
  • Disciplined Saving: SIP instills financial discipline by ensuring you invest regularly, regardless of market conditions.
  • Compounding Benefits: Over time, SIP investments benefit from the power of compounding as returns on your investments generate additional returns.
  • Accessibility: SIP is accessible to both new and experienced investors and accommodates a wide range of budgets.
  • Professional Management: Mutual funds are managed by professional fund managers who make investment decisions on your behalf, based on their expertise and research.
  • Diversification: Investing in mutual funds through SIP provides diversification as your money is spread across a portfolio of assets, reducing the risk associated with individual stocks or bonds.
  • Convenience: The automatic deduction of SIP amounts from your bank account makes it a hassle-free investment option.

Tips to invest in SIP?

  1. Define Financial Goals: Clearly outline your financial goals and the purpose of your SIP investments, whether it is wealth creation, education planning, or retirement.
  2. Understand Risk Tolerance: Assess your risk tolerance to align your SIP portfolio with your comfort level, choosing funds that match your risk appetite.
  3. Diversify Your Portfolio: Opt for diversification by investing in SIPs across different mutual funds and asset classes to spread risk and enhance potential returns.
  4. Select Suitable Tenure: Choose SIP tenures that match your investment horizon, ensuring your funds align with short-term or long-term financial objectives.
  5. Regularly Review and Adjust: Periodically review your SIP portfolio to ensure it aligns with your goals, and consider adjustments based on changing financial circumstances or market conditions.

Things to Consider Before Investing In SIP

  1. Financial Goals: Clearly define your financial objectives, whether it's wealth creation, education, retirement planning, or buying a home. Align your SIP investments with these goals.
  2. Risk Tolerance: Assess your risk tolerance and choose SIPs that match your comfort level with market fluctuations. Conservative investors may opt for debt funds, while those comfortable with risk may choose equity funds.
  3. Investment Horizon: Determine your investment horizon, considering the time you can commit to staying invested. Longer investment periods often align well with equity funds, while shorter periods may suit debt funds.
  4. Expense Ratio: Evaluate the expense ratio of the SIP, which includes management fees and operational costs. Lower expense ratios contribute to more efficient returns.
  5. Fund Performance: Analyse the historical performance of the mutual fund, comparing it with benchmark indices and peers. Consistent and robust performance over time is indicative of a well-managed fund.
  6. Fund Manager Expertise: Consider the expertise and track record of the fund manager. A skilled manager can significantly impact the fund's performance.
  7. Exit Load: Be aware of the exit load, a fee charged for premature withdrawals. Understanding the exit load structure is crucial for managing liquidity needs.
  8. Diversification: Diversify your SIP portfolio across different asset classes and fund categories to spread risk and enhance potential returns.
  9. Market Conditions: Stay informed about prevailing market conditions. Periodically review and adjust your SIP strategy based on economic trends and financial goals.
  10. Systematic Investment Amount: Determine an affordable and consistent SIP amount based on your financial capacity. Regular contributions, even if modest, can accumulate to significant wealth over time.

1. Financial Goals and Time Horizon

  • Clarity of Objectives: Before investing in SIP, it is essential to define your financial goals clearly. Whether it is saving for a child's education, buying a house, or building a retirement corpus, having well-defined objectives helps in selecting the right investment strategy.
  • Investment Horizon: Determine the time horizon for your financial goals. SIPs are designed for long-term wealth creation, and having a realistic time frame allows you to ride out market fluctuations and benefit from the power of compounding.

2. Risk Tolerance

Assess your risk tolerance before committing to a SIP. Different mutual fund schemes come with varying levels of risk. Understanding how much risk you are comfortable with helps in selecting funds that align with your risk appetite.

3. Fund Selection

Conduct thorough research on the mutual funds available in the market. Analyse fund performance, historical returns, fund manager expertise, and the fund's investment objective. Diversifying your SIP across multiple funds can further reduce risk.

4. Investment Amount

Determine the amount you can comfortably invest through SIPs regularly. It is crucial to choose a sum that aligns with your monthly budget and financial commitments. Consistency in investment amounts is more important than the quantum of the investment.

5. Consistency and Discipline

The essence of SIP lies in its disciplined and regular contributions. Before starting a SIP, ensure that you can commit to making contributions consistently. Irregular investments can dilute the benefits of rupee cost averaging, a key advantage of SIPs.

6. Monitoring and Review

While SIPs are designed for long-term wealth creation, it is essential to periodically review your portfolio. Market conditions and economic factors can impact fund performance. Regular reviews help in making informed decisions about continuing, increasing, or pausing SIP contributions.

7. Exit Strategy

Have a clear understanding of the exit strategy. SIPs are meant for the long term, but circumstances may warrant premature withdrawal. Be aware of exit loads, tax implications, and the process of redeeming your investments if the need arises.

Conclusion

Embarking on the journey of investing in a Systematic Investment Plan (SIP) can be a transformative step toward financial well-being. This step-by-step guide has illuminated the path, emphasising the importance of aligning investments with clear financial goals, understanding risk tolerance, and maintaining discipline in contributions.

Crucially, the magic of SIPs lies in their long-term perspective, harnessing the power of compounding and rupee cost averaging. As investors commit to regular contributions and navigate market fluctuations with prudence, SIPs become a reliable vehicle for wealth creation.

Remember, the journey doesn't end with the initial investment. Periodic reviews, adjustments, and staying informed about market trends contribute to a robust SIP strategy. Whether it is securing a child's education, buying a home, or building a retirement nest egg, SIPs, when approached thoughtfully, stand as a steadfast companion in realising financial aspirations. In essence, this guide underscores that investing in SIPs isn't just about allocating funds; it is about sculpting a financial future with foresight and discipline.

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Frequently asked questions

Which is the best SIP for beginners?

The best SIP (Systematic Investment Plan) for beginners depends on individual financial goals and risk tolerance. Generally, starting with a well-diversified equity mutual fund with a good track record can be a prudent choice for long-term wealth creation.

Can I invest Rs. 100 daily in SIP?

Yes! You can start an SIP with as low as Rs. 100.

Is SIP a good investment?

SIP is considered a good investment strategy for long-term financial goals. It offers benefits like rupee cost averaging and the power of compounding, making it a disciplined and effective way to accumulate wealth. However, the choice of the specific SIP and its performance can impact the overall results, so research and diversification are key.

Can I withdraw SIP anytime?

Yes, you can withdraw from your SIP investments at any time. However, the ease of withdrawal and any associated charges may vary depending on the mutual fund scheme and its terms. It's advisable to check the fund's exit load, if any, and consider your investment horizon before making withdrawals to optimise returns and meet your financial goals effectively.

How can I start investing in SIP?

Investing in a SIP (Systematic Investment Plan) is simple. Choose a mutual fund, set your investment amount, and select the frequency (monthly, quarterly, etc). Here’s how to go about it.

Step 1: Set a target
The first step that you ought to take is deciding how much you want to earn via SIPs. Once you know the desired amount, move on to step two.

Step 2: Decide the amount
This step involves judging your current income and expenditure and deciding how much you will contribute to SIPs monthly. The best part is that you can increase the amount later on if you wish to. To start with, you can invest as little as Rs. 100 too.

Step 3: Decide the tenure
Based on the amount that you can invest, select an appropriate tenure. Remember that the benefits of rupee cost averaging and compounding interest are highest when you stay invested for a long duration. You can use a SIP calculator to decide this parameter accurately.

Step 4: Select an SIP
This is the most critical consideration. Research your options thoroughly and discuss them with a financial advisor. This way, you will be able to select the best SIP that caters to your financial goals.

What is SIP interest rate?

SIP doesn't offer a fixed interest rate because it involves investing in mutual funds, which are market-linked. Your returns depend on the performance of the underlying assets in your chosen mutual fund.

Can I start SIP at any time or when the market is high?

You can start a SIP at any time, and it's generally a good practice to invest consistently regardless of market conditions. SIP's rupee cost averaging feature helps you benefit from market volatility.

Are there any upper limits in SIP investments?

There is typically no upper limit on SIP investments. However, the maximum amount you can invest may depend on your chosen mutual fund and your financial capacity.

How much to invest in SIP (systematic investment plan)?

The SIP amount you should invest depends on your financial goals, risk tolerance, and budget. It can vary from a few hundred rupees to any higher amount you're comfortable with.

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