Everything You Must Know About SIP

The SIP (Systematic Investment Plan) investment is a new generation investment plan which emerged as the best tool for earning higher returns by investing small and equal amounts at regular intervals into a mutual fund, trading account or retirement account, etc. Mutual fund SIPs however has gained much importance over the last 15 years and has been providing promising returns to its investors. AMFI (Associations of Mutual Funds In India) launch “Mutual Funds Sahi Hai” campaign has further added to the glory of popularizing the concept of mutual funds and SIP as a preferred investment option for potential investors.

Among the mutual fund SIPS, equity mutual funds are one of the best instruments to accumulate long-term savings. Equity oriented mutual funds are more tax-efficient than most other investment products and its long term capital gains are also exempted from tax.

SIP facility allows investors to invest a fixed amount as per their convenience either through weekly, monthly or quarterly at regular intervals facilitated using the Electronic Clearing Services i.e. through ECS and benefiting from the long-term advantages of rupee-cost-averaging.

What is rupee-cost-averaging?

The volatile markets make it skeptical for the investors to invest and try to ‘time’ their entry into the market. Rupee-cost averaging allows them to opt out of this skeptical tendency. Rupee-cost-averaging means buying the same fixed-rupee amount of units regardless of its price at each periodic interval. As a result, shares are bought at various prices and in varying amounts thus benefiting the investors from rupee-cost-averaging and from the power of compounding. Since the amount invested is generally fixed and doesn’t depend on unit or share prices, the same money fetches more units when the price is low and lesser when the price is high. These units so purchased at the current ongoing market rate for the day is called NAV i,e. Net Value Asset. During a volatile period, this helps to achieve a lower average cost per unit.

SIPS are long term financial commitment/ saving / passive investments as the investors continue to invest regardless of how it performs. An investor can start for SIP with a minimum investment of Rs.500 per month. However, the requirements of a minimum starting amount may vary from a company’s SIP to SIP. At any point, an investor may choose to increase/decrease the amount being invested or discontinue the plan before the end date. Discontinuing the plan may however incur penalty charges to the investors if he quits the plan within the first year. The penalty amount may, however, differ from company to company. However the imposition of the penalty if any and its charges differ from company to company. Also missing payments at times may lead to the termination of the investor’s plan.

It is strongly recommended that the investor do not invest a lump-sum amount in equity mutual funds/SIP, rather he is recommended to invest the amount periodically on a monthly basis. This ensures that the average cost of the units so purchased is maintained and maximum returns are earned on the investments. Secondly he is also recommended to invest the money for longer tenure without being worried of the market volatility & draw huge benefits at the maturity of the SIP investments mainly through the average costing & through the power of compounding income. The rule for compounding is simple – the sooner the investor starts investing, the more time his money has to grow. Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.”

Why should YOU invest in SIP

SIPs provide you with a variety of benefits to invest your money:-

1. Flexible and affordable investment option– You can always start with a smaller amount and can gradually increase the amount as your earnings grow with the time.
   
2. Minimize Risk– Investing a small amount on a monthly basis creates risk-free investments for you. The flexibility to stop investing at any time in the rare and unfortunate event such as- a well-performing fund has a change in fund manager, or a risky investment doesn’t pan out well, or the fund displays below-average returns for an extended time, minimizes your risk coverage and the investments can be redirected to another well-performing fund to recoup any negative returns if any.
   
3. Keeps you stress-free – you do not have to worry about the steaming tension from the ups and lows of the markets.
   
4. Convenient and saves you time- The SIP amount will automatically get deducted from your bank at a particular date every month by opting for ECS. Also, the online trackers and apps help you to track the status of your investments, the returns generated, etc.
   
5. Rupee-cost-averaging– When you regularly invest into the markets irrespective of the market conditions, you tend to buy more units in low markets and lesser in the high markets. This averages out the purchase cost of your mutual funds units.
   
6. Increased returns via compounding interest– The power of compounding helps you to build a large corpus that helps you to achieve your long-term financial goals with regular small investments.
   
7. Long-Term Gains – Due to rupee-cost averaging and the power of compounding SIPs have the potential to deliver attractive returns over a long investment horizon.

How to start investing in SIP?

Before you start investing in SIP, it is important that you follow the below-mentioned guidelines:

1. First, it is important you set your financial goals.
2. Secondly, you must set your investment tenure, as in when you wish to withdraw your invested funds.
3. Third and most important, you must set your per month budget, as in how much you can afford to invest regularly. If you want, you can take help of the various SIP calculators easily available on the online platforms to calculate your goal figure and achievable amount figure before you start investing money per month in SIP.
4. Fourth, you must also know the eligibility criteria set in India for SIP investments, which are:
   (a) The investor must be an Indian resident, NRI (Non-Resident Indian) who is staying abroad on a full repatriation basis.
   (b) The age of the investor must be above 18 Years.
   (c) He must have an account with the bank.
   (d) He must maintain sufficient balance in the account for the debiting of SIP contribution through Auto debit / ECS.
5. Lastly, know the documents required for investing in SIP which is as follows. Identity proof- anyone photo id – PAN card, Passport copy, Driving license, or Voter ID card. Address proof- a copy of anyone – Driving License, Voter’s ID, Rental agreement, Adhar Card.

Conclusion:- SIPs help you to average your purchase cost and to maximize returns through rupee-cost-averaging and the power of compounding. People usually question what is the right time to start for a SIP. But now that you know about SIP, it is easy to understand that there is no ideal time to start for a SIP. But starting SIP at an early age will fetch you longer tenure which in turn will benefit you with higher returns through the 8th wonder theory of compounding.

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