We have all heard MS Dhoni say “Mutual Funds Sahi Hain”. But as soon as the ad ends: we also hear “investment in Mutual funds are subject to market risks, please read the offer document carefully before investing”. Now if you wanted to start investing, but are afraid to take the plunge. we have got the right thing for you. A SIP will help you test the waters while helping you plan for your future.
A SIP or Systematic Investment Plan helps you pay a fixed amount to a mutual fund scheme at regular intervals. It helps you start investing with as less as a cup of Starbucks coffee.
But what is it really? Let’s find out everything about SIP and start your journey to goal-based investing.
What is a SIP?
Investment in mutual funds can happen in two ways – the lump sum method and SIP. In the case of the lump sum method, investors pay a large sum upfront and purchase units of mutual funds in one go.
On the other hand, SIP involves regular payments at fixed time intervals. The biggest advantage of investment via SIP is that one does not need to time his/her investment. The fixed amount is automatically invested at the same time every month, and investors also get to benefit from rupee cost averaging or RCA.
Timely and regular small investments also provide the benefit of compounding for SIP investors. This technique leads to wealth accumulation over a period of time and inculcates financial discipline among investors.
It is a popular method of investment among small and retail investors who do not wish to invest a lump sum amount of money at once.
How Do SIPs Work?
When you are investing by using a Systematic Investment Plan, you make regular payments and purchase corresponding mutual fund units. You do not have to worry about the market timing as a SIP allows you to benefit from both bullish and bearish markets.
The Net Asset Value or NAV of mutual funds gets updated every day, and the cost of mutual fund units bought from one SIP instalment may differ from another instalment. When the markets are down, you will be able to purchase more units, and in case of markets have a bull run, you will be able to purchase lesser mutual fund units.
Over a period of time, rupee cost averaging occurs, which lowers the overall cost of your mutual fund portfolio. SIPs also harness the power of compounding for you. Compounding means that profits or gains accrued from mutual fund units are reinvested back into the portfolio. It increases the size of your investment corpus and allows you to earn higher returns.
- Let us take an Example
Suppose you want to plan for your child’s education. You know that college is 15 years away, but you would like to start saving right away. Suppose you start investing ₹5,000 per month. At the end of 15 years, you would have invested ₹9,00,000 but your total corpus for funding your child’s dreams will be more than ₹25 lakhs! Magic? No, SIP.
Why should I invest using SIP though?
Here are some benefits of investing in mutual funds via SIP:
- Financial discipline
SIP inculcates a sense of financial discipline. It also encourages you to go for basic financial planning, and helps you manage your investments and expenses. The best thing: the investment amount gets automatically deducted from your bank account. Give yourself a pat on the back because you have just automated your financial planning.
- Tackle market fluctuation
Another benefit that arises from SIP investment is you do not have to worry about market timing. As SIPs are long-term investment plans, it reduces the risk associated with stock markets. Moreover, buying mutual fund units via SIP will lead to dithe versification of your investment portfolio.
This investment method gives you the flexibility to change or alter monthly payments as per your financial situation. You can increase your investment in a running SIP if you start earning more and reduce your investment amount in case of financial stress.
Moreover, many SIPs also provide the option of a temporary halt in payments in case of financial exigencies.
The mutual fund units bought with SIP are offered against various equity and debt instruments. Fund managers invest in diverse industries and companies of different market capitalisations, thus reducing the overall risk associated with the investment portfolio.
These are one of the most convenient methods of investment if you want to invest with the small amounts. These payments get auto-debited from your bank accounts on the due date, Say goodbye to hassles of tracking the due dates and making payments.
- Rupee cost averaging
This is the reason why many experts and advisors tell investors with low regular income to go for SIP-based investments. RCA allows individuals to take advantage of both bullish and bearish markets.
You will receive higher units of mutual funds in case of market slowdown and lower units of mutual funds when markets are rising. Over time the cost of purchasing units of mutual funds will average out. This will help you to buy more mutual fund units than the lump sum method with the same amount.
- Drawbacks of lump sum investment method
If you have a low investment corpus should avoid investing via the lump sum method as it might not allow you to achieve your financial objectives. Lump-sum investment method may not be right for you:
- Irregular investment
This investment method might not make you a sustained and disciplined investor. An upfront payment now and another upfront payment after a few months might make it difficult for you to track your finances.
- Market Timing
If you are planning to go for the lump sum investment method, you should time the market entry in order to make any meaningful gains. For example, if you invest in a mutual fund scheme when markets are on the upside, you will receive lower units of mutual funds compared to SIP investments with the same amount of funds.
You will not get the benefit of rupee cost averaging, which lowers the overall value of the investment portfolio.
- Detrimental for small investors
A lump sum investment method requires a large amount of investible corpus. It is not suitable for small retail investors. Individuals having small regular income can benefit more if they go for SIP mode.
How to invest in an online SIP?
You need a Demat account to start investing in a SIP online. Don’t have one?
If you have an Arihant account: These are the steps you can follow to opt for a SIP online.
Step 1: Talk to your relationship manager or reach out to us at 07314217271.
Step 2: Decide the amount and the mutual funds you want to invest in to start your SIP.
Step 3: Sign the physical form or allow access to net banking through a mandate.
Step 4: Give yourself a pat on the back for planning a better future.
Now you know that SIP is one of the easiest and most convenient options for investment for people who have a small investible corpus. It allows you to fulfil your long-term and medium-term investment goals as well as accumulate wealth over the long term.