When it comes to investing in mutual funds, Systematic Investment Plan – most commonly known as SIP – is an excellent approach for your long-term or short-term financial goals. With SIP, an investor has the liberty to invest a fixed amount of money in mutual funds at regular intervals.
Once you feel like you have settled in a job/career/profession with a stable income coming in, getting started with investing might seem like the next logical step.
When you decide to start investing, it’s common practice to seek the advice of those who seem to have a good understanding of what investing means.
This could be your uncle who just bought his dream car or an aunt who just bought a bigger home or your own parents who provided for you through the years.
Some might suggest you buy a home right away, as they are under the impression that real estate always appreciates in value. (that is NOT always the case, of course)
Some might steer you in the direction of recurring deposits at a bank.
Some might suggest you buy gold.
Some might even suggest that you stay away from investing in the stock market altogether.
But amidst all these suggestions, “start investing in SIP”, is probably the most common and the most popular advice one receives, especially these days.
There are very few people who can educate you about any particular investment in great detail.
Most of the investment advice that is floating around is rather vague and directionless and you might still not know how to invest in SIP.
Depending on who you end up talking to, these suggestions can overwhelm you and lead to further confusion in terms of your investment options.
We believe that SIP is one of the easiest ways in which one can start investing.
You can start early. You can start now.
Especially when you realize that a big financial commitment is coming up in a few years.
Irrespective of when you start, there is a SIP option available for almost all of your financial goals.
But what exactly is SIP?
How to invest in SIP?
Is it a product or an investment method?
Is it a short-term or long-term investment?
And so on the list goes.
Today, we want to attempt to answer these questions for you.
In this article, we will talk about how to start investing in an SIP.
We will cover all the information you might need to make an educated investment decision.
If you have ever wondered if a SIP is right for you, this will certainly help put things in perspective.
Let’s get started.
Systematic Investment Plan – most commonly known as SIP – is an investment method in which an investor can invest a fixed amount of money in mutual funds at regular intervals.
In a systematic investment plan, a fixed amount is automatically deducted from your savings or salary account. This deduction happens every month (in most cases) on your chosen day and directed towards the mutual fund of your choice.
You can also choose the frequency of your investment to be weekly, monthly, or quarterly. In general, most investors choose to make SIP a monthly investment.
Let’s look at an example. Let’s assume that your current salary is Rs. 50,000 and you decide to set aside 10% of your monthly salary towards a monthly SIP.
Rs. 5,000 will be automatically deducted from your account on a monthly basis and invested in the mutual fund of your choice.
This entire process is automated so you don’t have to worry about making SIP payments manually.
One of the reasons SIPs are considered the most favourable form of investment is because they can help you achieve some of your most important financial goals.
There are many variables that factor into your financial goals. In the interest of this article, let’s consider a few common goals that broadly fall under three main categories.
Typically, short-term financial goals are the ones that you aim to achieve in about 3 to 5 year period.
These goals could be things like purchasing your first home, purchasing your very first bike , a holiday to your favourite international destination and so on.
There could be many other items on this list based on your personal preference, these are just a few examples to help you get a rough idea.
Long-term financial goals are the ones that you want to achieve over a period of 10 to 15 years or even more.
These could include things like purchasing a dream home or purchasing a vacation home for your family.
These goals also include saving up for your child’s education, having enough money available for the wedding of your child and so on.
For instance, let’s assume your child is 8 years old now and you would like to pay for your child’s education abroad. Your goal would be to have about 15 to 20 lakhs available in the next 10 years. With this kind of clarity in mind, you can plan your SIP accordingly.
Health insurance, term insurance, and other such policies typically come under long-term planning as well.
Long-term goals include planning for your retirement, providing financial support for your ageing parents and other situations that arise due to the mere passage of time and changes in lifestyle.
Having an emergency fund for unexpected incidents and situations is equally important.
Such a fund is extremely handy when you have a health emergency at home. If you or your loved one met with a minor accident, this might help you cover the treatment expenses.
What if you find yourself unemployed due to unforeseeable circumstances? An emergency fund with at least 4 months’ worth of salary will help you get by until you find employment again.
We understand that these are some very unpleasant situations to think about, but having foresight into matters like these will really help you be financially prepared.
Here is a great guide to help you set up an emergency fund.
There are several benefits of investing in SIP.
Let’s take a look at what some of them are.
One of the biggest advantages of investing in SIP is that it makes you a disciplined investor. Since the money is automatically deducted from your account, you become more responsible with your money.
As an SIP becomes a part of your monthly financial commitments, you learn to adjust your lifestyle and other spending habits accordingly. You become more aware of any unnecessary expenses and make a deliberate attempt to reduce them significantly.
As we have already mentioned, SIP doesn’t require any manual payments from your end. SIP payments are completely automated. You can set it up once and not worry about any other needless logistics with regard to your future payments.
Since you do not invest directly in the stock market, the volatility in the market will not have major impact on your investment.
As SIPs are consistent and mostly for the long-term, you don’t have to constantly keep an eye on what kind of funds are performing well, which sector is performing well, what kind of asset classes are performing well and so on.
This reduces your risk exposure as compared to other investment options.
As discussed under the financial goals section previously, your investments should be in line with your changing financial situation.
If your income/salary increases so should your investments to match your changing lifestyle costs.
SIPs offer a great degree of flexibility as they can be customized according to your changing financial needs. It can be increased with your income or stopped if an emergency arises.
Since SIP is invested in a mutual fund, which in turn invests in a good mix of different kinds of market instruments like equity, debt and so on, your investment is automatically well-diversified.
The power of compounding is probably one of the most important reasons why SIP tends to generate better returns than many other investment options.
In order to benefit from the power of compounding, you are encouraged to start investing early and as soon as you can.
Compound interest ensures better long-term performance. In this case, you earn returns on the returns earned by your investment. This increases the value of your overall investment by multiple folds.
Now that we have talked about some of the many benefits of investing in SIP, let’s take a look at different types of SIP.
Since your SIP payments will be invested in mutual funds, let’s briefly take a look at what mutual funds are and what does it mean for your investment.
Simply put, a mutual fund collects money from a pool of investors and invests the money on their behalf by purchasing shares, stocks, bonds and other money market instruments.
Mutual funds are professionally managed by extremely knowledgeable fund managers who try their best to ensure the best possible returns.
There are different types of mutual funds available for your SIP investments. Let’s take a look at what they are.
We do have to, however, mention that mutual funds come in many forms and sizes. There are mutual funds based on asset classes, investment goals, level of risk and so on.
In order to keep things simple and easy to understand, we have included three major categories that encompass most of the funds in the market today.
Equity funds primarily invest in the shares of different companies trading in the stock market. Equity funds make a profit when the share prices surge and run into a loss when the share prices fall. As equity funds come with high growth possibilities, investing in them comes with a considerable degree of risk.
Equity funds are ideal for investors who stay invested for an extended period and are comfortable with moderate to high risk.
Debt funds mostly invest in fixed-income government securities such as treasury bills, corporate bonds, government bonds, certificates of deposit, etc.
Debt funds are less risky than equity funds and are ideal for investors who are risk-averse and are looking for short-term investments.
Hybrid funds invest in both equity and debt securities in order to balance the level of risk and maintain a certain rate of return.
Each year, Scripbox recommends some of the best performing funds based on our meticulously designed scientific investment process.
These funds are further put into different categories based on your investment requirements and financial goals.
Let’s take a look at some of them in this section.
This is an equity mutual fund with the objective of generating long term capital appreciation by predominantly investing in equities in large-cap companies.
This is ideal for investors looking at long-term wealth creation by staying invested for a long period of time and willing to take on high risk.
As you can see in the graphs below, this fund has consistently performed slightly better than other similar funds. This fund generated an average return of around 9% over a period of 1 year and an average return of over 18% over a period of 5 years.
This is a debt mutual fund with the objective of generating reasonable returns with high liquidity.
It is ideal for investors who are risk-averse and looking for something short term.
This is an equity mutual fund with the objective of generating medium to long-term capital appreciation by investing in equity and equity-related securities of corporates.
This also allows investors to avail tax deduction from total income as permitted by the Income Tax Act 1961.
This is yet another debt mutual fund with the goal of providing a high level of liquidity with reasonable returns by investing in low-risk debt securities. As you can see in the graph below, this fund has provided an average return of around 7.45% over a period of one year and an average return of around 7.84% over a period of 5 years.
You can invest in SIP by talking to your relationship manager at your bank or with the help of a trusted financial planner.
Or you can start your SIP investment right away with the help of Scripbox. We have made it extremely easy for you to set up your SIP almost immediately.
As always, below is a quick walkthrough of how to set up your SIP with Scripbox.
Once you go to Scripbox’s website, click on the green ‘Let’s Get Started’ button.
You will be navigated further to see something like this on your screen. Click on the ‘Start a SIP’ option from this list.
Once you do that, you will be directed to this section shown below. Select ‘Monthly (SIP)’ and fill in the details of the amount and mention the number of years you want to stay invested. Then, click on ‘Create A Plan’
You will be presented with options as follows.
Select the option that best suits your needs and click ‘Continue’.
If you select long-term wealth, you will see the following information on your screen. You will find additional information along with our basket of funds for 2019.
You just have to click ‘Continue’, sign up with your email address and follow the instructions on the screen.
Choosing the best SIP plans for investments can be challenging the task, here are the recommendations by Scripbox.
Do you know by Increasing the SIP amount each year by even 5% can have a dramatic effect on your final goal amount? A 10% increase means achieving 7 lakhs more. When the increase is 15% the result is a corpus that’s three times bigger. know in detail why you should aim to increase your Systematic Investment Plan by 15% each year.
Some investors nullify the benefits of a SIP, by making the wrong moves.
We hope this helped you learn more about SIPs and will help you to get started.
Feel free to browse through our blog and read all other SIP related articles in order to continue your research and further educate yourself on this topic.
You can start your SIP whenever you feel ready.
We, however, encourage you to get started as early as possible so that you can take advantage of all the benefits that come with early SIP investing.
Taxation on mutual funds is a complex topic. Taxes paid on your mutual fund investments vastly depend on factors such as what kind of funds you have invested in, the duration of your investment, which income tax slab you belong to and so on.