Many investors consider SIP (Systematic Investment Plan) as an investment product. However it is an investment mode that used for investing in Mutual Fund. Here is a quick guide that will help you while planning for investing in mutual fund.
A Systematic Investment Plan is an investment mode that helps investors to plan for their future financial needs by regularly investing a fixed amount. The popularity of SIP as an investment mode has seen a rise in the last few years. The reason for the popularity of SIP as an investment mode is because it is one of the most convenient and simplest mediums for investing in Mutual fund schemes. Let us understand how you can use SIPs for investing in various mutual fund schemes and achieve your financial goals in long-run.
What is SIP?
SIP stands for SystematicInvestment Planand as the name suggests, this investment tool helps investors in investing in a systematic manner. The SIPs allow investors to invest a fixed sum of money on a regular basis in a mutual fund scheme of the investor’s choice. These mutual fund schemes can be equity schemes, debt schemes or a mix of both equity or debt schemes as per the financial risk appetite of the investor. Investment through SIP is beneficial for generating corpus and achieving financial goals, whether for a long-run or short-run. Investors need to define their financial goals and select the mutual fund scheme as per their financial needs.
What are the benefits of SIP?
With the help of SIP, investors can start investing small amounts for a regular period and reap huge returns. Following are the benefits of investing inmutual fundsusing SIPs:
- Financial Discipline: Investment through SIP is done regularly and at fixed amount and thus, it helps in promoting financial discipline in investor’s life.
- Convenient: Investment via SIP can be done with an amount as low as Rs. 100 or 500. The amount to be invested is directly debited on the preferred date from the investor’s bank account. Thus, it proves to be an extremely convenient and hassle-free tool of investment.
- Compounding Returns: SIP offers the returns in a compounding manner i.e. the interest earned on investments are re-invested into the mutual fund, thereby ensuring that the investor gets better returns by this perpetual investment as compared to one-time investment. Also, the compounding interest ensures that the investor receives handsome returns at the end of the tenure.
- Effective: Investment through SIP is beneficial as it offers higher returns than the conventional tools of investment like recurring deposits, fixed deposits etc. Thus, SIP proves to be an effective and efficient tool that helps in beating the effects of inflation.
- Monetary Gain: Investment via SIP helps the investors in rupee cost averaging, thus ensuring that the investors do not face the volatility of market fluctuations. The rupee cost averaging ensures that more units are purchased when the market performance is low, which reduces the overall investment cost.
- Risk: The risk associated with investing via SIP depends upon the risk appetite of the investor. An investor can choose the mutual fund scheme as per financial risk that the investor is comfortable in taking up.
- Emergency Fund: SIP offers high liquidity of invested money. Withdrawal of money from mutual fund SIP investment is quick and hassle-free. In case of emergency, investors can quickly withdraw the money and use it for tackling financial contingencies. Thus, these are the various benefits of investing in the mutual fund with the help of SIPs.
Why invest in mutual fund through SIP?
Systematic Investment is beneficial in many ways. With an SIP, you can invest a fixed amount at regular intervals. Investing with SIP is beneficial as compared to one-time investments. One-time investments allow individuals to invest a lump-sum amount at one time. Following are the reasons that every investor must consider while planning for mutual fund SIP investment:
- SIP is a perfect plan for investors who wish to do periodic investment as opposed to one-time investment. Investors can invest on weekly, monthly or quarterly basis as per their convenience for a pre-determined tenure. On the other hand in one-time investment, the investors have to invest lump-sum amount which is invested for the entire tenure.
- Performance of mutual fund depends on the market. The capital market is subject to fluctuation. So in such volatile and uncertain scenario, investment via SIP is beneficial as it curtails the volatility of fluctuation to a large extent. The performance of SIP is better when the market is performing low, which is not the case with a one-time investment.
- The volatility of the share market cannot be fathomed and hence, it is very important to protect the investments. SIP is a great tool to save and protect investments in a mutual fund from potential market lows.
On the other hand, one-time investments may lead investors to face loss.
- Minimum Investment: SIP allows investors to start investing in the mutual fund with a minimal amount of Rs. 100 or 500, while with one-time investments, investors have to invest a considerable amount of money. Investors do not face the burden of investment while investing in Mutual Fund with SIP.
- Flexible: SIP helps investors plan for the future in a more organized manner as compared to one-time investments. This is because the investor can increase the amount of investment gradually over a period of time. Thus, this helps in planning for the future better and helps in tackling the effects of inflation.
How to choose a SIP?
While planning for investing in mutual fund through SIP, it is very important that investors select the SIP that is in sync with their financial goals. The following guide will help you in making an informed and wise decision while choosing the best mutual fund SIP investment:
- Asset under Management: Every fund in the mutual fund investment is backed by assets to safeguard the financial interest of the investors. So while investing via SIP, it is advisable that is backed by a reasonable asset size. Another important aspect that an investor should focus on is the performance of the fund before starting a mutual fund SIP investment.
- Tenure: Tenure of the SIP is a very important factor while planning to invest in mutual fund. The tenure must be pre-defined by the investor while planning for mutual fund SIP investment as it will act as a benchmark for the performance of mutual fund SIP investment.
- Fund House: Investors must keep a close eye on the reputation and performance of the fund house while planning for mutual fund SIP investment. A good Fund House shall handle the performance of the mutual fund SIP investment in a manner which shall fetch good returns to the investors.
Thus, investing through SIP is a lucrative option while planning for mutual fund investment. SIP shall help investors to achieve their financial goals and help them in creating wealth.
Recommended Read:Best Mutual Funds for a young investor