A Systematic Investment Plan (SIP) is an savings instrument through which investors can invest a fixed amount of money every month in Mutual Funds. Since a lot of first-time investors in mutual funds are extremely wary about the market and taking risks and investing big amounts at a time, the SIP scheme is a boon to those wherein they can choose to invest as low as INR 500 per month.
How SIP works
Let us consider an example to best understand the working of the SIP scheme.
Considering that you have agreed to invest INR 1000 per month for a period of 5 years. Thus, your total investment for the period of the SIP would be 0.60 lakh
Calculating your returns at 10% p.a., the expected amount would be 0.80 lakhs
However, the average of the returns given by the Equity markets for the last decade is 15%. Thus, you would be making a lot more than just 0.20 lakhs.
Let us look at what your portfolio with a mere INR 1000 investment per month would look like over a longer time period:
After 5 years – 0.80 lakhs
After 10 years – 2.05 lakhs
After 15 years – 4.20 lakhs
After 20 years – 7.65 lakhs
After 25 years – 13.4 lakhs
After 30 years – 22.8 lakhs
After 35 years – 38.3 lakhs
The best part about SIP is, however, not the returns that it gives in a short-term investment but in the long-term. If the investment of INR 1000 was continued for more than 5 years, the investment has the capability to give hefty returns.
Advantages of SIP
SIP scheme has many advantages over a one-time investment in the mutual funds market.
– A good beginning
SIP scheme is a good way to begin with investment and savings. With low and mitigated risks
– Affordable budgets:
SIP schemes do not require huge investments. Initial investments can be as low as INR 500 per month or INR 100 per day.
– Price averaging:
Since under the SIP scheme, you buy units worth the exact same amount every month for the tenure, you end up buying more units when the price drops and you end up buying less units when the price increases. Thus, it averages out the price over a long period, ensuring that the impact of fluctuating prices is minimized.
Starting SIP scheme
Starting with the SIP scheme to invest towards Mutual Funds is fairly simple. Instructions can be given to your bank either by filling a simple form or through your online bank account. There are also a few Broking houses which provide Mutual Fund investment products. Across, you would be required to select the amount you wish to invest, the tenure of the investment and the payment date. On the said payment date, you can either instruct your Bank to auto-debit your account for the amount towards the investment or choose to pay manually.
Though monthly SIP scheme is the most commonly known and used, it is not the only available variant. Options like Daily SIP, Weekly SIP and Quarterly SIP are also available, though might not be available with all Mutual Funds. A daily SIP, as the name suggests, requires you to invest in the Mutual Fund every business day or every trading day. Weekly SIP requires investment once every week, monthly SIP requires once every month and quarterly SIP requires once every quarter.
Daily SIPs are only good in case of highly volatile funds such as small-caps. However, the most stable ones as per the market are the Monthly SIPs and available across all Mutual Funds. Additionally, with regards to Monthly and Quarterly SIPs, the tax calculation is simpler as compared to calculating your income and taxes for daily or weekly SIPs.
Now that you know just how useful SIP can be for your savings and investments, plan them. However, ensure that you do not plan them for a short-term. SIPs usually give good returns when invested in for 3 years or more.
However, as rightly said by an expert, the best way to start investing is by starting to invest. As a new investor, you can start by investing in two funds. Once you have understood the ropes, you can gradually increase to three or four funds. However, it is advisable to invest in maximum four funds to ensure and manage the fund outflow.