What is SIP?

What is SIP Investment?

The first question that arises in the mind of anyone unfamiliar with mutual funds is- what is SIP?
Systematic Investment Plans — or SIPs — have proven to be a reliable wealth creation tool over time. However, a large number of investors remain confused about SIPs and how they work. SIPs are offered by most Mutual Fund houses in India and all over the world.
They’re said to bring financial balance and discipline to your investment, and assist you in achieving whatever long-term goals you may have — such as retirement planning, children’s education, buying a house, etc. In this post, we will dig deeper into the concept of SIPs and explore their significance in securing your financial goals.

Types of Investments in a Mutual Fund

Generally, there are two types of investments you can make into a Mutual Fund: a lump sum and a SIP. A lump sum investment is one-time investment option whereas a SIP investment is a recurring investment in a Mutual Fund scheme.
You may want a big corpus to invest if you want to start with a lump sum amount into a Mutual Fund scheme in order to average your costs — although this is not necessary. If you received money after retirement or by selling your house or from an inheritance, you can consider a lump sum investment. But, generally, SIP investments are recommended.

What is SIP Really?

A Systematic Investment Plan is a mode of investment which allows you to invest a fixed amount of money in any Mutual Fund scheme at regular intervals — for example on a monthly or quarterly basis. It is similar to a Recurring Deposit (RD) in a bank, but the difference is that your money will be invested in a Mutual Fund scheme, which may mean it is headed for the equity markets or debt instruments.
Your SIP amount can be as per your future needs and goals. For a real life analogy — a SIP investment is like planting a tree, watering it and watching it grow over the years to give you fruits.

How does it work?

SIPs are effectively regular investments which let you achieve long-term goals by building your wealth over time:

  • Once you choose the investment interval, the SIP amount is debited from your bank account as long as you have sufficient funds.
  • SIP investments are typically done via an ECS mandate, or through post-dated cheques. You can even choose a specific tenure for your investment scheme which can be in either months or years. Asset Management Companies (AMCs) or Mutual Fund Houses also give you an option to transact online.
  • You can also check out Clearfunds, which provides you a hassle-free, zero commission based option to invest in Mutual Fund schemes online. With a few clicks, you can choose from a number of mutual funds and even track the performance of your investments.

What is Rupee-cost Averaging?

Many investors are often concerned about the best time to invest, and try to figure out the right time to enter the market. This is understandable, since the stock market can be volatile and often not predictable.

A SIP is essentially rupee cost averaging since invest a fixed amount of money at regular intervals. Rupee-cost averaging is one of the major factors which makes SIPs such a favorable option for long-term investments. You get more units when the price is lower and fewer units when the price is higher. By investing in a regular manner, you can opt out of the complexity of trying to figure out the best time to enter the market. Rupee-cost averaging nullifies the effect of short-term market fluctuation on your investments.

The Power of Compounding

Warren Buffett said, “My wealth has come from a combination of living in America, some lucky genes, and compound interest.” Compound interest can have a staggering effect on your investments. The sooner you start investing, the more its impact.

For example, If you started saving ₹1,000 a month on your 30th birthday, in 30 years time you would have put aside ₹3.6 lakhs. If that investment grew by an average of 10% a year, it would be worth around ₹22.8 lakhs when you reach the age of 60.

However, if you started investing on your 20th birthday, the ₹1,000 a month corpus would be worth ₹4.8 lakh over 40 years. Assuming that the growth rate is 10% annually, your investment will be worth ₹59 lakhs on your 60th birthday. Isn’t that amazing? The amount you end up with can more than double if you started investing a few years earlier.

 

Benefits of SIPs

  1. No big investment:You can invest small amounts of money in SIPs at regular intervals — even as low as ₹500 per month. The minimum amount of lump sum investment in a Mutual Fund is typically ₹5,000.
  2. No worries about market timing:SIP investments are a good option for eliminating the worries of entering the market at the right time. You don’t have to worry about the high and low of market. Staying invested for a long time using SIPs can even-out the volatility of the stock market.
  3. SIPs have rupee-cost averaging effect:SIPs work much better than lump sum investing or one-time investing. You will get more units when the price is lower and fewer units when the price is higher. It averages out your risks in the market.
  4. SIPs have the power of compounding: The money that gets invested regularly and systematically through SIPs is compounded over time through regular investments — since a SIP can potentially allow you to start investing early. The quicker you start, the more compounding impact you’ll see.
  5. Convenience: It is fairly convenient to start a SIP investment. Register on Clearfunds and start investing after choosing a mutual fund of your choice. You can track the day to day performance of your investments and act accordingly. You also have the option of skipping a SIP if you have insufficient funds.
  6. Future goal planning:We’ve all got future goals — buying a house, a dream car, children’s education, retirement etc. If you don’t have a lot of knowledge about the stock market, SIPs can be the best alternative for all your future goals.
  7. Disciplined investing:SIP investments encourage discipline and regularity in investments. They are a time-tested method for disciplined investing.

Types of SIPs

  1. A Top-up SIP allows you to increase the SIP investment amount at regular intervals. This will be an advantage over normal SIP investments as you can increase your investment when a Mutual Fund scheme is performing well, or when there’s a bull run. You could even increase your SIP investment when your salary increases.
  2. A Flexible SIP allows you to increase or decrease the SIP amount as per your requirement. For example, you can cancel some SIP installments in times when you’re not in a position to make an investment. You can even re-invest the whole amount or partial amount of your bonus received from a Mutual Fund scheme.
  3. Perpetual SIP:Normally, you are expected to select a fixed period for your investment — say, 1 year, 3 years, 5 years and so on. But if you do not provide any fixed date for your investment, your investment will be deemed as a perpetual SIP. This leaves you an option to redeem your investments fully or partially as per your requirement or financial goals. However, it is better to start a SIP for a fixed period as it brings financial discipline in your life.
  4. A Trigger SIP is usually preferred by investors with sound knowledge of the financial markets. A Trigger SIP allows you to set either a particular date, or an event to start this SIP — such as the index level or a NAV threshold. But this type of SIP is not preferable for investors who have less knowledge about the financial market. It also encourages speculation.

How to select the best SIP

To select best Mutual Fund scheme to get started with a SIP, you should look and analyze the following:

  1. Visit a portal with research tools: Research tools can help you in many ways to find the best Mutual Fund scheme which suits you. You will have to choose from a variety of Mutual fund schemes.
  2. Open the research tool: You can dig deeper into a Mutual fund scheme by looking at its past performance, dividend yield, fund category, assets, expense etc. If the research tool has a SIP calculator, calculate the amount of money you could have earned had you invested earlier. Some tools also be able to sort funds on the basis of fund category, performance, and Mutual Fund house. You can also look for similar funds in that category.
  3. Look for funds based on Morningstar Rankings: CMFR uses multiple factors other than just returns or Net Asset Value (NAV). It takes into accounts risk-adjusted returns, asset concentration, liquidity and asset quality. It uses NAV and portfolio-based attributes for the evaluation of a Mutual Fund scheme. You can visit its website to look for the top-ranked Mutual Fund schemes and choose any fund as per your requirement.
  4. Choose the Direct plan for better results: Mutual Fund schemes are available in two variants: a Direct Plan and a Regular Plan. The Direct Plan has a lower expense ratio than Regular Plans. So you will get better results if you opt for a Direct Plan. These savings in return will be added to your scheme, and thus the Net Asset Value (NAV) will be higher for the Direct plan. This doesn’t mean that the Direct plan will be costlier for you. Instead, you will get better returns even if you get fewer units. Don’t be fooled into assuming that some extra expenses won’t matter, they will cost you a lot of money in long-term.
  5. Choose Dividend or Growth Plans as per your need: After you decide which Mutual Fund scheme you want to start with, choose between Dividend and Growth options. If you want regular income, choose the dividend option. Else, go for the growth option if you want your dividends to be reinvested in the scheme.
    You can read about this in detail on this post: Growth vs Reinvestment vs Payout.

What to do if you have a big Corpus to Invest?

Let’s say you have ₹50 lakhs with you in your bank account, or you received it by selling your house or from an inheritance. You can follow these two approaches to investing:

  • Start a monthly SIP with a Mutual Fund scheme with your desired amount. The money will be then be invested regularly from your bank account. This way you can save yourself from the worries of timing your market entry.
  • Invest the lump sum amount in a liquid Mutual Fund scheme. Then you can start a Systematic Transfer Plan (STP) from the debt fund to an equity Mutual Fund scheme of your choice.

The best time to plant a tree was 20 years ago. The second best time, is now! Begin a SIP at Clearfunds today, and get started on your wealth creation goals!

 

Rameez Reza :