SIP (Systematic Investment Plan) is the highly preferred choice for investors. Through SIP, you invest a fixed amount in mutual funds at periodic intervals—weekly, monthly, or quarterly—instead of investing the entire amount all at once. This way, investors are able to handle volatility in the markets and cultivate financial discipline.
What Is SIP?
SIP means Systematic Investment Plan. It’s a mutual fund investment plan wherein you invest a small sum of money every month, i.e., normally monthly. Rather than waiting to collect a big corpus, SIP allows you to start with a small sum of ₹500, which is affordable even for a new investor.
How SIP Works
When you make an investment via SIP, your funds purchase units of a mutual fund at the current Net Asset Value (NAV). The NAV changes on a daily basis depending on the performance of the fund. When the market goes up, your SIP value purchases fewer units. When the market declines, it purchases more units. This is referred to as rupee cost averaging, which smooths out market volatility over the long run.
Example:
You invest ₹5,000 a month.
In a high market, ₹5,000 would buy 40 units (at ₹125 NAV).
In a low market, ₹5,000 would buy 50 units (at ₹100 NAV).
Averaging blunts the impact of volatility on your investments.
Advantages of SIP Investment
1. Disciplined Investing
SIP develops investment discipline. By putting in a lump sum from time to time, you develop a habit of saving and investing without hoping for the market to change in your favor to invest.
2. Compounding
The longer you leave your money invested, the more you gain. Your investments earn you returns, which you invest again to create a compounding effect that doubles your money within a period.
3. Flexibility
You can invest in SIP with a small amount, set it aside for a short while, increase it, or even withdraw from it according to your wallet. Hence, SIP can be enjoyed by novice as well as seasoned investors.
4. Rupee Cost Averaging
As explained earlier, SIP spreads your investment over market volatility, reducing the impact of volatility and enabling you to purchase more units when prices are low.
What To Know Before You Begin SIP?
1. Set Your Financial Objectives
Ahead of time, you would have determined goals. Do you need a short-term goal, like a holiday, or a long-term one, like retirement or education funds for a child? This will help you pick the appropriate money category.
2. Determine Investment Horizon
For long-term wealth creation, equity mutual funds via SIP are the best. For the short term, opt for debt or hybrid funds. Your investment horizon will decide the fund that you might choose.
3. Consider Risk Appetite
Every mutual fund entails risk. Equity funds entail high risk and returns in the long run. Debt funds are secure but offer good returns.
4. Selecting the Right Mutual Funds should be based on your goal, time frame, and risk tolerance. Consider and evaluate such things as past performance, expense ratio, and fund manager experience. But never ever take past performance for granted as future performance.
5. Choose SIP Amount and Frequency
Calculate how much you can save each month. Use an SIP calculator to find out how contributions in the future can compound and get you close to your desired goal.
Tax Implications of SIP
Income earned on SIP investments is taxable. Taxation is different based on various types of mutual funds and holding periods:
Equity Funds—All short-term capital gains tax will be charged for income earned in less than 12 months, and long-term capital gains tax will be charged if the income is more than 12 months.
Debt Funds: Gains are taxed differently and according to your income tax slab for short-term gains, while long-term gains are taxed at a fixed rate.
Understanding the tax rules makes you better plan your investments.
Facts vs. Myths about SIP
Myth 1: SIP is a Product
Fact: SIP is not a product but an investment plan in mutual funds.
Myth 2: SIP Guarantees Returns
Reality: There is no guarantee of returns on SIP. Your success in investing depends upon the performance of the underlying mutual fund and the market.
Myth 3: SIP Requires a Large Amount
Reality: You can start an SIP for as little as ₹500 per month, and hence it is also feasible even for beginners.
How to Start an SIP Investment?
It is a simple process to open an SIP:
Complete KYC (Know Your Customer) formalities.
Select a fund according to your purpose.
Choose your SIP amount and date.
Establish an auto-debit order from your savings account.
You can open a SIP within minutes at many fund houses and platforms.
Why Should First-Time Investors Invest via SIP?
For first-time investors, SIP is an excellent way of investing without worrying about the timing of the market. As investment is made over time, SIP avoids the agony of choosing the correct entry point. Select your SIP size and date.
Set an auto-debit instruction from your savings account.
You can open a SIP in a matter of minutes in most fund houses and platforms.
Why must SIP be used by first-time investors for their investment?
SIP is the best option for beginners to do away with market timing. Since the investment is done over time, SIP prevents the pain of selecting the right entry point. It also promotes disciplined investment, which is necessary to become wealthy.
Conclusion
SIP investing is a simple yet powerful way of creating long-term wealth and managing volatility, promoting systematic savings, and leveraging the power of compounding. Whether retirement planning, purchasing a home, or saving for your child’s education, SIP provides a systematic and flexible approach to reaching the goal.
