If you want a simple and regular investment option, then SIP is one of the best options available. Unlike traditional investment options, SIP allows you to invest a fixed amount for a particular time (generally long-term) in mutual funds and helps build wealth with time.
What is SIP (Systematic Investment Plan)?
SIP (Systematic Investment Plan) is one of the methods of investment in which an individual invests a fixed amount regularly for a particular period of time into mutual funds, and the invested amount grows over time according to the performance of the market. It helps the investor in long-term wealth creation. It is suitable for beginners who do not have much knowledge of the stock market and do not want to invest directly in shares, so they can start their investment journey with SIP and achieve long-term financial goals.
How does SIP work?
SIP allows you to invest a fixed amount on a fixed date (generally monthly) into a chosen mutual fund scheme. On the specified date, the amount is automatically debited from your bank account via NACH (National Automated Clearing House), and no. of units will be allotted to the mutual fund scheme as per the NAV ( Net Asset Value). This process is repeated every month until you pause or stop the SIP.
What is NAV (Net Asset Value)?
NAV (Net Asset Value) is the per-unit price of a mutual fund. When the NAV is lower, you will get more units, and when the NAV is higher, you will get fewer units for the same investment amount.
For Example,
Mr Arun has invested:
| Months | SIP Amount | NAV | Units Allotted |
| April | 10000 | 100 | 100 |
| May | 10000 | 80 | 125 |
| June | 10000 | 50 | 200 |
As you can see in the table above, Arun has invested the same amount for 3 months, but due to changes in NAV, he is being allotted a different number of units.
SIP Calculator:
Curious, how much wealth can you create through SIP? Use this simple and easy SIP calculator to get an approximate idea of your future returns based on your investment, expected rate of return and investment duration. Click the link below:
Benefits of SIP:
1. Builds financial discipline: SIP helps create a habit of regular saving and investing, which is beneficial for achieving long-term financial goals.
2. Low Investment to start: You can start investing with just ₹ 500 monthly and enjoy the returns of the stock market.
3. No need to give time to the market: When you are doing SIP, there is no need to predict the ups and downs of the market.
4. Rupee cost averaging: One of the benefits of SIP is that you will invest in different levels of the market, and it will help reduce the average cost of investment with time.
5. Flexible: SIP is very flexible and convenient; you can pause, increase, or decrease your SIP amount as and when required.
Types of SIP:
1. Regular SIP: It is one of the most common types of SIP. You will invest a fixed amount for a definite period of time at regular intervals.
2. Top-Up SIP: It is an advanced level of SIP, in which you can increase your SIP amount periodically and increase your returns to the next level.
For example, you have started investing 5000 monthly and increased it by 1000 every year.
3. Trigger SIP: It is a type of SIP in which investment only happens when a particular condition is met, such as when the stock market has fallen to a certain level.
4. Perpetual SIP: This is an infinite SIP that doesn’t have an end date and continues till you stop or pause it.
Is SIP a safe investment?
SIP is one of the most popular methods for investing in mutual funds, however its safety depends on some factors like the selection of the mutual fund, market conditions, and the duration of the investment.
Risk involved in SIP:
- Market Risk: If the market goes down, there might be chances of losses.
- Wrong fund selection: Risk depends on the selection of mutual funds; if the wrong mutual fund is selected, the return might be low.
- Short-term volatility: When you invest for a short duration, there may be a risk of volatility, and returns are unpredictable.
How to make it a safer investment?
- Stay invested for the long term (generally 5-10 years), as it mitigates the risk of losses.
- Choose diversified mutual funds.
- Review your portfolio regularly.
- Don’t invest by just looking at past returns.
- Choose a trusted fund house for better stability and better returns.
Common Mistakes to Avoid SIP:
- Thinking of short-term returns: The stock market in the short term is considered to be very volatile, and adds risk of losses.
- Stopping SIP in market crashes:
- Wrong mutual fund: Selecting a mutual fund based on past performance without proper analysis can be risky, as future returns are unpredictable.
- Investing without a clear goal: Before investing, your goal should be clear to avoid undue withdrawals.
- Not using top-up: Top-up SIP make your investment to the next level and helps long-term wealth creation.
Conclusion:
In conclusion, SIP is one of the most effective investment methods for long-term wealth creation, but its returns are totally dependent on the market performance. Therefore, the investor should have a clear financial goal and investment horizon before starting the SIP. Its success depends on some factors like choosing the right mutual fund, market conditions, and investment duration. It involves patience, discipline and the right strategy to achieve financial goals.
FAQs:
1. What is the minimum monthly amount required for starting a SIP?
Most of the mutual funds allow you to start the SIP from as little as 500 monthly.
2. Can I stop my SIP anytime?
Yes, you can stop or pause your SIP whenever required.
3. Are SIP returns tax-free?
No, SIP returns are heavily taxed, depending on the type of mutual fund and the duration of investment.
4. What is the ideal duration for SIP?
It depends on the investor’s financial goal, but ideally it should be at least 5-10 years long.
