Systematic Investment Plan, commonly known as SIP, is a godsend investment avenue to those who wish to multiply their wealth efficiently without parking too much of their money in a single asset class at a given time.
Thanks to demonetization, many individuals have discovered the charm of SIPs and mutual fund investment. This, in turn, has increased the popularity of SIP investments and led to its growth spurt over the years. Today, as per the latest Association of Mutual Funds of India [AMFI] data, there are about 3.09 crore SIP accounts in the country.
For starters, SIPs are a way of investing in mutual funds. To elaborate, various asset management companies [AMCs] offer SIPs as a method to invest in mutual funds in a disciplined manner.
Under the SIP investment method, an investor chooses a mutual fund scheme according to his/her investment needs and regularly invests a fixed amount in these schemes. The periodicity can be daily, weekly, monthly, quarterly, semi-annual, or annual. An investor can invest in SIPs with an amount as low as Rs 500.
Let’s understand how SIP works with the help of an example.
Let’s say your monthly salary is Rs 50,000 and you set aside 10% for your monthly SIP mutual fund investment.
Meticulous research on the most significant mutual funds in the country will aid you to perceive how a few funds have continuously outperformed the overall market over a considerable period.
Suppose you first started investing Rs 5,000 per month in XYZ fund from March 2010. Under this investment, Rs. 5000 will be automatically invested in XYZ fund every month. One of the major advantages of SIP investment is the power of compounding it offers.
The Rs 5,000 that you periodically invest in mutual funds online accumulates over the years to form a substantial corpus. Between March 2010 and March 2020, you would have made 120 investments of Rs 5,000 each into the fund. Today, the total of the principal invested would be Rs 6 lakh [120*Rs 5,000].
If you calculate the return on this at 12%, the investment would have grown to Rs 11.6 lakh, almost double your original investment.
Even if you adjust this against an assumed inflation rate of 6%, your wealth would grow to Rs 8.24 lakh in this period, i.e. a nearly 50% appreciation of the capital invested.
How to invest in SIP?
- Know the investment objective and your risk tolerance
You should first apprehend your risk appetite before investing. After you have assessed your risk appetite, it is important to understand why you want to invest and define your financial goals. It is vital to know the objective for your investment to get the right portfolio mix of debt and equity. - Choose the apt mutual fund for your investment
The selection of your mutual funds should be entirely based on your risk appetite, financial goal, and investment horizon. While choosing the fund, you should also consider its past performance. Once you have chosen the mutual fund company, follow these steps:
- Fill up the application form
- Duly fill the KYC form
- If you opt for the offline mode, fill up a cancelled cheque of the monthly SIP amount. However, if you plan to opt for the online mode, fill up the ECS [Electronic Clearing Service] mandate form to be given your bank.
- Provide requisite identity proofs
- Select the date of SIP investment
Choose a date as per your convenience. You can also choose multiple dates for multiple SIP investments in a month.
SIPs are a perfect way to utilize your investments to their maximum. Mutual fund experts often advise individuals to stay invested in mutual funds until the end of their investment period to reap the most from their SIP investments.
Have you started your SIP yet? Happy Investing!