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WHAT IS SIP?


Over the last few years, investments in mutual funds have seen a steady increase. Professional fund managers manage mutual fund schemes ensuring the best investment decisions. Additionally, mutual funds help in portfolio diversification while mitigating the risks of investing in direct equities. The aforementioned benefits have increased the popularity of mutual fund investments. One of the greatest advantages of investing in mutual funds is that you do not necessarily have to invest amounts in lump sums. A popular method of investing in mutual funds is via systematic investment plans, commonly known as SIP.

WHAT IS A SIP (SYSTEMATIC INVESTMENT PLAN)?

SIP or Systematic Investment Plan is an ideal way in which you can invest in mutual funds, in easy installments. The SIP allows you to invest a fixed amount of money at fixed intervals into your chosen mutual funds. As such, you can invest money on a weekly, monthly or even quarterly basis into the same fund. What’s more, you can use SIPs to invest in more than one mutual fund at the same time. You just need to determine the sums you wish to invest and the investment period. For instance, you could be allocating ₹5000 to ‘Fund A’ through one SIP and ₹2000 to ‘Fund B’ through another. Once you begin the SIP, the funds are automatically debited from your bank account. SIP allows you to invest as low as ₹500 over your investment horizon to avoid financial distress while maximizing your benefits.

WHAT ARE THE BENEFITS OF SIP?

Apart from the fact that the investor does not have to dedicate lump sum amounts to invest in mutual funds through SIP, the systematic investment plan also comes with several additional benefits, making it one of the most lucrative forms of investments that can fit every budget; whether it is that of a new investor or a seasoned investor. Let us look at some of the chief benefits that investors can take advantage of through SIP investments. Here are eight such benefits of SIP:

  1. Brings about financial discipline

  2. Easy on your wallet

  3. No need to time the market

  4. Rupee cost averaging

  5. Gives the benefit of the power of compounding

  6. Flexible

  7. Can be customized

  8. Helps achieve financial goals

Now let us take a brief look at all the above-mentioned benefits

  • Financial discipline
    A systematic plan gives you the nudge you need to have a disciplined approach towards investments. Since you are obligated to dedicate a pre-determined sum periodically, it ensures you save a certain amount of money at a regular interval, without indulging in impulsive purchases. You may invest monthly, bi-annually, or annually as per your convenience. This financial discipline that is instilled by systematic investment plans plays an integral role in helping you to build your wealth in the long-term.

  • Easy on your wallet
    SIPs are extremely affordable. You do not have to worry about putting away a lump sum amount of money in mutual funds. You may start a systematic investment plan with as less as ₹500 per installment and can gradually increase your installments if you choose to. Therefore, saving and investing in such plans is not limited only to investors with higher income. SIPs are thus designed in such a way that the average investor has no financial difficulty or liquidity crisis while investing for capital growth.

  • No need to time the market
    If you invest in equities, and the prices of the equities drop you may need to wait until there is some market correction and stock prices increase. Alternatively, you may prematurely exit your investment in case market conditions become unfavourable. Timing the market to maximize profits is almost impossible. A major benefit of SIP is that it overcomes this need to time the market to earn higher profits. This is what makes SIP a favourite investment plan for beginners. While you do not need to keep a watchful eye on your fund’s performance on a day to day basis, it is recommended that you review your mutual funds from time to time.

  • Rupee cost averaging
    A specified amount is periodically invested in your chosen funds with SIPs. Therefore, when the underlying asset prices are higher resulting in an increased Net Asset Value (NAV), you are able to accumulate a lesser number of the fund units. On the other hand, when the prices are lower resulting in a decreased NAV, you are able to acquire a higher number of units. Therefore, this averages the cost of your total investments through rupee cost averaging.

  • Power of compounding
    When you invest in a mutual fund SIP, you are able to benefit from the power of compounding. When you remain invested for a longer period and earn profits on your returns, your wealth starts growing through the compounding effect. Through the power of compounding, you can keep reinvesting the returns earned, which can eventually help you grow your corpus. Therefore, a regular, small investment held for a longer period allows you to build a larger corpus that may be used to meet your financial goals.

  • Flexibility
    You may choose the amount and the periodicity of your systematic investment plan. Furthermore, you may start or discontinue these systematic plans as per your choice and requirements, so long as you continue to meet the terms and conditions of each mutual fund. Additionally, systematic plans are flexible because you may increase or decrease the installment amount based on your financial situation. For instance, you can increase the installment amount annually when you receive a hike in your salary or decrease it when you are going through a financially dry spell.

  • Customisation
    Investors can customise their investment from time to time. SIPs come with step-up plans, through which the investor can systematically and periodically increase their installment amounts. This is especially helpful for salaried individuals who can afford to increase SIP installments whenever they receive their annual raise. You can also choose another plan known as the alert systematic plans. The alert systematic plan option sends an alert to the investor, enabling him to buy more units of the fund in case the market prices are down. Additionally, investors may also choose a perpetual systematic plan through which you can keep investing in the same fund in perpetuity. This simply means that there does not have to be an end date to your investment. You can, however, redeem the mutual fund whenever you need the funds.

  • Helps achieve financial goals
    With SIP you are investing a specific amount of money each month (or the investment frequency chosen by you). Unlike a fixed or a recurring deposit that you can exit at any time by paying a small penalty, you have to stay invested in the mutual fund for the duration you have chosen. You can enter a SIP keeping a financial goal in mind. Since you already have a decent idea of the outcome to expect when you invest in the fund, you can achieve your financial goals through SIP.

GETTING STARTED WITH SIP INVESTMENTS

Now that we have a clear idea of what is SIP mutual fund and its benefits, let’s see how you can start SIP investments. You can get started with your SIP investments simply by keeping these things in consideration

  1. You must define your objectives and your financial goals – It is important to determine the reasons for your SIP investment. This can help you inculcate a disciplined approach vis-à-vis your investment and also help you achieve your financial goals. Ensure that you define specific, attainable goals over the short, medium and long term. A financial goal could be as simple as accumulating funds for a vacation, children’s education or wedding, purchasing a car or even building a corpus for retirement, when the steady flow of income ceases to exist.

  2. Determine the timeline – You must make your investments after determining when you would require the money. This simply means that you must decide your investment tenure. The tenure of investment should be determined by keeping your financial goals in mind.

  3. Determine the amount you can invest – SIPs work like EMIs, in that you must pay the same amount at the chosen interval. Therefore, you must decide the amount you can invest regularly, to achieve your financial goals. You must consider all your necessary expenses including household expenses, credit card bills, EMIs etc., before committing an amount to SIP.

  4. Determine your risk appetite – You must invest only in those funds you are comfortable with. Start with conservative investments and gradually increase your risk appetite.

  5. Choose a fund to invest in – You can consult your financial advisor to suggest funds that can help you fulfill your investment goals.

HOW TO START SIP ONLINE

SIP investments can also be made online. Starting a systematic plan online is very simple and the entire procedure may be completed in a matter of minutes.

Here are the steps to follow to start a SIP online:

Step 1 – Keep your documents ready: Ensure you have scanned, soft copies of all your personal documents, including those issued by the government such as your PAN Card and Aadhaar Card. The former can be submitted as ID proof and the latter as address proof. Having soft copies enables you to attach the necessary documents with the duly filed forms, wherever you are asked to do so

Step 2 – Complete the Know Your Customer (KYC) formalities and the in-person verification: KYC compliance is mandatory for all sorts of investments. However, you do not need to go through the KYC process each time you wish to invest. KYC compliance is a one-time process in which you have to submit your personal details such as photocopies of your identity proof (PAN Card) and your address proof. Though Aadhaar Card is not compulsory, submitting your Aadhaar details can expedite your KYC process. It takes approximately 30-45 days for complete KYC verification.

Step 3 – Create an online transaction account: You can now create an online transaction account to start a systematic plan in your chosen mutual funds. This account can be created on the website of the mutual fund company offering the fund. You will once again have to fill an online form to provide your basic personal details.

Step 4 – Choose your SIP scheme: You can choose from a wide range of mutual fund schemes available on the mutual fund website. It is possible to choose more than one scheme for mutual fund SIP investments.

Step 5 – Enter the date and amount: Once you finalise the scheme in which you wish to invest, you will be prompted to choose a date and the monthly installment amount, before you submit the request. You can choose from several different dates for your SIP installment. While the minimum SIP amount is ₹500, you can choose SIP dates such as the 1st, 5th, 10th, 15th 20th and 28th day of the month.

When it comes to online mutual fund purchases, investors have three options to choose from. They are:

  • Online stock brokerage websites

  • Online mutual fund distributors

  • Mutual Fund’s website

SIP AND SECURITY – ARE SIPs A SAFE FORM OF INVESTING

The security of SIPs is a question that goes hand in hand with what is SIP in mutual funds? After all, security is always the primary concern of all investors. Yes, SIP is, in fact, one of the safest forms in which one can invest in mutual funds. If an investor invests in a particular fund by spending a lump sum amount, depending upon the condition of the market, he could potentially end up paying a very high price for the fund. This simply means that he may be looking at a loss if the fund’s value falls. However, SIP investments can eliminate this situation altogether. The investor does not have to worry about timing the market if he opts for SIP mutual fund investments. As per the nature of this investment, the investor invests only a small amount of money periodically. In the months that the price of the fund is high, the investor is allocated fewer units of the fund, however, when the price of the fund falls, he is allocated more fund units. Considering the duration of the SIP and the term, the price paid by the investor is a good average of high and low. As such, the investor does not end up paying a high or an overvalued price if he chooses to invest in mutual funds via SIP. He thus benefits from rupee cost averaging and his investment remains safe and secure.

SIP INSTALMENT – DEBIT AND CREDIT

To make the procedure more convenient, you may provide an Electronic Clearing System (ECS) instruction to your bank. This automatically debits the installment amount from your bank account on the chosen date ensuring you do not forget to invest. Should you choose to redeem the SIP amount sometime in the future; the money can also be easily credited into your account through IMPS or NEFT transfers. You may also opt to receive a cheque instead of online transfers when you redeem the SIP. You can redeem your SIP in 4 different ways as mentioned below

  1. Redemption directly through AMC

  2. Redemption through demat account

  3. Offline redemption through agents or distributors

  4. Redemption through registrar and transfer agency

You may start investing in one or multiple mutual funds. However, with a large number of available options, making the right choice may be difficult. The proprietary ARQ investment engine in Angel Bee’s mobile application helps you make the right investment decision. This engine uses quants and algorithms to analyse a billion data points in order to provide you with customized recommendations that match your requirements and risk profile. Download the Angel Bee mobile app and start your systematic plan today.


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