Investing a huge sum at once is not everyone’s cup of team, nor do we all have the equal financial ability. A large group of investors is salaried individuals who earn a monthly salary. They look for a way to invest a part of their monthly savings consistently and earn out of it in the long run. In such a case, Systematic Investment Plan or SIP helps investors by allowing them to invest a fixed sum every month in mutual funds. In this article, we will learn everything about SIP- what it is and how to invest in SIP properly.
How does a systematic investment plan work?
A systematic investment plan or SIP is a way of investing on a periodic (mainly monthly) basis. Let us understand how the SIP works with an example:
Suppose you earn Rs 70,000 per month. After all the expenses, you save Rs 30,000, out of which you want to keep Rs 10,000 as liquid cash. The remaining Rs 20,000 can be used to invest in one or multiple mutual funds through SIP. You can either invest Rs 20,000 in one mutual fund SIP, or choose to allocate Rs 5,000 in four different funds to diversify your portfolio. Opting for SIP means you are choosing to invest that fixed amount at a predetermined date every month. However, you are free to withdraw your investments anytime you want.
How Much Return Can You Get From SIP?
The returns from SIP depend on the performance of the mutual fund itself. However, this is not the only factor in determining returns. SIP helps you build a strong investment habit which is essential for long term investment. It gives you the opportunity to generate healthy returns through your limited savings. The gem in SIP is compounding, which means the interest you earn gets reinvested every period. Let’s see what magic does it perform:
Suppose you have planned to invest Rs 20,000 in SIP and wish to remain invested for 20 years. In that period, you would have invested Rs 48 lakhs. Now here comes the surprise- Considering the annual rate of return to be 15%, your 48 lakhs will turn into a corpus of over 3 crores in 20 years!
But the next question is- Will you invest Rs 20,000 only for the entire 20 years? Probably not! As your income increases, you will consider increasing your investments as well. There comes the role of step-up SIP.
Step-up SIP simply allows you to increase your investment amount every year automatically. For example, if you opt for a 10% step-up, you will have to invest Rs 22,000 from the next year (considering the above example), and another 10% over it from the third year. So, how does this affect your returns? Well significantly-
Taking the above example only, if you choose the step-up to be at 10%, you would have invested around Rs 1.37 crores and built a corpus of Rs 5.16 crores!
How to invest in SIP
Set your financial goals
Every mutual fund scheme has a particular objective and that is what the investment fund is trying to achieve. Now you need to understand and plan out your own financial requirements and find out which mutual fund scheme matches your risk aptitude and financial goals.
If you are finding it difficult to choose an investment plan that meets your requirements then you can also take the assistance of a seasoned financial expert.
Choose SIP over lump sum investment
There are two separate methods through which you can invest in mutual funds. One is a lump sum investment process that takes a significant amount of your savings and the other one is a systematic investment plan that can help you slowly but steadily invest in the mutual fund schemes. If you are a salaried individual then you should opt for SIP because it can also help you maintain a budget while providing you with investment benefits.
Complete the KYC process
Be it a fund house, asset management company, or a third-party platform such as 5Paisa if you want to invest in mutual funds through SIPs then you must possess a bank account and simultaneously you will also have to go through a Know Your Customer or KYC process in meantime.
According to the norms of the Securities Exchange Board of India or SEBI, undergoing the KYC verification process is obligatory for each and every investor and without it, you will not be allowed to invest in securities or mutual funds.
How Much You Should Invest in SIP
According to experienced financial planners, an individual should invest at least fifty percent of their income in mutual funds and equities through SIP. That is how you will be able to earn a lofty return on your investment. However, if you want to generate better revenues then you should be patient with your overall investment process.
Also, remember that capital market investments are always dynamic and that is why they also possess some volatility risks. It can also significantly affect the returns you can make through investment. It is better to invest in long-term equity funds because the irregularities in the market can be corrected during your entire investment period.
If you move your funds and buy new assets whenever the market condition is doing well your overall investment expense will keep on increasing. The reason behind this is that you are practicing the investment method which is the exact opposite of what seasoned financial experts recommend which is ‘to buy equities whenever the market is low and sell them when their market price is high.’
● As the equity market is dynamic, it is normal that your investments will go through both profit and loss over the course of time. Nevertheless, here the trick is to stay afloat for as much time as possible and that is the best way you can grow your money. SIP investment has made this financial trick steadily possible.
● Remember not to stop your SIP investment when the equity market is in its underachieving state and doesn't ever stop investing in the same condition. Systematic investment plans can assist the investor during different market conditions (in both the profit and loss situations).
● This is because the SIP encourages people to have a well-balanced investment portfolio which ensures that at the end of your investment journey you will generate more revenue than what you have actually invested. Just make sure that you are not deviating from your original long-term investment goal and staying afloat.
A Step-by-step Guide on How to Invest in SIP in India?
In this section, we will provide insight on how to invest in SIP in India.
Articulate your investment objective and know about your risk-taking ability
Before you initiate your investment journey you will need to comprehend your risk tolerance ability. In most cases, it has been observed that the risk tolerance of an individual decreases with the increase in age and financial obligations of the person.
After you have understood your risk tolerance ability now you need to find out why you are willing to invest in mutual funds or to be more precise what your investment goals are. Your financial goals can involve getting married, getting higher education, your kid’s education, buying a car, retirement planning, etc. if you have a well-defined goal then you will be able to put more focus on your investment and create a portfolio accordingly.
Select a mutual fund for your investment
You can finalize from a wide range of mutual funds depending both on your risk profile and personal financial goal. Additionally, you should decide what you expect out of your SIP investments and how your fund has been performing in the last couple of years. Once you have considered these, you can go about the process in these easy steps:
● Fill in the SIP form
● Submit either the online mode of the ECS form or the offline cheque disclosing the monthly SIP form
● Provide your residential or ID proof and a canceled cheque
● Fill out the KYC form
Choose a specific date for your SIP and its duration
Since in the SIP system, your money automatically debits from the bank account, you must mandatorily choose a convenient day for paying or multiple dates in installments within the same month (1st, 5th, 10th, 15th, 20th and 28th are common dates offered in SIP installments). In order to fulfill your financial goals, you must calculate the SIP amount beforehand and then plan on the duration of the fund.
Keep on investing until the end of your investment period
Being long-term investments, SIPs are one of the most assured ways to create wealth wherein you do not have to keep daily track of the market but rather focus on investing in a wholesome manner for maximized benefits.
For a lot of people in India, the systematic investment plan or SIP has made financial planning much more accessible. More importantly, salaried individuals ( which comprises most of the Indian citizens) can also invest their money and gain higher returns if they invest in mutual funds through SIP.
Before you start investing through SIP you need to have a valid bank account and valid documents such as a PAN card and Aadhar card which will help in verifying your identity using the KYC process. After the completion of KYC (as it is a one-time process), you will be able to conduct your first SIP investment and continue to do the same.
Also, make sure to have a financial plan and take the help of an expert if required. Remember that SIP can be a perfect opportunity for salaried individuals to earn their share of returns from the equity market.
For most of the Indian people who depend on their monthly salaries to maintain their livelihood, the systematic investment plan can pave the way for their investment journey. Most of the salaried individuals cannot use lump sum amounts for investments but through SIP these individuals can contribute as low as Rs. 500 and become a part of any mutual fund scheme.
If you want to opt for SIP but don’t know how to start SIP then you should visit 5Paisa. This online investment platform will help you become an investor in no time through SIP investment plans.