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Many new investors wonder if mutual funds are the same as SIPs. While a simple Google search will give one the answer, but it is important to understand SIPs and their advantages. It is one of the easiest ways to earn returns via mutual funds and helps make mutual fund investments regular and disciplined.
Introduced in India in the late 90’s, Systematic Investment Plans (SIP) have been a popular and chosen investment tool today. The first mutual fund to introduce SIP in the Indian territory was Franklin Templeton.
Later, in the early 2000’s Association of Mutual Funds of India launched campaigns to propagate SIPs and its benefits. The key objective of this article is to educate new and existing investors about Systematic Investment Plans.
What is Systematic Investment Plan?
SIP is short for Systematic Investment Plan. It is a scheme under the umbrella of open-ended mutual funds wherein investors make regularised and systematic payments toward a mutual fund.
At present, SIPs are the best investment instruments and are profitable over a long period. Basically, this is a scheme wherein the investor’s money is invested in several investment tools. Such schemes under open-ended mutual funds don’t have a time limit. Hence, investing in mutual funds through SIP is profitable for long-term financial goals as the money of the investor is invested by professionals who regulate the funds.
Mutual fund investments through SIP are ideal for new investors and individuals who don’t have enough time to evaluate the market or indulge in investing tactics thoroughly. Note that having a demat account is mandatory for registering in a SIP.
If you don’t have a Demat account, open one with your chosen authorised capital. If you have a Demat account, use it to register for SIP plans.
What are the benefits of investing in a Systematic Investment Plan?
Investing in systematic investment plans (SIPs) promotes an consistent approach, to saving and investing. It encourages individuals to commit to contributions either monthly or quarterly. It helps them develop a habit of allocating an amount towards their investments. This not only facilitates wealth accumulation but also fosters financial discipline.
By opting for funds through SIPs, investors can entrust the task of monitoring the market to fund managers. These managers possess expertise in making investment decisions based on market analysis and knowledge. This relieves investors from the burden of predicting market movements.
Systematic Investment Plans enable investors to contribute a fixed amount at intervals, of market conditions. By taking advantage of the market’s volatility SIPs allow for more units to be acquired when share prices are lower. Also, fewer units when share prices are higher. This strategy helps balance the cost per unit and mitigates the impact of short term market fluctuations.
SIPs are specifically designed as long term investment tools aimed at generating returns, over time. Through disciplined investments investors can benefit greatly from the power of compounding that comes with reinvesting returns. Over time this can result in an expansion of the investment.
Generally, SIPs offer flexibility with respect to investment amounts. SIPs also enable investors to modify their contributions or pause the same whenever necessary. Moreover, SIPs do not impose fines or charges for failure to pay or missed payments of investment amounts, unlike some investment tools. Such features of SIPs increase its adaptability and convenience for investors.
How to invest in Systematic Investment Plans?
Investing in SIPs is really simple. Start by identifying your financial goal. This will let you decide on the starting point and regularise the amount of investment. Each individual can have varied goals, be it retirement, vacation, marriage or something else. Setting a financial goal at the start will help you plan your investments in a better manner.
Next, choose the mutual fund you wish to proceed with. Consider the following aspects:
Background of the fund manager
Top holdings in the mutual fund’s portfolio
The expense ratio
History of returns
Then, determine the amount you want to invest. As a beginner, you can begin investing with a small amount. Gradually increase it depending on the kind of financial goal you wish to achieve.
Finally, choose the frequency of investment. The frequency of investment can be monthly, annually, or quarterly. This depends on your current financial situation and the goal you’re investing in.
