11-10-2022 |
In India, many financial institutions provide a wide range of investment options that help individuals grow their capital regularly. The Systematic Investment Plan (SIP) in mutual funds is one such dependable and goal-oriented approach. SIP encourages consistent saving practices while enabling you to invest a set amount at regular periods, allowing your capital to increase steadily. It’s a smart way to build long-term wealth without financial pressure. This article explains everything you need to know about systematic investment plans.
What is Systematic Investment Plan (SIP)?
A systematic investment plan is a mode of investing in mutual funds. When you decide investing in the systematic investment plan, you will invest a specific fund regularly towards the chosen fund option.
A mutual fund will have a pool of investors having a common investment objective in the financial securities market. An Asset Management Company (AMC) will collect the funds. The funds collected will be invested in varied financial securities by the fund managers of the mutual fund house. The returns will be based on the price movement of the associated securities in the fund. When you cannot invest in such a mutual fund as a lump sum, you can choose to invest regularly, choosing the frequency of payment, such as monthly, semi-annually, etc.
How to Invest in SIP?
Here’s a step-by-step guide on how to invest in SIP.
Gather the necessary documents.
For a seamless verification and registration process, collect necessary documents before beginning your SIP, including your bank account information, Aadhaar card, PAN card, and proof of address.
Complete the KYC (Know Your Customer) process
Either online or offline, the KYC verification process needs to be completed. Financial institutions take this mandatory step to verify your identification before letting you invest in mutual funds.
Sign up for an SIP
Use the website, mobile app, or authorised agent of the mutual fund company of your choice to sign up for a SIP. To open your investing account quickly, enter the necessary information correctly.
Decide on a suitable investment plan.
To maximise possible returns over time, pick up the mutual fund plan that best fits your investment duration, risk tolerance, and financial objectives.
Decide how much you want to invest.
Find out how much you can afford to invest each month without compromising your daily spending. As your income increases, progressively increase the amount of your SIP.
Choose the best time to pay your SIP.
To ensure regular investments and on-time contributions, pick a convenient date for your SIP auto-debit, preferably immediately following your salary credit.
Send in your application for SIP
After all the information has been confirmed, carefully go through your form and submit the SIP application.
Key benefits of investing through an SIP?
SIP offers several advantages that make it a suitable choice for disciplined and long-term investing. Let’s look at some key benefits:
Rupee cost averaging
One of the key benefits of SIP investing is rupee cost averaging. It allows you to buy more fund units when prices are low and fewer when prices are high. Over time, this helps average out your purchase cost and reduces the impact of market instability.
Flexible investment amount
SIPs make investing simple for all by allowing you to begin with as little as ₹500 per month. With the SIP top-up option, you can gradually raise this amount as your income rises. This flexibility helps you to slowly increase wealth while investing comfortably and without financial burden.
Flexible Investment Tenure
You have total control over how long you want to invest with SIPs. Depending on your objectives, you can invest for a few months or for a number of years. SIPs provide you with the freedom to invest for as long as you want to because they don't limit you to a specific time frame like lump-sum investments do.
Power of Compounding
SIP lets you gain from compounding, which is the process by which your earnings eventually produce more returns. Your wealth increases rapidly through the reinvesting of gains, particularly if you remain invested over an extended period of time. You can grow small sums into a sizable corpus by investing consistently through SIPs.
How much you should invest in an SIP
An individual’s personal life goals, existing income and the overall monthly expenditure or budget are the factors based on which he or she can decide on the amount of SIP investments. Firstly, identify your short-term as well as your long-term financial objectives. These may include creating a savings fund to be used after retirement, buying your dream house, or allocating an emergency fund. You can estimate how much you can invest monthly after clearly establishing your requirements.
Often 20 to 30 percent of one’s monthly income can be invested, considering the financial conditions. Compounding in SIPs can lead to the creation of substantial wealth even with small but regular contributions. You may choose to increase the amount gradually over time in tandem with your salary hikes. Consistency is the key.
When is the right time to start an SIP – market top or bottom?
Regardless of when the market is at its peak or its lowest, it is simply better to start a Systematic Investment Plan (SIP) as soon as possible. SIPs are designed to assist investors in taking advantage of rupee cost averaging, which involves buying more units at discounted rates and fewer premiums. This lowers the risk of market timing and eventually balances the cost of investment. By beginning early and making regular investments, you give compound interest more time to grow your capital. To put it briefly, the key to building wealth with SIPs is not timing the market but rather staying invested for a reasonable amount of time in the market.
Simple ways to calculate your SIP returns
You may better manage your budget and forecast how your assets may increase over time by calculating SIP returns. The following calculation is used to determine your SIP's future value:
M = P × ((1 + i)^n - 1) / i × (1 + i)
Where:
M = Maturity amount or future value of the SIP
P = SIP amount invested every month
i = Periodic rate of return (annual interest rate divided by 12)
n = Total number of months
As an alternative, you can simplify the procedure by using an online SIP calculator. To obtain an estimate instantly, simply enter the duration, projected return rate, and monthly investment into the calculator. The actual results may vary depending on the performance of the fund and the state of the market, as SIP returns are linked to the market.
Things you should know before starting an SIP
It's crucial to understand how a Systematic Investment Plan (SIP) works and all the factors that may affect your results before starting one. SIPs let you invest a set amount in mutual funds on a monthly basis, but consistency and goal clarity are essential for success. Start by evaluating your investing horizon, risk tolerance, and financial goals. Depending on how comfortable you are with market swings, this guides you in selecting a suitable mutual fund category, such as debt, equity, or hybrid.
One important thing to consider is that since SIPs are dependent on the market, there is no assurance of returns. They perform best when held for an extended period of time, which enables compounding and rupee cost averaging to benefit your investments. If you remain committed, even small, consistent payments can increase dramatically over time.
Conclusion
Building long-term wealth with an SIP is a thoughtful and systematic approach. It helps you to gain through compounding, take advantage of rupee cost averaging, and make regular investments. Your investments can grow over time if you start early and remain steady. SIPs promote steady saving practices and financial discipline, helping you to easily build a solid financial future and complete significant life goals regardless of market fluctuations.
FOR EXISTING POLICY 
FOR NEW POLICY 
