Systematic Investment Plan (SIP) is a type of investment scheme which is offered by mutual funds companies. SIP allows you to invest periodically (monthly, quarterly, weekly) a small amount of money in a particular mutual fund.
In this article, you will come to know why you should invest through SIP, how to invest in SIP, advantages, and disadvantages of SIP investment.
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You may have heard that the most popular way to grow your wealth is to invest in the share market.
If you want to earn money out of money to purchase stocks, bonds, debentures. But learning how to invest in share market and then purchasing stocks, investing in bonds is a little bit complex and clumsy too.
If you don’t know the game you may end up in losing your money.
AMC is known as Asset Management Company, a company which owns the mutual funds.
Their business is to doing investment in stocks, bonds, debentures by the experts hired by AMCs and to get a higher return out from it.
Then they share a portion of the profits with the investors.
You can invest in a mutual fund either by investing a lump sum amount directly or periodically by SIP.
But investing a lump sum amount means you are putting a large amount of your savings in the fund.
The benefits of investing in mutual funds through SIP are given below:
- Rupee Cost Averaging Because of fluctuations in the market the average cost of NAV is lower than at a single point of time. This helps you to acquire more units of mutual funds through SIP than investing through a lump sum.
- Minimize Risks Investing through SIP can be stopped at any time if any fund is underperforming thus putting your money at another performing fund, Thus reducing the risk from the lump-sum amount.
- Financial Discipline Investing through SIP gives you a disciplined manner to save your money rather spending on unnecessary items. It will cater your habit of saving and you create wealth over a period of time.
- Compounding Growth Earnings in a mutual fund are added back to the fund thus its value increased. This is called growth by compounding.
- Convenience Investing through SIP is highly convenient. The amount deducted automatically from a bank account can be tracked online and can be stopped any time just by canceling with one click.
Investing in mutual funds through SIP online is much faster, easier and more efficient way than doing tons of paperwork.
To get started with SIP you must meet the eligibility criteria.
- A person of Indian resident, non-resident Indian, Person of Indian origin who resides abroad on full repatriation.
- Must be above 18 years of age.
- Must have a bank account on own name.
- PAN Card is a must for investing above Rs 50,000 a year.
The first thing you need to do before investing through SIP is by verifying your KYC. KYC is must to invest in mutual funds as per guidelines of SEBI.
It is a one-time procedure after which you don’t have to do it again and again for every time you invest through SIP.
One must have at least one of the below as Proof of Identity.
- PAN Card
- Driving License
- Passport (a must for NRI & PIO)
- Voter’s ID card
One must have at least one of the below for proof of address
- Adhar Card
- Voter’s card
- Driving License
- Electricity Bill
- Property Tax Receipt
Ensure that your mobile number is linked with your Aadhar card as for eKYC verification it will send one OTP to your mobile.
For opening a SIP account you have to log on to particular mutual funds company website. But there is another method also.
Named below are some popular websites give you a one-stop destination platform for all your SIP needs.
Step 1 Log on to any platform of your choice mentioned above and open an account by giving your email ID and mobile number.
Step 2 After opening the account it will ask for the required documents. Scan it and upload. OTP will come for each time that you have to provide.
Step 3 Addhar based eKYC verification. After completing the upload of PAN if your KYC is not registered before it will ask for Adhar based eKYC verification or you have to send the signed documents.
Step 4 If done through eKYC verification within 2-3 minutes you will get your online dashboard.
Now you have to choose a mutual fund. Here you can pick any mutual fund scheme of any AMC.
How to pick mutual funds for yourself.
- Based on your risk appetite and objective of investment choose a mutual fund.If you want to get higher returns on investment than you have to increase your risk appetite.
After assessing your risk tolerance you have to think what is your financial goal. It is imperative that your objective is clear to you so that you can get the right portfolio mixture of equities and debts.
- Filter for the AMCs having a presence in the market (whose name you have heard before) for long.
- Do not hurriedly pick any mutual fund just for the sake of it.
If not able to understand which one to pick, do some little research. Ask any financial planner. Take some time and then pick.
Step 5 After picking a particular mutual fund just go for purchase by giving monthly SIP amount and duration.
For example, the below illustration is taken from a snippet from Groww.in for Reliance Large Cap Fund Direct-Growth
Image courtesy: Groww.in
Monthly SIP amount in the marked space in blue.
After giving the amount hit “Monthly SIP”. Minimum monthly SIP amount for each mutual fund is different and mentioned below.
Also, set duration for how long you want to be stay invested for this mutual fund through SIP. For example, 5 years, 10 years.
P.S: If press “One Time” it means you have purchased the units of mutual fund in lump-sum and next month onwards amount will not be debited for SIP.
Step 6 Set the date for your SIP as it will get auto-debited from your bank account every month on a particular date.
Most mutual fund AMC gives date like 1,5,10, 25, 27, 28, 30. Some AMC allows any date in the month.
Step 7 Set up an ECS mandate. For allowing the AMC to auto-debit your account and process the SIP every month you have to provide one ECS mandate.
ECS mandate may be added as a biller to BSE. One biller id will be generated and that biller you have to add in your bank account through internet banking or another similar way.
Another method is signed ECS mandate form which you have to download, take a print out, sign at proper mentioned space, scan it and upload again.
This is a one-time measure. Once done no need to do every time you invest in SIP. If you download from your dashboard it will come with all pre-filled details.
Step 8 Sit back and watch your money grow. You can track your investment on your dashboard.
You can redeem amount at times of need and can cancel any time. Keeping in mind the exit load of the mutual fund.
Some of the advantages while investing through SIP are mentioned below
- Liquidity Unless you have opted for close-ended mutual funds.
It is easier through SIP to buy and exit when you do not like the performance of your scheme with no big hole in your pocket.
- Free From Market Volatility While investing through SIP, the investor won’t have to worry about volatility in the market as at regular intervals the unit got purchased and added in the portfolio.
Their money fetches more units when the price becomes lower and vice-versa.
- Petty Investment SIP can be started with a very small amount.
Funds like Reliance Small Cap allows starting with Rs 100.
Those who want to give a try about their first SIP they easily opt for mutual funds which accept very low SIP monthly amount.
- Better Than RD in Banks The returns of SIP over a long period of time is much more (near to 11-13%) than the same amount you invest in RD in a bank.
Most of RD gives an interest of 6-7% annually for which TDS also deducted if interest cross a certain limit.
- Tax Benefits Some ELSS mutual funds provide tax benefits by having rebated under Section 80C.
So if for the whole year you invest Rs 1.5 lakhs in ELSS mutual funds you will get a rebate for the whole Rs 1.5 lakhs. It works as savings, tax-free and higher returns.
- Savings Habit Doing SIP regularly inculcates savings habit for investors as well as create wealth for a long time. For salaried class, SIP is a very good alternative for savings.
- Safe & Transparent All mutual funds AMC comes under the purview of SEBI and they have to disclose their details monthly as per guidelines.
All the investments made is transparent.
There is some criticism as well in SIP. Below are a few of them.
- No Guaranteed Return SIP does not always give you guaranteed returns. It always depends on the time of entry and exit.
If you enter in bearish market and exit during a bullish market, then only you will get good returns. Contrast to it, you may face loss.
- Cost Investing through SIP bears some cost as the company manages all our funds with the help of experts funds managers, the cost has to be born by investors for that.
- Insufficient Funds Once ECS mandate lodged and you have started SIP, funds should always be there in your bank account.
Otherwise, if got dishonored you have to give a penalty and for that month units would not be purchased.
- Delay in Units Purchased The date when your amount got deducted the units not got purchased at the same moment and would not reflect in your dashboard. Rather it takes 3 working days time.
So the price of a unit on the day it gets purchased actually may differ from the day your amount got deducted.
- Risk Risk associated with mutual fund investments. Investing in mutual funds through SIP is not as safe as deposits in banks and Post Office.
- Aimless SIP If you have started SIP just for the sake of it, it will get no good returns until you plan your financial goal and stick to it.
Aimless SIP won’t run longer and it will fail.
- Dilution Avoid investing in too many mutual funds through SIP as mutual funds are themselves diversified investments.
Further diversifying will dilute your gains and you will get no good of it.