“Never depend on a single income. Make an investment to create a second source.”- This famous quote by Warren Buffett proves how important it is to invest your money, as hardships and emergencies never ring the bell before arrival. One such source of investment is SIPs or Simple Investment Plans.
So, instead of opting for a one-time lump-sum investment approach, SIPs allow you to invest a fixed amount of money in a disciplined manner at predefined intervals (weekly, monthly, or quarterly as per your convenience).
Depending upon the financial goals you want to attain, you can invest your money in various mutual fund schemes without stressing much about market dynamics. SIPs provide you the benefit of average costing and the power of compounding and let you build wealth over time
How Does SIP work?
SIP works on the principle of disciplined investment i.e. a predefined amount set by you will get automatically deducted from your bank account every month at a predetermined interval and get reinvested in the mutual fund scheme you’ve purchased for investment purposes.
Furthermore, you will be allocated the units of mutual funds depending upon the current value of the NAV of a mutual fund scheme you’ve chosen. Additional units of mutual funds get credited to your account depending upon the market’s current rate.
All the above process gets controlled by a team of professional fund managers, who carry enough knowledge about the market risks and opportunities and analyze the market condition before investing.
On every investment made, the amount that is reinvested is always larger and so does the return you gain on those investments. The process will continue and units of SIP keep on compiling until your pre-defined investment tenure gets over. After you reclaim those units, the final value of the units gets credited to your bank account.
SIPs typically work on two principles-
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Rupee Cost Averaging
Market volatility can’t be presumed accurately but investment in SIPs lets you escape from the volatile nature of market risks.
Therefore, when the market rises, you get fewer allocations of NAV units of mutual funds and when the market falls, you acquire more units of NAV.
This means when you plan for long-term investments, regular investment minimizes risks and assures that average purchasing costs get evened out and you purchase the units at a low average cost.
For instance, you’re investing Rs 2000 every month. When NAV is 40, you get 50 units, since 2000/40=50.
But, if market conditions fall and NAV drops to 38, you will gain 52.63 (2000/38=52.63) units. So, you buy more units when markets are at a lower level.
Save a small amount of money regularly for a longer duration and gain a higher amount of incredible returns, that’s what the power of compounding does to your savings.
Let’s have an example to understand the impact of compounding on your investment-
Rajesh starts investing money for his 50th birthday at the age of 20. Assume he invests Rs 2000 monthly with an 8% rate of return. The final value at the end of 30 years will be Rs. 30,00,590.
Similarly, Ramesh starts investing Rs. 2000 monthly with 8% returns for his 50th birthday but at the age of 30. The total value of his investment at the end of 20 years will be Rs.11,85,894.
Investing regularly for a longer period yields higher profits. In addition, the compounding effect also assures that you earn a return both on the principal amount and the gains on the principal amount i.e. return on returns approach.
Types of Systematic Investment Plans
To inculcate the habit of saving before spending, that’s the motto SIP carries out. So, to become a disciplined investor, given below are the various types of SIPs you can consider while investing-
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Flexible SIP
While starting the investment process, you have to fix the amount to invest periodically.
But the trick here with this type of SIP is, they offer you the flexible approach to increase or decrease the invested amount as per your cash flow or preference.
You can change the amount up to 7 days before your installment date arrives and this seems easier when you opt for the online SIP method.
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Trigger SIP
Although market volatility isn’t directly proportional to effects on SIPs, in some severe or plight conditions it can hugely impact your planned investment schemes.
The experienced investor picks SIPs through triggers for both upside or downside market conditions. A trigger Sip facility lets the investor automatically switch/redeem from one scheme to another when it shows up at a pre-defined trigger point and reduces the market risk to an extent.
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Top-up SIP
As your income grows, so should your savings. Top-up SIP provides you with a facility to increase your invested amount periodically as you earn higher income or have more amount to put under investment.
For example- You can make an increment of Rs. 1000 in your invested amount after every six months. This means if currently, you’re investing Rs. 3000 per month, then after six months it will automatically become Rs.4000, after another six months it rises to Rs.5000, and so on.
In this manner, Top-up SIP lets you invest in better-performing funds and make the most of your investment and reach your goals faster.
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Perpetual SIP
Whenever you choose a Perpetual SIP for investment, it allows you the freedom to continue the process without putting an end date to it i.e. end date is indefinite. This means investments keep going until you stop and you can withdraw the invested money as per your wish or whenever your financial objectives get fulfilled.
Factors To Be Kept Under Consideration While Starting SIP Investment Plan
The following points should be kept under consideration while investing your money in SIP-
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SIP Amount and frequency
Decide an amount and set frequency for investing in SIPs. Choose the investment cycle as daily, weekly, monthly, or quarterly and they are highly dependent on market volatility, business condition, the money you earn, the cash flow you expect, or the goal you want to achieve.
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SIP Investment Plan Tax Benefits
You can start investing from INR 500 and there is no upper limit or restriction to investment. Depending upon your objective, look for all the benefits and tax deductions you might get under your investment plan.
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SIP Purpose & Tenure
No fixed tenure i.e., SIPs can be continued for short-term horizons (say 6 months) or for a long run (say 20 years). Be it education, marriage, retirement plan, Medical or emergency funds, SIPs for mutual funds (both in equity and debt funds) are chosen based on the returns you expect, principles, time frame & the objective of financial goals you want to fulfill.
Bottom Line
In recent years, SIPs have been listed as one of the most important instruments in the investment field. It gives the investor the financial freedom to build a wise habit of investing a certain amount periodically and saving wealth to accomplish their future goals.
Before investing, take counsel from your financial advisor and gain a minimum knowledge of the stock market & mutual funds and have the potential to invest a particular amount that provides you a benefit to boost returns and fulfill your long-term financial goals, like education, marriage, real-estate or retirement planning.
Still, confused about which SIP to choose for your investment purpose?
Let’s get connected and discuss the best plan for your investment.
