Investing can seem like a daunting task, especially if you are a beginner. With so many options available, it can be challenging to know where to start. However, there is a simple and effective way to invest your money without the stress and confusion – the Systematic Investment Plan (SIP).
SIP is a smart investment strategy that allows you to invest a fixed amount of money at regular intervals. By investing small amounts of money consistently over time, you can grow your wealth and achieve your financial goals.
In this article, we’ll dive deeper into how a systematic investment plan can work for you and why it’s a great option for anyone looking to invest their money wisely. So, whether you’re a seasoned investor or a beginner, read on to discover how investing easy with SIP can help you achieve financial success.
Table of Contents
- What is a Systematic Investment Plan (SIP)
- Systematic Investment Plan Benefits
- SIP vs Lump Sum Investment
- How Does a SIP Work?
- Types of Mutual Funds for SIP Investment
- How to Start a Systematic Investment Plan?
- Factors to Consider Before Selecting a Systematic Investment Plan
- SIP Investment Calculator
- SIP Investment Tips for Beginners
- What is Systematic Withdrawal Plan in Mutual Funds
What is a Systematic Investment Plan (SIP)
A Systematic Investment Plan (SIP) is a smart investment strategy that allows you to invest a fixed amount of money at regular intervals. It is a method of investing in mutual fund that allows investors to invest small amounts of money at regular intervals, usually monthly, for a specified period. The primary advantage of a SIP is that it enables investors to invest their money in a disciplined manner without having to worry about market fluctuations.
Investment in mutual funds and systematic investment plans is executed according to the net asset value (NAV) of a mutual fund scheme. The NAV of the schemes keeps changing according to the value of the portfolio securities depending on their market price.
The goal of a systematic investment plan in mutual funds is to achieve consistent returns over time. You should consider using a SIP when you want to build wealth over time. If you do not have enough money or expertise to buy individual stocks, then you might want to use a systematic investment plan instead.
SIPs can be useful to save for retirement, buy a house, children’s education or marriages, pay off debt, or just make regular contributions to your savings account.
Systematic Investment Plan Benefits
There are many benefits to investing through SIPs. One of the biggest advantages is that it is a disciplined investment approach that allows you to invest regularly and systematically. This approach helps you to avoid the temptation of timing the market and making hasty investment decisions. Other benefits of investing through SIPs include:
SIPs are flexible investment options that allow you to start investing with a small amount of money and gradually increase your investment amount as your income grows. Additionally, you can choose the frequency of your investments, which can be monthly, quarterly, or annually.
SIPs are a cost-effective way to invest your money as they come with lower transaction costs and management fees. As a result, they are an excellent investment option for small investors who want to invest in the stock market but do not have a large amount of money to invest.
Investing through SIPs allows you to diversify your investment portfolio as you can invest in a variety of mutual funds that suit your investment goals and risk appetite. This diversification helps reduce your overall investment risk and improves your chances of achieving your financial goals.
Helps in accumulation of wealth over the longer time horizons by compounding factor.
5. Tax Savings
A big advantage to taxpayers is the income tax benefit SIP investment offers. This is availed by investing in tax saver mutual fund scheme, the Equity Linked Savings Scheme or ELSS. An Indian taxpayer can avail tax benefit up to the limit of ₹1,50,000 under section 80C of the Income Tax Act. ELSS has a lock-in period of three years for each instalment invested. Thus, investing in ELSS funds offers the dual advantage of tax saving as well as high returns on SIP investment.
SIP vs Lump Sum Investment
When it comes to investing your money, you have two options – SIP investment or lump sum investment. A lump sum investment is when you invest a large sum of money at once, while SIP investment is when you invest small amounts of money at regular intervals. So, which is better? Let’s find out.
SIP investment is a more risk-averse approach as it allows you to invest small amounts of money at regular intervals, reducing your overall investment risk. On the other hand, lump sum investment is riskier as it involves investing a large sum of money at once, which can be affected by market volatility.
SIP investment is a disciplined investment approach as it requires you to invest regularly and systematically. This approach helps you to avoid the temptation of timing the market and making hasty investment decisions. On the other hand, lump sum investment does not require you to invest regularly, which can lead to undisciplined investment behavior.
SIP investment is a long-term wealth creation strategy that allows you to invest small amounts of money regularly over a specified period. This approach helps you to accumulate wealth gradually over time. On the other hand, lump sum investment can lead to a sudden increase in wealth, which can be difficult to manage and can lead to undisciplined investment behavior.
How Does a SIP Work?
SIP investment works in a simple and systematic way. You choose the mutual fund in which you want to invest your money and the amount you want to invest. The mutual fund company deducts this amount from your bank account at regular intervals, usually monthly, and invests it in the mutual fund of your choice. The mutual fund units are allocated to you at the prevailing market rate on the day of investment.
The number of mutual fund units you receive depends on the prevailing Net Asset Value (NAV) of the mutual fund on the day of investment. The NAV is the market value of the mutual fund’s assets minus its liabilities, divided by the number of outstanding units.
Types of Mutual Funds for SIP Investment
There are various types of mutual funds available for SIP investment. The type of mutual fund you choose depends on your investment goals and risk appetite. Here are some popular types of mutual funds for SIP investment:
Equity funds invest primarily in stocks and are suitable for investors who are willing to take high risks for high returns. These funds have the potential to deliver high returns over the long term, but they are also subject to market volatility.
Debt funds invest in fixed-income securities such as bonds and are suitable for investors who are looking for stable returns with low risk. These funds are less volatile than equity funds, but they also offer lower returns.
Balanced funds invest in both equity and debt securities and are suitable for investors who want a balanced portfolio with moderate risk. These funds offer a balance between high returns and low risk.
How to Start a Systematic Investment Plan?
Starting a SIP investment is easy and straightforward. Here are the steps you need to follow:
1. Choose a Mutual Fund
Choose a mutual fund that aligns with your investment goals and risk appetite. You can do this by researching the performance of various mutual funds and selecting the one that suits you best.
If your goal is to generate wealth over the long run, then you can choose to invest in well diversified equity mutual funds. They are high risk funds with potential to generate inflation beating higher returns.
If you plan to invest for retirement, you will need some safety along with capital appreciation. Retirement mutual funds make a better option for achieving corpus for post-retirement period.
If you want to put your money for short period of time, then liquid funds and short-term funds make a better investment option.
If you want to tax benefits along with capital appreciation, you may choose equity linked savings scheme or ELSS.
2. Open a Mutual Fund Account
Open a mutual fund account with the mutual fund company of your choice for investing in a Systematic Investment Plan. You can do this online or by visiting the mutual fund company’s office.
3. Complete the KYC Process
Complete the Know Your Customer (KYC) process by submitting the necessary documents such as your identity proof, address proof, and PAN card.
4. Set up a Systematic Investment Plan
Set up a SIP by selecting the amount you want to invest and the frequency of your investments. You can do this online or by submitting a SIP application form to the mutual fund company.
Factors to Consider Before Selecting a Systematic Investment Plan
Before selecting a SIP investment, there are several factors you need to consider. Here are some of the essential factors:
1. Investment Goals
Your investment goals should guide your investment decisions. Determine your short-term and long-term investment goals and select a mutual fund that aligns with your goals for investing through a Systematic Investment Plan.
2. Risk Appetite
Your risk appetite determines the type of mutual fund you should invest in. If you’re willing to take high risks for high returns, equity funds are suitable for you. If you’re looking for stable returns with low risk, debt funds are suitable for you.
3. Investment Horizon
Your investment horizon is the period for which you want to invest your money. If you have a long-term investment horizon, equity funds are suitable for you. If you have a short-term investment horizon, debt funds are suitable for you.
SIP Investment Calculator
A SIP investment calculator is a useful tool that helps you calculate the returns on your Systematic Investment Plan. The calculator takes into account the amount you invest, the frequency of your investments, and the expected rate of return on your investment. By using a SIP investment calculator, you can determine the amount of money you need to invest to achieve your investment goals.
SIP Investment Tips for Beginners
If you’re a beginner, here are some tips to help you start your Systematic Investment Plan:
1. Start Early
Start your SIP investment journey early to take advantage of the power of compounding. The earlier you start investing, the more time your money has to grow.
2. Invest Regularly
Invest regularly and systematically through a Systematic Investment Plan to build a disciplined investment approach. This approach helps you to avoid the temptation of timing the market and making hasty investment decisions.
3. Diversify Your Portfolio
Diversify your investment portfolio by investing in a variety of mutual funds that suit your investment goals and risk appetite. This diversification helps reduce your overall investment risk and improves your chances of achieving your financial goals.
What is Systematic Withdrawal Plan in Mutual Funds
Once you have created a corpus through systematic investment or a lumpsum investment, you may want to liquidate your investment and get your money back.
You can sell your investment in one go. However, if you want a regular income and still want to stay invested to benefit from rising market, you can opt to exit through systematic withdrawal plan or SWP.
Systematic withdrawal plan allows investors to redeem their investment systematically in fixed installments at regular intervals over a time period from their accumulated corpus in a mutual fund scheme.
Systematic withdrawal plan is just opposite to a systematic investment plan where you withdraw investment instead of investing.
For SWP, you submit your request to the AMC managing mutual fund scheme of your investment for redemption. You can choose to redeem any fixed number of units or amount on a fixed date. The requested amount/units shall be redeemed at the prevailing market price of the net asset value of the units and credited to your bank account.
Thus, systematic withdrawal plan in mutual funds offers dual benefits of providing regular income and still offering the opportunity to stay invested for long period of time till your holdings last.
Finally, investing your money can seem like a daunting task, but with the right investment strategy, it can be easy and stress-free. A Systematic Investment Plan (SIP) is a smart investment strategy that allows you to invest a fixed amount of money at regular intervals. By investing small amounts of money consistently over time, you can grow your wealth and achieve your financial goals.
In this article, we discussed what a SIP is, the benefits of investing through SIPs, SIP vs lump sum investment, how a SIP works, types of mutual funds for SIP investment, and how to start a SIP investment. We also discussed factors to consider before selecting a SIP investment, SIP investment calculators, and SIP investment tips for beginners.
Remember, investing is a long-term wealth creation strategy, and it requires patience, discipline, and a long-term investment horizon. With the right investment approach and a disciplined investment behavior, you can achieve your financial goals and secure your financial future.