Sameer wanted to buy the recently launched version of his favourite smartphone brand but did not want to splurge his savings at the same time. So, he opted for a smart and disciplined approach by systematically setting aside small amounts every month into his ‘smartphone fund’. At the end of the sixth month, he finds out that he has accumulated enough savings to buy the smartphone he desires without breaking his monthly budget.
This is exactly how mutual fund SIP works. It allows you to make regular investments in a mutual fund scheme, which accumulate and steadily grow over time into a significant corpus. This blog discusses in detail the SIP meaning, how it works, and the benefits of investing in SIP, among other related topics. Continue reading.
What is SIP?
SIP stands for Systematic Investment Plan. It is an easy, flexible, and efficient method for investing in mutual funds. When you sign up for a SIP, you provide your consent to invest fixed amounts at pre-determined intervals – which can be weekly, monthly, quarterly, semi-annually, or annually – in a mutual fund scheme of your choice. This amount is deducted automatically from your bank account, and then, invested in the chosen scheme on the decided date.
Instead of investing a lump sum, SIP investments enable investors to spread out their investments over time, which is particularly beneficial for those who do not want to commit large sums of money upfront. Over time, these small investments accumulate and potentially grow into a significant corpus due to the power of compounding.
Before starting your SIP, you need to open demat account if you don’t already have one, as it will facilitate smoother transactions and tracking of your mutual fund investments.”
Why Should People Do SIP?
People often ask, “Is SIP good for investment?” and “Why should I do SIP if I can invest monthly?” There are plenty of reasons to invest in SIP, including:
Save For Your Long-term Goals
SIP is among the best investment tools that allow you to save for your long-term financial goals. You can make regular investments in a mutual fund scheme, which accumulates over time to form a substantial corpus. Such an approach can help you save for a prolonged period to create wealth for goals, such as buying a house, saving for your child’s higher education, planning your retirement, etc.
Encourage Financial Discipline
Another reason why people should start investing in SIP is that it instils financial discipline by encouraging regular investments. SIP requires consistent monthly or quarterly contributions, thus cultivating a habit of saving and ensuring that you set aside a portion of your income for investing purposes.
Invest As Much As You Can
Unlike most investment instruments, SIP does not require you to invest a large amount at once. You can start by making small investments every month and then increase them according to your income. Several Asset Management Companies (AMCs) allow you to start a SIP in their mutual fund schemes with as low as Rs. 100 per month. Furthermore, there is no upper limit on how much to invest in SIP, which means you can invest as much as you want to achieve your financial goals.
SIP Benefits: What Is The Advantage of SIP Over One-Time Investments?
There are several distinct advantages of investing in SIP compared to making lump sum investments. These include:
Rupee Cost Averaging
Through SIP, you invest in mutual funds at different price points, meaning you automatically buy more units when the prices are low and fewer when prices are high. This averages out your purchase cost over time, helping to mitigate market volatility.
Power of Compounding
The power of compounding works best when you start early and stay invested for the long term. SIP helps you benefit from it as the returns generated are reinvested, helping you to grow your wealth at an accelerated pace.
Minimises Market Risks
SIP investments spread the risk of market volatility. Since you invest at various price points, you don’t have to worry about the stock market’s ups and downs as much as someone who has invested a large amount in one go.
No Need For Market Timing
Timing the market is almost impossible, even for the most experienced investors. By opting to invest through SIP, you eliminate the need to determine your entry and exit points. Instead, you invest systematically regardless of the market’s movement, reducing the risk of making bad timing decisions.
High Flexibility
SIPs are one of the most flexible modes of investment. You can increase or decrease your investment amount, stop or pause your SIP, or withdraw from your mutual fund investment at any time, depending on your financial goals and market conditions.
Tax Benefits
People are often unaware of Systematic Investment Plan (SIP) tax benefits. Some mutual fund SIPs, such as those in Equity-Linked Savings Schemes (ELSS), allow you to claim tax deductions under Section 80C of the Income Tax Act of 1961.
How Much Profit a Day Can You Expect With SIPs?
While SIPs have the potential to generate attractive returns over the long term, it’s essential to understand that mutual fund SIPs are linked to the performance of the underlying market. Therefore, asking “How much profit a day can you expect with SIPs” can be misleading, as daily fluctuations are a natural part of market-linked investments. Instead, SIPs should be viewed with a long-term horizon, where returns can average 12-15% (or even more) annually depending on the market conditions and the fund’s performance.
Is It Better to Take More SIPs?
Investors often ask, “Is it better to take more SIPs?” The answer depends on your financial goals and risk tolerance. Some investors may prefer to diversify their portfolios by investing in multiple SIPs across different asset classes, such as equity, debt, and balanced funds, which can help them spread out risk and optimise returns.
How To Invest In Mutual Fund SIP?
Thanks to the rise in technology, investing in SIPs is now easier than ever. Many SIP apps, such as the HDFC SIP investment app, allow you to start, manage, and track your SIP investments with just a few clicks. Here are a few simple steps to start an SIP:
Select a Mutual Fund Scheme: First, choose the mutual fund scheme you want to invest in. You can start by assessing your risk profile and financial goals.
Choose Your SIP Amount and Frequency: Next, decide how much money you want to invest regularly and how often (weekly, monthly, or quarterly).
Register through the SIP App: You can use your SIP investment app to set up your SIP. You will need to complete your KYC and sign up for an auto-debit mandate.
Consider a Web Trading Platform: Many investors also benefit from a comprehensive web trading platform that offers seamless integration with mutual funds and SIPs. These platforms often provide tools for managing your investments effectively.
Track and Review: Once your SIP has started, ensure to track your investments regularly and review your financial goals.
Conclusion
SIP investments are an ideal way for anyone to achieve their long-term financial goals. They allow you to systematically build your wealth without needing to time the market or invest large amounts of money upfront. With SIP apps such as HDFC Sky, investing in SIP has never been easier. So, if you’re looking for an easy and systematic route to start your SIP, HDFC Sky might just be the perfect solution for you. Click to know more.
