Planning to invest in SIPs as a staggered method of mutual fund investing? If yes, then wait. In this article, you will get answers to all your questions and doubts so that you can move ahead to investing with a clear mind.
What is SIP?
A Systematic Investment Plan (SIP), more popularly known as SIP, is a facility offered by mutual funds to the investors to invest in a disciplined manner. SIP facility allows an investor to invest a fixed amount of money at pre-defined intervals in the selected mutual fund scheme. The pre-defined SIP intervals can be on a weekly/monthly/quarterly/semi-annually or annual basis. By taking the SIP route to investments, the investor invests in a time-bound manner without worrying about the market dynamics and stands to benefit in the long-term due to average costing and power of compounding.
Benefits of SIP Investing
Power of Compounding
When you regularly invest through SIP and invest for the long term, the benefits are magnified by the compounding effect. Compounding effect ensures that you earn returns not only on your principal amount (actual investment) but also on the gains on the principal amount, i.e. your money grows over time as the money you invest earns returns. And the returns also earn returns.
Power of Starting Early
The earlier one starts saving and investing regularly, the easier it is to achieve your goals. The graph below shows the impact of beginning to invest S$5,000 monthly at various stages of life till the age of 60 years (assuming a return of 12% p.a.).
Convenience
Three simple, paperless steps to invest in a SIP:
- Register for a SIP online
- Fill the required details
- Ensure the availability of funds
Disciplined Investing
It’s the key to investing success. Regular investment makes you disciplined in your savings and also leads to wealth accumulation. Systematic investing is a time-tested discipline that makes it easy to invest automatically. Investing regularly in small amounts can often lead to better results than investing in a lump sum.
No Need to Time the Market
Knowing when the right time is to invest in the market can pose a big dilemma. It is hard to predict when the market will be at its peak or low point. Investing through SIP keeps you from timing the market. While SIPs are not free from the market volatility, you needn’t worry about the market movements.
Features of SIP
For long-term wealth creation through the equity market, you, need discipline and long term time horizon, which are inherent features of SIP. The following features of SIP make it fit for the equity market.
- A Simple and disciplined approach to investment.
- Investment possible with a small sum of money regularly invested to accumulate wealth.
- Flexibility in terms of amount or quantity based SIP.
- Due to the principle of cost averaging, a number of units are bought in a falling market and fewer units in a rising market.
- Flexible intervals like daily/weekly/fortnightly/monthly basis.
- SIPs allow you to take part in the stock market, without trying to time it, also bringing discipline to your investments.
Types of SIP
Flexible SIP
Flexible SIP gives you the option of changing the investment amount, depending on your cash flow. Should you face a cash crunch, you can accordingly adjust your instalment until the financial situation gets better. On the other hand, if you receive a bonus, you can deposit the entire amount or part of it into the SIP account. Along with this, there is the trigger-based option, where triggers like broader market reaching a specific valuation multiple or change in the scheme NAV (by a certain percentage) determines the SIP amount.
Top-up SIP
Top-up SIP lets investors enhance the SIP amount during regular intervals. This allows you to make the most out of your SIP investments by increasing your contributions towards those schemes that are performing well. Additionally, you can also increase your investment amount when there is a hike in your pay. An essential point to be noted is that this facility can only be availed for SIP through direct debit or ECS mode.
Trigger SIP
This kind of SIP is better suited for investors with sound knowledge and awareness of financial markets. Under trigger SIP, you can set a target based on pre-specified date, price, NAV and index level. Trigger SIPs are generally not the best option since it encourages speculation. If, for instance, you know that a certain kind of government policy will be in force in a couple of days and that will affect the index crossing a certain mark, you can set it as a trigger date.
Perpetual SIP
Perpetual SIPs are those without a tenure end date. Fund houses mostly assume such SIP to continue until 2099, unless you have given a written communication to stop them. Perpetual SIP help ensure continuity of investment for people who find themselves too busy and do not have the time to renew their SIP. It is, however, always better to start SIP for a fixed period, rather than leaving the end date blank, since SIP help foster goal-based approach.
Who Can Invest via SIP?
There are no eligibility criteria for investing via SIP. Anyone can invest in the mutual fund. So, the earlier you start and the longer you stay invested, the more you will benefit from compounding and cost averaging.
If you want to invest through SIP and have a moderate risk appetite, you can consider putting your money in any five different funds. However, if you are starting out for the first time, it is advisable to go for debt funds. Once you are familiar with how it works, you can shift your focus to equities to generate higher returns on your investment.
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