Systematic Investment Plan (SIP) works on a simple idea – you invest a fixed sum regularly in a mutual fund for the number of years you need to reach your financial goal. You follow this disciplined approach regardless of the direction of the market movements. With this approach you will end up buying more number of units when the markets are down and less units when the markets are up.
The structure of SIP is based on a simple and straightforward idea, wherein you invest a fixed sum regularly in a mutual fund regardless of market conditions. So, over the long-term, you end up buying more units when the markets are down and fewer when the markets are up. In this manner, your average price of investing is predictably lower over the long run. When you invest through a SIP, you also leverage the power of compounding and the benefits of rupee cost averaging. Moreover, by investing regularly, you get to keep a check on your emotions and not attempt timing the market.
Compounding is the process of allowing the return earned on a sum invested to also generate returns. The base on which returns are being earned keeps increasing, even if additional investments are not made, as the return earned each period forms part of the invested amount for the next period. Compounding works best when the investment period is for a long period of time which gives the investment more opportunities to grow. More frequent the compounding, the better the returns. As an investor, you can benefit from compounding by starting early, investing regularly, and continuing to stay invested, to make the best of your investments.
By investing regularly, you will be disciplined and not attempt to time the market or stop investing when the markets are in a downward phase. This simple approach addresses the biggest challenge faced by investors - stock market volatility. Human behaviour tends to influence investors to stop investing when the markets go down, and in some cases, investors completely exit their investments. Likewise, investors tend to invest more when prices are high. Investing with SIPs enables investors to invest regularly through market highs and lows which is beneficial in the long term since time in the market is more important than attempting to time the market
Over the long term, SIPs tend to benefit from rupee cost averaging and the average cost per unit through SIPs is generally lower since regular purchase through highs and lows of the market reduces average cost of investment. As equity markets generally move in the upward direction over the long term, SIPs in equity mutual funds benefit from rupee cost averaging.
It is impossible to predict stock market movements, which is why it is important to invest regularly in a disciplined manner towards your financial goals. Historical stock market data indicates that over long periods, volatility smoothens out, which makes systematic investing effective. If you are concerned about volatility, you should know that it is volatility in equity markets that helps build long-term returns since it provides the opportunity to invest in markets through highs and lows. Suppose there is no volatility and markets move only in an upward direction, it will mean that each SIP instalment will buy in lesser units as the NAV of the fund will only go up. Market corrections or dips in market gives opportunity to SIP investors to buy more units. Thereby averaging the price of your purchase in the fund over time.
Instead of focusing only on market returns, you will be wise to systematically and regularly invest towards your financial goals. When you invest towards a financial goal, you can calculate the monthly SIPs you need to invest in suitable funds to reach your goal. This approach will keep a check on your emotions and also cultivate the habit of regular investments over market cycles. When you face market volatility, especially when the markets keep sliding downwards, treat the situation as something like a sale. Just as you buy more during a festive sale, you could use the falling markets as an opportunity to invest more. Unlike stock market movements, your financial goals pretty much remain the same and that is what you should aim to invest for without overtly getting worried about stock market volatility.
An inherent advantage of investing through SIPs - you can start with small investments and scale up your SIPs over time. You also automate your investments, which reduces the chance of you delaying your investments. You can also start a SIP with a minimum amount or as low as Rs.1000 per month in a fund of your choice. Choose your SIP date, frequency and then choose between different modes of payment such as Electronic Clearing Service (ECS), Direct Debit, Post-Dates Cheques (PDCs) or National Automated Clearing House (NACH). You can enrol for a SIP online or by submitting duly completed SIP Enrolment Form at any Official Point of Acceptance (OPA) of the Fund House.
Have a list of dreams and goals that you want to fulfil?
Its every parent’s wish to send their child for higher education that they are passionate about. Starting investments early on when the child is young helps the education corpus grow given the longer time duration available. Regular SIPs can help achieve your child’s education goal.
Click here to Fund your Child’s Education
So what are you waiting for? Kickstart your financial goals.. Use these SIP Calculators to help you plan for your goal
It is advisable to invest via the SIP route, particularly when investing in equity. SIP offers the benefit of rupee cost averaging. This ensures that you get more units when the markets fall and less units when it rises, thereby averaging the cost per unit of your investment. In fact, SIP eliminates the risk of timing the market and smoothens out the falls and peaks so that your investment can benefit from volatile markets.
The SIP amount should reflect your goals. Minimum investment amount to start a SIP may vary between Fund Houses.
You can start a SIP on any day of the month.
Start a SIP with a financial goal in mind like buying a car or higher education of your child. The time to fulfil your financial goal should be the tenure of your SIP.
It’s easy to start a SIP online following a few simple steps, start by visiting the website of the Fund House. Register a new account and select the fund you want to start a SIP in. Then, all you need to do is fulfil your KYC requirements online and create a debit mandate with your bank. You can also take the offline route by visiting any branch of the fund house.
You can change the date of debit and frequency, modify the SIP amount, and also pause or stop your SIP.
Where you invest depends on your risk profile, investment horizon, and expected returns. If you are risk averse, debt funds may be appropriate for you. If you can manage more risk and have a long-term investment horizon, equity funds may be appropriate for you.
Markets regularly move up and down. Every time the market falls, your SIP buys more units. In case of negative returns, the loss you see is only notional, i.e., it will be real if you decide to sell off your holdings. Hence, it is prudent for investors to continue with their investment plans. Benefits of a SIP are seen over the long term when you keep investing regularly over different market cycles. Continuing to invest when markets are down gives you a better chance to enhance returns when the market recovers.
Decide your financial goal and the amount of money you need to achieve it. Then use a SIP calculator to find out the amount you will need to invest regularly to meet your financial goal. It’s simple.
