SIPs or Systematic Investment Plans have become popular in India in the past few years. Many confuse SIP investments with schemes. However, a SIP is simply a financial tool that helps investors buy into the best mutual funds. It is a way of staggering the earnings from equity mutual funds. Investing through SIPs is one of the best ways of bringing financial discipline into your life.
These plans have now become one of the most trusted and popular investment options in India. Investing through SIPs allows you, the investor, to spend a small amount each month on your preferred mutual funds. Each month, a fixed amount is deducted from the bank account linked with your trading account.
What should your SIP goals be?
The main objective of investing with SIPs is ensuring that each portfolio has the desired risk factor tolerance. The higher the risk associated with the mutual fund, the better the return. It can thus diversify asset classes in your portfolio and maximize the return on investment.
Therefore, the goal is to ensure that the fund’s units purchased with a SIP diversify your portfolio and invest in different asset classes.
Popular types of SIP investments
- Top-up SIP
It helps you grow your investment periodically. This type is suitable for those who earn huge incomes. It is a kind of high-performing fund unit where investments are made at regular intervals.
- Flexible SIP
As evident by the name, this type of SIP offers flexibility when investing periodically. You can increase or decrease the investment based on your cash flow and what you can afford.
- Perpetual SIP
These are long-term investment schemes where the end date is usually one year, three years, or five years. However, there is no restriction on making withdrawals. You, as the investor, have the flexibility to withdraw the amount at any point in time.
Criteria every mutual fund scheme must meet
- The mutual fund’s total asset size must be significant.
- It must be at least five years old.
- It should preferably belong to an established mutual fund house
- Your investment in the mutual fund must work in combination with the bank.
How does the SIP scheme work?
When you invest in a mutual fund, you are buying a certain number of fund units. You do not need to consider the market timings when making a SIP investment. Therefore, you can invest in the market, whether it is in the bull or the bear phase.
When the market is down, i.e., in the bear phase, try to purchase more fund units. You can maximize more return on investment as time passes. The net value assets of all the mutual funds are updated daily. Therefore, the cost of the fund units also varies. It will also affect the monthly installment plan.
As time passes, the cost of purchases is averaged. This process is known as rupee cost averaging. It helps you profit from market volatility.
Benefits of investing through SIPs in mutual funds
SIPs allow you to invest in a planned and disciplined manner. You have the flexibility to choose the SIP amount as per the affordability. It could be as low as Rs. 100.
- Avail of the benefits of rupee cost averaging
When investing with SIPs, you do not need to look for the right time to invest in the market. However, buying the fund units when the market is low is recommended. It helps minimize the cost of the mutual fund investment.
- Enjoy the power of compounding
When you periodically invest with a SIP for a long duration, you get to see the power of compounding. It is because compound interest and the rupee cost averaging phenomenon help you earn a higher return on investment than a lump-sum investment.
- 2x higher returns
SIPs have the potential to let investors earn 2x higher returns. It is one of the best investment options rather than putting money in investment schemes like fixed deposit, PPF, or other traditional investment options.
SIPs are a disciplined way of investing in the market regardless of its trends. However, mutual funds are always subject to market conditions and volatility. So, even before investing with SIPs, ensure you are reading the documents thoroughly and have understood the terms and conditions of mutual fund investments.