SIP stands for Systematic Investment Plan. It is based on the idea of recurring deposits where an investor invests a specific sum of money at frequent intervals like monthly or quarterly.
In a way, SIP disregards the much-hyped idea of timing the market. SIP plans provide a systematic form of investment where an investor can organize or plan their investments to break into smaller payments rather than invest a huge lump-sum amount at one go.
It provides a more viable mode of investment and makes the idea of investments less intimidating to the average person with lesser buying power.
It enforces the importance of saving over years so that the investor can eventually reap the overall benefits of all the payments they have made towards the SIP.
In addition to making investment more accessible to the average earner in the economy, it also benefits wealthy investors by saving them from the disappointments of wrong investments or untimely investments.
SIP is not just for small investors, but for anyone who wants to inculcate disciplined investment and regular savings. Diligent investment in the SIPs can go a long way. Let us see how SIP plans work and how they are considered to be beneficial for investors.
What is SIP?
SIPs offer ease of investment to the investors who agree to pay a certain amount of money towards the SIP every month. This amount is automatically debited from their account and invested in a mutual fund scheme.
Depending on the NAV for the day, the amount you pay is allocated towards buying certain units of the mutual fund.
When money is paid the next month, another set of units for the mutual fund scheme is purchased and added to the current units. Since the mutual funds are purchased at different rates every time you pay the SIP, you benefit from the power of compounding and rupee-cost averaging.
Let us understand these two terms in a better way to gain a deeper insight into SIPs.
What Is Rupee Cost Averaging?
This term refers to the process of investing frequently without relying on the process of timing the market. This removes the need to guess the right time to invest and invest when the markets are low and sell the stocks when market prices are high.
Rupee-cost averaging is all about investing a certain amount of money without any relevance to the current market conditions.
By using this technique, investors can offset the chances of a risk, although they may not be able to avoid risks completely.
For example, you invest ₹500 every month in an SIP plan. You will be able to buy 20 units of a fund when the unit price is ₹ 25, but when the price falls to ₹20 in the next month, you will be able to add 25 units of the same fund to your account.
You would have paid an average cost of ₹22.5 for 45 units.
This benefits you from overpaying for the funds when the markets are high because you invest a fixed amount every month. So if the market prices are high then the total number of units bought that month will automatically be low. This is what rupee-cost averaging is.
Compounding is the term used for the method through which interest is calculated on SIPs which leads to a substantial amount of savings after a period of time. A person begins INR. 1000 a month at the age of 20. At the end of 30 years, when he turns 50, he will have accumulated a total sum of 35 lakhs compounded at 12% per annum. The word compounded here means that every year, interest was calculated for the total amount of money accumulated by the end of that year which includes the principle and the interest. Hence the compound amount of the principle and the interest grows at 12% per annum.
If the same person had started investing 5 years later, when he was 25, then by the time he turned 50 he would have a total sum of 16 lakhs compounded at the same rate of 12% per annum. The interesting part here is that the difference in the investment is 5 years’ worth of investment which comes to 60,000 but the amount gained at the end of the investment has a difference of a whopping 14 lakhs.
Since interest continues to get added to the principle, compounding usually generates better results over a long period of time. This also entails the fact the investments should begin at an early age. It helps the person save more over a certain number of years. Since most companies in India have a retirement age of around 60, you would want to be able to save up through SIP by this time through a good SIP scheme. The early you begin, the more you will be able to save by retirement.
Types of Investments in SIPs
Most SIPs are based on monthly investments. This is because most of the investors are salaried people who are paid once a month. Agents who sell SIPs aggressively pitch in the monthly SIPs because of the popularity of this type of investment in SIPs. A lot of us are comfortable with monthly payments as well so it is easier for agents to make conversions with monthly SIPs.
But there are other types of investment like Daily SIPs where you invest on a daily basis. In daily SIP, the investor invests a certain sum of money every day to buy the fund at the NAV for the day. While some micro-investors may find this promising, it lacks the ease of monthly investments which is why it is less popular.
Quarterly and bi-annual SIPs allow investors to contribute a specific amount of money every quarter or once every six months. If monthly investments are over-burdening your financial position then you may consider either of these for your SIP scheme.
Like the name suggests, Perpetual SIP plans do not require any renewal. They go on for as long as you want. This type of investment plan does not come with an end date. It means that you have the opportunity to withdraw the SIP amount whenever you want to. Many investors see this as a good opportunity to invest till the time they want instead of having to pay for a specified period of time according to the fund house. It gives more freedom to the investor in terms of choosing the period of time for which they want to make the investment.
If you like to time the market but you prefer SIPs because of the ability to make small investments on a regular basis then the Alert SIP may be able to interest you. The investor gets an alert when the market goes down so that they can invest when the market is low. People who have good knowledge about the market will be able to use this type of investment in SIPs to their advantage.
How to Invest in SIPs?
Investments are a lot more streamlined now than what they were before. This makes it easy for investors to complete most of the documentation online and even buy the SIP online.
Begin with completing the KYC procedure
KYC stands for Know Your Customer. It is an important step for investing in any type of mutual funds. Since SIPs invest in mutual funds, you must complete the KYC. It is a one-time exercise which will allow you to begin your investment plans. This is a mandatory process which cannot be missed. Read more about KYC here – What is KYC?
You will be required to submit your Pan card, identity proof and address proof. The procedure is completed when your documents are verified and your physical existence is verified through In-Person verification (IPV). If you submit your AADHAR card for the identity proof then you will not have to complete the IPV. If you do not submit your PAN card then your investments will be limited to INR. 50,000 for a financial year. To make sure that you do not face problems in future when you increase your investment amount, it is best to submit your PAN card during the KYC process. You will have the opportunity to submit it anytime at a later date as well.
Provide bank details
Keep your bank details ready and make sure you have your mobile phone with you because you will be required to enter your bank details at the time of the registration and you must verify your account through the OTP sent to the mobile number you register.
Once the account is created, you are ready to invest.
Select your Portfolio and invest
Select a portfolio from many portfolios available on Groww. Or you can request our financial experts to create a portfolio for your needs.
If you want you can create a portfolio yourself according to the risks that you can take. Go through different mutual funds options which will show you the returns. You must consider your asset allocation requirements and choose funds that suit your needs. Diversify your investment through a mutual fund which offers good returns and meets your appetite for risk.
Start the SIP
Once you have picked the portfolio, just click on “Invest”. Rest of the process is self-explanatory. For more details, you can check out this post – How to do paperless SIP on Groww
SIP has gained momentum in the investment market when people realized that it carries lower risk. However, it must be noted that lower risk does not mean that risks are completely eliminated when you invest through SIP. It does have its benefits of averaging the cost of purchasing the funds and it can be helpful for small investors, but it must not be considered as risk-free investments.