What is SIP?
A Systematic Investment Plan, also called by its acronym 'SIP' is a mode of investment that allows investors to periodically invest a small amount towards their preferred mutual fund scheme. It is preferable for investors to use SIP as it helps in mitigating short-term risks. Investing using SIP allows investors to efficiently operate in both bullish and bearish market conditions, and can promote disciplined financial habits.
In this article, we'll look to cover commonly asked queries like “How to open a SIP account?”, “How to invest in SIP online?”, “How much should I invest in SIP?”, etc so that you can get started on your SIP journey. The earlier you begin, the more you can enjoy the benefits of compounding over your lifetime.
1) Setting SIP goals
2) Step-by-step guide to starting SIP
3) How to invest online
4) How much to invest
5) How does SIP work
How does SIP Work?
Under the SIP method, individuals can choose a mutual fund scheme according to their financial requirements and needs, and regularly invest a fixed amount in them. You can invest weekly, monthly, quarterly, semi-annually, or annually, as per your comfort.
Let’s understand how a SIP works with the help of an example: Say you have a monthly salary of ₹50,000 per month and you have decided to set aside 10% for your monthly SIP mutual fund investment.
You first started investing ₹5,000 per month in a fund in January 2000. As per the SIP scheme, ₹5,000 will be automatically invested in this fund every month, which accumulates over the years and forms a sizable corpus. Therefore, from January 2000 to June 2021, you would have made 258 (21 years * 12 months + 6 months) investments of ₹5,000 each, which would make the total capital invested worth ₹12,90,000 (258 months * ₹5,000 per month). Assuming an average return of 10% per year compounded with an expected inflation rate of 6%, your corpus over this duration would be worth ₹20,39,700. Note that you can easily find mutual funds and investments that can provide returns over 10% per year, and you can increase your monthly investments as and when comfortable.
How to set SIP goals?
The most important SIP goal is to ensure your portfolio gets diversified across various industries and asset classes as per your risk tolerance. Diversification is essential to be able to earn the maximum returns possible while protecting your risks. Noting this, you must look to select a mutual fund house meeting the following criteria
- Significant corpus, preferably at least ₹500 crores.
- A longer period of existence to judge track record over a higher time frame. A decent period like 5 years is preferable, but the longer it has existed, the better.
- Higher mutual fund ranking wise
- SIP investments are in conjunction with your bank. If this is not the case, contact the relationship manager of your bank to set you up.
Step-by-Step Guide to Invest in SIP
Step 1 – Assess your risk appetite
The younger you are, the higher risk you can take. The higher risk you take enables you to earn higher returns. Read more on risk appetite & risk tolerance over here.
Step 2 – Recognise your investment objective
Individuals who may opt for a retirement plan may opt for an investment portfolio that has the lion’s share of debt instruments and less of equities. If you are following SIP for any other objective, like education or vacation, your portfolio may look different.
Step 3 – Select a profitable and diversified mutual fund
You’ll have to choose the mutual fund house that is ideal for you considering your risk appetite, financial goal/ investment objective, and the long-term performance of the funds.
Step 4 – Set a convenient time horizon
Step 5 – Religiously continue the process for a long time frame
How to Start SIP Online?
1) Keep the Necessary Documents Ready:
Before starting your SIP, you will need a set of essential documents, such as PAN card, Aadhar Card (for address and identity proof), canceled cheque, and a passport size Photograph. Note that although your Aadhar Number is not necessary, it will simplify the process by the long way
2) Get your KYC done:
As part of the know-your-customer (KYC) process, you will be required to provide certain details such as your Name, Date of Birth, Address, and Mobile Number to be able to invest in mutual funds via SIP. This is just the one-time thing you need to do to be eligible to invest in multiple funds. Log onto the website of the mutual fund house that you have chosen to invest in and provide the required documents needing these details.
Finally, a Systematic Investment Plan makes it easy to have a long-term strategy for investors to invest for a plan by investing small portions in regular intervals. It is easy to get started on using SIP online and investing as per the risk profile and objective of every individual.
SIP Investment - Frequently Asked Questions (FAQs)
1. Why is your investment generating negative returns despite being in a SIP?
A SIP does not protect you against losses, just that your investments in equity funds are spread out over a comfortable time period so as to avoid catching a market peak. Lumpsum investments can be much more difficult to handle when facing losses.
2. When is the right time to start investing using SIP?
Due to the nature of SIPs, any time is a good time to start investing systematically!
3. Isn’t it better to start SIP when the market is at a low?
Theoretically yes, but it is difficult to predict when exactly the market will be low or high. Waiting for the market to reach a low level before you start investing using SIP can take away precious time in the market. And as the best investors always say, time in the market is more important than timing the market.
4. Will SIP do better if I choose to split it into weekly installments instead of monthly installments?
There will not be a massive difference whether you invest smaller amounts weekly or relatively larger amounts monthly over the longer time frame. The point of SIP is to ensure you are not overburdened into making an investment lumpsum.
5. Can I stop SIP?
If you have achieved the monetary amount required to fulfill your financial objective, there is no reason for you to stop the SIP for that particular reason. However, it is recommended to keep it going unless it is not a concern for you anymore.
6. How is SIP redeemed?
If you redeem part of your mutual fund investment, the earliest investments tend to be redeemed first and the later SIPs redeemed later. If you made 12 monthly SIP installments during a year and would like to redeem a part of that investment, the first, second, third, etc investments are redeemed initially, followed by the latter ones.
7. What kind of capital gains tax do you have to pay on SIP?
To qualify for long-term capital gains, each SIP in your corpus must complete a minimum period of one year. For equities in particular, long-term gains over ₹1 lakh are taxed at 10 percent and short-term gains at 15 percent.