What is a SIP Investment?
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Systematic Investment Plans (SIP) have grown tremendously in popularity over the past few years. It is estimated that nearly Rs. 60,000 Crores of savings have been deployed into Mutual Funds in 2017-18 using SIP’s. With SIP’s, investors can automatically invest a fixed sum of money in a mutual fund at pre-specified intervals of time – for instance, once a month, week, or fortnight by issuing a one-time instruction for the same. Just like a Recurring Deposit (RDs) for mutual funds, SIPs help you invest regularly and with discipline; they also take away the hassle of having to manually invest money every month.
To start an SIP, you need to provide a NACH mandate or an X SIP mandate to the fund house, which would authorize them to debit your bank account for a fixed some of money at periodic intervals and invest it into a scheme specified by you. Here are some key features of SIP Investments that you should know about.
With SIP’s, You Don’t Need to Start Big
With a Mutual Fund SIP, you don’t need to start with a large investment. Most funds allow monthly investments that are as low as Rs. 500/ month. In fact, it is advisable to start with whatever amount is comfortable, and more importantly – sustainable in an unbroken manner over the long term.
SIP’s Enforce Discipline
By acting like a ‘good EMI’, SIP’s enforce discipline. Left to our own devices, most investors would likely not save money every month, as spending would take precedence. With SIP’s, on the other hand, investors are likely to be a lot more committed as the investment happens automatically. This results in a much higher degree of investment discipline.
SIP’s are Flexible
SIP’s are extremely flexible in nature (it’s a subject of some debate on whether this is actually a plus point or not!). Investors can freely stop or start their SIP’s without the fear of penalties or lapsation and can even reduce or increase their SIP amounts. There are no surrender charges applicable on redeeming your SIP investment either.
With SIP’s There’s no Need to Time the Market
SIP’s take away the headache of having to ‘time’ the market. Since investments of a fixed sum of money are made at regular intervals, there’s a much smaller chance of concentrating the bulk of your investments at or near a market peak – something that can potentially result in a serious erosion in your portfolio value.
Not Meant to Earn You Blockbuster Returns
SIP returns from a given fund tend to be a lot smoother than similar period returns earned by making lump sum investments in the same fund. In fact, the purpose of SIP investing is not to earn blockbuster returns, but rather to help your regular savings beat inflation in the long run, in a tax efficient manner. SIP’s are not speculative in nature, and are really not dependent upon secular bullishness to deliver growth. Mutual Fund SIP’s can even deliver good returns in flat, range bound markets. The key is to let them continue uninterrupted.
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