How to invest through SIP (Systematic Investment Plan)

How to invest through SIP (Systematic Investment Plan)

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SIP or Systematic Investment Plan is a type of investment scheme offered by mutual fund companies. SIPs allow one to invest a small amount of money periodically (quarterly, monthly, weekly) into a selected mutual fund.

If you invest a lump sum in equities, it will not be much beneficial for you as a large portion of your income will be locked in those assets. Those funds may perform well initially, but a fluctuating market can never guarantee anything. Say, for example, the particular fund that you have invested in starts underperforming continuously for two to three years. If you had invested a major part of your savings in it, your returns will invariably be zeroed down. It may even become negative as well. If you have financial liabilities like personal loans or home loans etc to repay, that may not be very likable since a high inflation period like this may hamper your financial position.

It is possible to avert such situations with Systematic Investment Plan (SIP) as it allows you to monitor your fund’s performance from time to time. SIP is beneficial as it will allow you to invest in a fund in periodic instalments. After that, you get to decide your level of savings if you have already set aside a significant amount of money for your insurance premiums and future emergencies.  Careful fund allocation is an important step in SIP investment. Always be choosy in the selection of funds and make sure that you do not have an excess number of equity mutual funds. Instead of investing in too many funds, it is advisable to invest only in three to four funds that have been consistently performing well over the past years.  In the beginning, it is important to build a well-diversified as well as a balanced portfolio. This will ensure a good start for your investment. Investing in a combination of large-cap-oriented, small- and mid-cap funds, multi-cap funds can be a good call.

You should invest at least 50% of your money into equities in the above-mentioned asset classes. It will assure you a robust return over a period of time. However, for that, you are required to be patient. You should keep in mind that capital market investments are always associated with some amount of risk or volatility. And, this may affect your returns. That is why long-term equity investments are always better, as market irregularities get corrected over a period of time. Therefore, it is advisable to stay invested till the market evens out. If you keep moving out of your funds you enter into new assets whenever there is a dip in the market, it will only increase your expenses. That is because this practice is the exact opposite of what is advised by financial experts- “buy your shares when the prices are low and sell them when the prices are high”. Moreover, it will also reduce the overall return that your fund is expected to earn. Exiting midway will only make you miss out on many good market days that could have fetched you quite a high return.

As the capital market is mostly volatile, it is quite natural that your fund will experience both profit and loss from time to time. But the trick is to stay invested as long as possible to make your money grow.  It is wrong to exit your funds or stop the SIP even when the market is under-performing. Systematic Investment Plans (SIPs) help in both market cycles- during profits and during losses. It is mainly because, when you consider your fund selection, a balanced portfolio always ensures that, at the end of your investment period, your return turns out to be more than the amount you invested. Therefore, it is important to stay put and never deviate from your goal of long-term savings for future.

The goal of SIP investments is to ensure that your portfolio gets the required risk profile as accepted by you along with a good diversification across asset classes. The diversification is crucial if you really want to earn the maximum return from your investments.  Diversification of assets become easier with SIP as it is a simple as well as a flexible investment plan. Generally, the money is auto-debited from your bank account and gets invested into the specific mutual fund scheme that you had already purchased. This allocates your with a certain number of units depending on the market value of your funds (Net Asset Value or NAV) for the day.

Here, let’s give you a detailed and step by step guide on how to invest through SIP.
Step 1- Understand Your Risk Appetite and the Objective of Investment

 You should first understand your risk tolerance before investing. In most cases, higher the age and financial obligations lower the risk tolerance. However, if you want a higher return on investment, you will have to increase your risk appetite. After you have assessed your risk tolerance, it is now important to understand why you want to invest. Investments help us meet our financial goals. You can have multiple goals like your kid’s higher education and marriage, buying a new car, vacation, retirement etc. or you can have a particular goal for which you want to grow your wealth. So, it is imperative to know the objective for investment as it will help you get the right portfolio mix of equities and debts.
Step 2- Choose A Mutual Fund For Your Investment

 You can choose from various mutual fund schemes available in the market. However, the selection of funds should be based on your risk profile as well as your personal financial goals that you want to achieve through SIP investments. The fund’s performance in the past few years should also be taken into account while choosing the funds. Once you have chosen the mutual fund company, you will have to go through the following steps:

  1. Fill up the application form.
  2. Submit a cheque of monthly SIP amount (for offline mode) or fill up ECS form (for online mode).
  3. Provide a cancelled cheque
  4. Provide your Residential proof
  5. KYC form

Step 3- Select the Date of SIP

 As under SIP, your money gets auto-debited from your bank account, it is necessary to choose a particular date when it is convenient for you to pay. However, you can choose multiple dates for SIP instalment per month. Most Mutual fund companies offer the following dates for the investors to choose from- 1, 5, 10, 15, 20, and 28.
Step 4- Decide on the Duration of SIP

 Investment in mutual fund through SIP is the best and the most convenient way to fulfil your financial goals. One can calculate the SIP amount required for meeting your future financial goals.
Step 4- Decide Whether You Want To Invest Offline or Online

 Both offline and online modes are available under SIP. However, the best part of SIP is that it allows auto-debit of money into your funds. So, there is no need for manual money transfer to your SIP account.
Step 5- Stay Invested till the End of your Investment Period

 SIPs are the best way to create wealth through long-term investments. You don’t need to check daily prices of Mutual funds and should not try to time the market every day. So, stay free of worries till the end of your investment period.

There are a number of benefits of investing through SIP. So, if you are thinking of starting a long-term financial planning in order to fulfil your future financial goals, SIP investment is the best way to start with.

You may also like to read: What is the current interest rate on SIP