SYSTEMATIC INVESTMENT PLAN: SIP
What exactly is a SIP?
A classic proverb goes, “drop by drop, the bucket fills up.” A SIP works on the same principle as a SIP. It allows you to invest a fixed sum, as little as Rs 500, in a mutual fund on a regular basis. Indeed, you may choose how frequently you wish to invest — weekly, monthly, quarterly, or even annually. And, over time, you will be able to accumulate a substantial quantity of wealth.
Let’s take a look at an example that involves taking out a loan. We apply for a loan when we want to buy a house/car, fund a wedding, or do something as simple as going on vacation. This is primarily due to our inability to set aside a large sum of money to make these purchases/payments. However, if we take out a loan to make these purchases, we can easily repay it through a monthly EMI, which is a manageable amount. However, in addition to the principal, we must also pay interest on the loan. As a result, the key difference between a loan and a SIP is that with a loan, you must pay interest; while, with a SIP, you can get a high return while saving a huge sum.
How SYSTEMATIC INVESTMENT PLAN Works?
Investors can choose from several investing options, including systematic investment plan, through mutual funds and other investment companies. SIPs allow investors to invest little amounts of money over time rather than making huge lump sum investments all at once. The majority of SIPs demand regular payments into the plans, whether weekly, monthly, or quarterly.
The concept of systematic investment is straightforward. It is based on the acquisition of shares or units of securities of a fund or other investment on a regular and periodic basis. Dollar-cost averaging entails purchasing the same fixed dollar amount of a security at each periodic interval, regardless of its price. As a result, shares are purchased at a variety of prices and in variable quantities—though certain plans may allow you to specify a specific number of shares to purchase. Because the amount invested is often set and unaffected by unit or share prices, an investor purchases fewer shares as unit prices rise and more shares as prices fall.
SIPs are considered passive investments since you continue to invest in them regardless of how well they perform. That’s why it’s crucial to keep track of how much money you’re accumulating in your SIP. You may want to reevaluate your financial objectives if you’ve reached a particular amount or are approaching retirement. Moving to an actively managed strategy or investment could help you increase your money even faster. However, speaking with a financial counselor or specialist to decide the best situation for you is always a smart idea.
DCA proponents say that this technique lowers the average cost per share of the security over time. Of course, if you have a stock that grows gradually and rapidly in price, the method can backfire. That means that investing over time will cost you more than buying everything at once. In general, DCA lowers the cost of an investment. The risk of putting a substantial sum of money into security decreases as well.
Systematic investing plans eliminate the investor’s possibility for making incorrect judgments based on emotional reactions to market changes because most DCA techniques are set up on an automatic purchasing schedule. When stock prices rise and news outlets announce new market highs, for example, investors tend to buy more hazardous assets.
When stock prices fall sharply for an extended period, on the other hand, many investors rush to sell their holdings. Buying high and selling low, especially for long-term investors, is in direct opposition to dollar-cost averaging and other smart investment techniques.
SIPs and DRIPs are two different types of investments.
Many investors, in addition to SIPs, use the earnings from their holdings to buy more of the same security through a dividend reinvestment plan (DRIP). Stockholders who reinvest dividends can buy shares or fractions of shares in publicly listed corporations they already own. Instead of delivering a quarterly dividend cheque to the investor, the company, transfer agent, or brokerage firm utilizes the funds to buy more stock in the investor’s name. Dividend reinvestment plans are also automatic—the investor specifies how dividends should be handled when they open an account or purchase stock—and they allow shareholders to invest varying sums in a firm over time.
DRIPs run by a company are commission-free. This is because there is no requirement for a broker to facilitate the transaction. Optional cash purchases of additional shares directly from the corporation at a 1% to 10% discount with no fees are available through some DRIPs. Due to the flexibility of DRIPs, investors can invest little or big sums of money, depending on their financial circumstances.
How does SIP investing help you build wealth?
It assigns you several units in exchange for the money you contributed to mutual funds. Let’s say the NAV of a mutual fund is currently Rs 20. You will receive 50 units of the plan if you invest Rs 1,000 in that mutual fund. As the NAV of the mutual fund rises, so will the value of your assets. So, if the fund’s NAV rises to Rs 30 the next year, the 50 units you acquired for Rs 1000 will be worth Rs 1,500 after the increase. This is how your investment increases, assisting you in building wealth over time.
SIPs of Various Types
With simply a one-time mandate, SIPs allow investors to adopt a disciplined approach to investing. SIP allows investors to make monthly or quarterly installments. Investing in a systematic investment plan (SIP) will help investors achieve considerable long-term returns. The key, though, is to pick the correct kind of SIP. The various types of SIP investments accessible in India are as follows:
1. Regular SIP
The most basic sort of investment plan is a regular SIP. The investor invests a set amount at regular periods in this SIP. SIPs can be scheduled on a monthly, bi-monthly, quarterly, or half-yearly basis. SIPs are also available on a daily and weekly basis. These, on the other hand, are not highly recommended. Investors can specify the SIP length, installment amount, and frequency when choosing a SIP. In a standard SIP, the contribution amount cannot be changed during the investment period.
2. SIP top-up
Step-up SIP or top-up SIP Investors can increase their SIP amount regularly with a SIP. Many asset management firms can increase SIPs. Choosing a step-up SIP gives recurrent contributions more flexibility and allows investors to store larger amounts. To put it another way, when an investor’s income rises, they can increase their SIP contributions to save more money. Because of the force of compounding, they will be able to build their investment portfolio faster. As a result, it’s a good idea to pick SIP plans that allow you to top up your savings.
In addition, SIP plans can be increased in increments of INR 500. For example, suppose an investor invests INR 10,000 in a mutual fund plan and chooses a $1,000 step-up every year. From the 13th month onwards, the SIP amount will be INR 11,000 per month. Investors would be able to build their investment corpus faster if they top up their mutual fund investments regularly. It also aids in the reduction of inflationary impacts on the maturity corpus.
3. Flexible SIP
A flexible SIP, as the name implies, allows investors to change the amount of money they invest. Flexi SIP or Flex SIP are other names for it. Changes in the SIP amount or contributions can be communicated to the fund house. The notice must be given at least a week before the SIP installment is due to be deducted. Investors can change the amount of their SIP based on their financial circumstances or market conditions. There is a pre-determined formula for market situations that allows investors to invest more when the markets are falling and less when the markets are rising.
For example, if an investor is experiencing financial difficulties, they can notify the fund house and request that their SIP payments be halted until further notice. This allows investors to skip SIP installments without going into default. In the same way, if an investor has extra cash, they can increase their SIP amount for a set period. As a result, the fund house will be able to alter the SIP amounts according to the investor’s instructions.
4. Perpetual SIP
The investor must choose the duration of the SIP while filling out the SIP application form. The SIP becomes a perpetual SIP if no tenure is given. In other words, the SIP will run until the investor instructs the fund house or manager to stop investing. In addition, if an investor does not want their contributions to be limited by a maturity period, they can choose the perpetual SIP option in the application form. This allows the investor to stay invested for extended periods and study the market. They can also choose to redeem at any moment in the future.
5. Activate SIP
Only those investors who are well-versed in market dynamics and confident in its movements should use a trigger SIP. When it comes to this type of systematic investment strategy, knowing when to purchase and sell is crucial. Investors can choose their SIP start date, as well as redeem or switch their SIP whenever the specified event occurs. Any event can be used as a trigger. A favorable market occurrence, for example, or a fund’s index level or NAV, or capital appreciation or depreciation. It’s also worth noting that the triggering SIP is only recommended for experienced investors because it encourages speculating. To effectively set relevant triggers, you must have solid knowledge and experience.
6. Insurance-backed SIP
If an investor chooses long-term investments, a few asset management firms provide insurance coverage. The insurance coverage begins at 10 times the initial SIP amount and gradually grows over time. This functionality is also only accessible for equities mutual funds. It’s vital to remember that term insurance is an optional feature that has no bearing on the fund’s performance.
7. SIP Multiplier
A multi-SIP allows investors to invest in various fund house schemes using a single instrument. This aids in the diversification of an investor’s portfolio. In addition, it decreases the amount of paperwork. To begin their SIP plans, investors simply use a single form and payment instruction.
How should I invest in a Systematic Investment Plan?
Which of the seven forms of SIP do you think is the best? This is determined by the investor’s objectives, income, and knowledge. A regular SIP is ideal for all types of investors who have a steady source of income and desire to save for the future. Because the investment grows each year, a step-up SIP helps you attain your financial objective faster and accumulate a larger corpus. A perpetual SIP is a regular SIP that keeps going indefinitely. It can be either a standard or a step-up SIP.
Flexible SIP is appropriate for persons with a range of incomes, such as professionals and freelancers. Trigger SIP is only suitable for investors who are familiar with market dynamics. SIPs with insurance are a relatively new form of plan, and investors have few options on the market. Investors should only choose this type of plan if the fund’s performance is good and the fund house provides free life insurance. Multi SIP only works when all of a fund house’s mutual funds are performing well in their respective categories.
SIP stands for a systematic investment plan, and it allows investors to invest regularly. SIP requires the investor to invest the same amount every month or to increase the amount of SIP owing to market dynamics or more income. As a result, we’ll compare a conventional SIP to a step-up SIP to evaluate whether one provides superior returns over time.
How and what form of SIP should you choose?
Investors should choose a SIP that best fits their financial needs, knowledge, and objectives. A regular SIP allows investors to invest in a SIP regularly without having to pause or top up their investment. Every year, a step-up SIP will increase the amount invested in the SIP. Perpetual SIP is a SIP that lasts forever. All of these SIPs are available to investors with a regular income.
Investors with irregular income will benefit from a Flex SIP. Freelancers, professionals, and persons without a job should consider investing in this SIP because they can increase, decrease, pause, and resume it whenever they want.
An investor who understands the market and its movements is most suited for a Trigger SIP. A trigger SIP should not be chosen by an investor who does not understand investing or how the market operates. A Multi SIP allows investors to invest in a fund house’s many funds. However, not all of a fund house’s funds perform successfully. As a result, when choosing this form of systematic investment plan, investors must exercise prudence.
Which is Better: RD, FD, or SIP?
Although FD, RD, and SIP are similar in many ways, they have significant distinctions. They provide varied benefits, and the suitability of each instrument is determined by the needs of the investor.
For risk-averse investors, RD and FD are viable options. Depending on whether they wish to deposit money monthly or in one big payment, investors can pick from these options. Fixed and recurrent deposits both provide guaranteed returns. As a result, both of these instruments aid in the achievement of an individual’s short- and long-term objectives.
As a result, RDs may be a superior way to develop an emergency fund. This is because you have a regular amount in RD and a lump sum amount in FD, both of which might help you earn interest. Because both RD and FD returns are taxable, this investment is best for those with lower tax levels. These investments are especially appropriate for senior folks because they are less risky than equity investments and provide predictable returns.
SIPs, on the other hand, are for investors who are willing to take on more risk in exchange for a bigger possible return. SIPs are ideal for investors with long-term objectives and investment perspectives. As a result, it is a superior investment option for those looking for tax benefits through products like ELSS.
You can choose the best product from RD, FD, or SIP. It’s best to base your judgments on your requirements, risk tolerance, and investment horizons.
1. Rupee cost averaging: Your cost is averaged out when you invest in a SIP. The markets, as you can see, move in cycles. It can be bearish at times, then turn bullish, then bearish again, and so on. The cycle proceeds in this manner.
If you invest a specific sum regularly in a SIP, you will be allocated more units for your investments when the markets are negative. Meanwhile, as the markets rise, the number of units available for your investments will decrease dramatically. That is, when the markets are down, you purchase more units, and when they are at their top, you buy less. As a result, your costs will be averaged out.
Because your costs have been averaged out, when the market cycle changes, for example, from bearish to bullish, this becomes an opportunity to generate large returns. It will eventually assist you in generating significant wealth from your ventures. So, if you invest in a SIP, you don’t have to worry about the market’s ups and downs because the cost is automatically averaged out.
2. The power of compounding: Warren Buffet began investing at the age of 14, but it wasn’t until he was 50 that his money began to rise enormously. Compounding power is often referred to as the world’s eighth marvel. And you’re probably wondering what this power of compounding entails.
Compounding allows you to earn returns not only on the money you’ve invested but also on the gains you’ve made. And in this way, you can amass a significant amount of wealth over time.
Let’s say you put Rs 1 lakh in a mutual fund over a year. It has a one-year return of 15%. So this sum will be Rs 1 lakh 15 thousand by the end of the year. The force of compounding means that instead of your original investment of Rs 1 lakh, you would receive a return of Rs 15 thousand in the following year (assuming a rate of return of 15%). As a result, you will receive a return on both the money you invested and the gain from the previous year in the second year. The money would be Rs 1 lakh 32 thousand by the conclusion of the second year.
3. Disciplined investing: Investing through SIPs teaches you how to be more disciplined with your money. Expert investors frequently advise that you should structure your daily financial activity around the basic formula Earnings – Savings = Expenses.
Let’s say you make Rs X per month. If you can’t keep your spending under control within a set budget, you can find yourself with nothing to save at the end of the month.
However, if you invest in a SIP, you will be forced to stick to a strict investment schedule. You will develop the habit of staying inside your budget if you are conscious of your expenses. Within it, you will first save, then spend. You will never face financial hardship if you design your financial activities around this, i.e. save first, then spend, because you are following a disciplined investment approach. Maintaining consistency in your investment technique will assist you in achieving your financial goal or objectives.
How much should you put into a SIP?
The subject of how to invest in SIP in India is a huge one. However, knowing how much to put in a SIP is also crucial.
In the above-mentioned asset classes, you should invest at least 50% of your money inequities. It will provide you with a steady return over time. However, you must be patient to do so. It’s important to remember that capital market investments are always accompanied by some level of risk or volatility. And this may have an impact on your earnings. As a result, long-term equity investments are always preferable, as market inconsistencies are corrected over time. As a result, it is prudent to remain invested until the market levels off.
If you keep moving money out of your account and into new assets whenever the market falls, your expenses will only rise. This is because this technique is the polar opposite of what financial experts advise: “purchase your shares when they’re cheap and sell them when they’re expensive.” Furthermore, it will lower the overall return that your investment is predicted to generate. Exiting in the middle of a good market day will only cost you a lot of money since you’ll miss out on a lot of good market days where you could have made a lot of money. This implies that you should have a thorough understanding of how to invest in SIPs in India.
Because the stock market is so unpredictable, it’s only natural that your fund will profit and lose from time to time. However, the key to making your money grow is to stay invested for as long as possible. It is only achievable if you understand how to invest in SIPs in India.
Also, even if the market is underperforming, it is incorrect to withdraw your funds or terminate your SIP.
There’s more to it than that!
SIPs (Systematic Investment Plans) are beneficial throughout both up and down market cycles. It’s because, when it comes to funding selection, a well-balanced portfolio always assures that, at the end of your investing period, your return exceeds your initial investment. As a result, it’s critical to stick to your plan and never stray from your long-term savings objective.