There are two methods through which we as an investor can decide to invest in Mutual Fund schemes. But for that, we must also know ways that could help us to select the most suitable Mutual Fund Scheme for ourselves. So before actually investing, it would be better if you first check out how to select the best Mutual Funds? and then continue with this.
Let us understand the methods using an example. Suppose you have a capital of 2 Lakhs with you that you wish to invest in Mutual Funds. The first way that you can invest that capital is through a Systematic Investment Plan (SIP), where you can invest that 2 Lakhs in a small and fixed amount in the scheme you want to at regular intervals (say Rs 1000 per month). And the second method is where you invest the whole 2 Lakh at once, this method is termed as Lump sum investment method.
Here in this article we will be focusing on the first method that is Systematic Investment Plan (SIP).
What is SIP?
SIP is a method of investing in a Mutual Fund, where you can invest a fixed amount – as low as Rs. 500, at regular pre-decided intervals of time. The pre-decided SIP intervals can be weekly, monthly, quarterly, semi-annually or, yearly.
Before starting a SIP, you will be asked to complete your KYC (Know Your Customer) where you will have to fill in your details, and add the Bank account from where you want the investments to take place. When investing through SIP, the amount gets automatically deducted from your Bank account at the interval you selected.
For Example, suppose you want to invest in Axis Bluechip Fund through SIP of Rs. 500 monthly and select the date of investment as 10th. So, on the 10th of every month Rs. 500 will be automatically be deducted from your bank account and get invested in Axis Bluechip Fund.
Working of SIP
Now, we know that in SIP the amount will get deducted automatically at pre-decided regular and get invested in the specific Mutual Fund.
But what about the Units? How will the Units be decided?
Here, a term called Net Asset Value (NAV) comes into the picture. In simple words, NAV is nothing but the price that you have to pay for the units of the Mutual Fund Scheme. Or, you can understand it this way, that if you want to buy 1 unit of the scheme the amount that you will have to pay would be equal to the NAV of that specific Scheme.
NAV keeps on changing daily. When the NAV is high, fewer units are allocated. Similarly, when NAV is low, higher units are allocated.
For instance, let us assume that you invested Rs. 500 through SIP in a scheme on a monthly basis on the 10th. When you invested the NAV of the Fund was Rs. 20, so you were allotted 25 units of that Fund. Now on the next date of SIP i.e 10th of next month, if the NAV rises to Rs. 30 (i.e. Rs.10 profit per unit) then you will be allotted only 16.68 units. Similarly, if the NAV would have been Rs. 10 (i.e. Rs.10 loss per unit) on that day, you would have got 50 units of that Fund.
What are the benefits of investing through SIP ?
Can be started with a very low investment
In SIP, you do not have to invest a large amount of money. One can start a SIP with as low as Rs. 500. Now, if you start earning a good income or think that you should increase the amount of your SIP. You can increase or decrease the amount of SIP gradually as and when you want. But to start with it you do not need to have huge capital.
You don’t have to time the markets
What does timing the market mean? You must have seen investors talking that the market is at its peak, we should not be investing now, or that the market is at its lowest level so we should invest now. But when you invest through SIP, you don’t need to constantly keep track as to whether the market is at its peak or whether it’s at a low level. Because when the markets are high, so is the NAV of the Fund and we know by now that high NAV means fewer units. Similarly, when the markets are at their low, we would be allotted more units. Therefore with time, the cost of investment gets averaged out. This is known as Rupee-Cost Averaging.
We have the option to Stop the SIP
Suppose you have invested through SIP for a certain period, but now you don’t want to continue the payments but at the same time also want to stay invested in the scheme. Yes, that is possible.
You can stop your SIP payments. You just have to click on the option in your SIP that says “STOP SIP“. There are no fines/penalties on stopping the SIP. And you can still enjoy the returns on the units that you already have of the Fund, as long as you wish to stay invested. Though you won’t be able to buy any further units.
We can skip the SIP payments
Don’t have enough balance in your account for this month’s SIP? Not an issue. You can skip the SIP payment for this month and continue from next month. No charges or penalties would be charged for missing a payment.
One can also pause the SIP payment for a temporary period without having the account deactivated. Fund Houses provides the option to pause the SIP payment for a specific period.
Benefit of Compounding
Compounding is the process in which the interest or profit that you earn on an investment is reinvested with the principal amount. In other words, it occurs when the returns you earned on your investments also start earning returns. Still, confused? Let us understand with an example.
Suppose you start a monthly SIP of Rs. 5000, assuming at the rate of 12% (returns). The return earned by you at the end of 1 year will be Rs. 3351. By adding the return earned to the principal amount i.e. Rs. 60,000, your new principal amount will be Rs. 63,351. This process will continue, the value generated after 5 years will be 3.9 Lakhs and by the end of 10 years, it will be 10.3 Lakh. Do you see the magic of earning returns on returns i.e. Compounding? The longer you stay invested the faster your investments will grow.
When you invest through SIPs, the returns you earn will be reinvested with the principal amount. The sooner you start investing the more times your money has to grow. Thus, invest just a small amount today through SIP and it can generate huge value in the future. The longer the period of investment more will be the effect of Compounding.
Helps to become a Disciplined investor
We focus more on spending and less on saving and investing. SIP is a great way of investing in Mutual Funds for those people who find it hard to manage their finances and do not want to keep a track of the market and manually invest. As in SIPs, the amount gets automatically deducted from the bank account at pre-decided intervals, making it easier and stress-free activity and thus helping to bring discipline to your finances.
SIP v.s. Lumpsum Investment
|Fixed amount is invested at pre-decided intervals regularly||One time investment|
|Tracking the market is not required||One has to track the market and invest at the right time i.e when the markets are at their low.|
|Can be started with as low as Rs. 500.||A good amount is needed to invest through this method.|
|Provides the benefit of Rupee Cost Averaging||Does not provide the benefit of Rupee Cost Averaging|
|It provides you with protection from any market crash||Does not provide any kind of protection from market crash|
Systematic Investment Plan
It is a method of investing in a Mutual Fund where you can invest a fixed amount in any scheme of your choice at pre-decided regular intervals.
Step 1: First you will have to analyze the objective of your investment. For eg – buying a car, or marriage of your children, etc. Your risk profile and the time for which you want to invest.
Step 2: Then you will have to select the Mutual Fund that will match your objectives, risk profile, and time horizon
Step 3: Then you will have to decide between the two modes i.e. SIP or Lump-Sum investments.
Step 4: Finally before investing you will be asked to complete your KYC and to add the Bank account from which the investments will be made.
You can stop your SIP by clicking the option that says ‘STOP SIP’ from the mutual fund website you have invested in or ask your mutual fund distributor to stop the SIP. You won’t be charged any penalties and you can still enjoy the returns on the amount that you have invested till that point in time as long as you want.
Yes, you can increase or decrease the amount of SIP payments when you want to. Increasing the SIP payments with time gradually will increase the effect of Compounding.