How to invest in SIP, its importance, best benefits, steps for perfect choice of plan, rupee cost averaging, power of compounding, disciplined investment, initial requirements, merits and demerits
‘Savings for the future’ became essential to every person. One can save money in many forms like FD, Mutual funds, etc. One of the smartest money saver plans is SIP. Planning to save a bulk amount needs some investment. Large investments are not possible to all.
At the same time, investing little amount at intervals is somewhat tension free and easy to save money.
SIP is the short form of Systematic Investment Plan. It is not a mutual fund but a good mode of money investment in mutual funds. It is a kind of Rupee cost averaging.
One can invest a small or minimum amount at regular intervals—monthly, quarterly, or half yearly. It is a well-planned and systematic platform for saving money with mutual funds. Percentage of SIP investment is increasing in the recent days.
How SIP Works?
SIP is a kind of Rupee cost averaging. Here the money will be invested periodically at correct intervals. There are three steps to invest in SIP. They are,
Determine the Amount to be Invested
One has to determine the amount to be invested. The amount is same for every term and is invested in a particular mutual fund scheme. The investment amount will be deducted automatically from the bank account periodically or through cheque leaves.
choose a scheme
After determining the amount, search for a suitable scheme to invest.
Determine the Frequency of Investment
After selecting a correct and suitable scheme, determine the period of interval you are going to invest, whether monthly or quarterly and start investing.
Process of the Investment
Based on the market rate prevailing at the time of investment, some number of units will be allotted with your money. When the market is down, one can get more units and when the market is up, one can get minimum units. Based on this, whenever the money is being invested, the extra units are purchased and joined with the account. Thus accounts for lump sum after a particular long term period.
Benefits of SIP
- Market risks are lowered when investing in schemes of SIP.
- Small amount of investments for a long term helps to get more returns in future.
For example, one can invest a minimum of Rs.500.
- One can choose their convenient investment interval that is of monthly, quarterly, half yearly, annually.
- We cannot change the scheme and the payment amount in the midst.
Demerits of SIP
- The investor should be aware of his income level and should plan how much he can invest. Because he cannot stop the payment as the money will be automatically deducted from the person’s bank account.
- We cannot change the scheme and the payment amount in the middle.
Rupee Cost Averaging
Usually, a person will invest more money and buy more shares only when the market is going high and retard the investment when the market is down. We don’t know the correct time to invest in market to yield better results. Rupee cost averaging is nothing but it averages the fund depending on the market flow that maximizes the unit of investment when the market went low and minimizes when the market went up.
Rupee cost averaging helps in this as the investment is done at regular intervals and at fixed amount. It lowers the risk of investment and one can earn more money.
Power of Compounding
We know the concept of compound interest. The interest gained for a particular period from the principal is added to it. And that interest added with the principal amount is taken wholly for next interest calculation. Thus, the principal amount increases in its sum and so on. So the principal amount will rise periodically. This is what happens in the compounding.
The concept of compounding defines that from the initial investment, some amount is gained as earning. This earning is added to the initial investment and invested again wholly and the process continues.
When comparing this compounding with other modes of investment strategies, the earnings ratio will differ much. Comparing RD with SIP, benefits of SIP means a lot to an investor.
Consider a person investing Rs.1000 at 10% interest annually. He will get Rs.1100 at the end of the year. The extra Rs.100 is an earning. And at the end of the second year, the person will get Rs.1210. Initial investment is Rs.1000 and the interest rate is Rs.200 and the extra Rs.10 is the compounded interest. Likewise one can earn more with this compounding process. And the power of compounding depends on how often we invest, whether monthly or quarterly or annually.
Investment meant many things such as how we invest, where we invest, etc. An investor practicing investments by himself is different from a professional investor. The latter one is doing it strategically in a disciplined approach.
Investing money in proper way yields high profits. Those who follow discipline in market matters will adapt themselves to the market change.
There are many strategies in this approach. They are,
Investing in Long Term Funds
To yield maximum profit, one should invest in long term funds. The earnings duly depends the tenure of investment.
Choosing Less Cost Investments
One of the business standards is choosing low cost investment.
Having Market Knowledge
Having clear knowledge about the market is important. When and where to invest and what not to do during investments should be clear. The market will not remain in a same state all the time. It keeps on changing every minute. And one should not go for new investments suddenly. So, clarity on market terms is important. Otherwise, it will cause bad effects.
Not Changing the Methodology of Investment
One should not change the methodology of investment as the market changes. The investment should be maintained for a long term. If you are planning to invest quarterly, then it should be maintained till the end.
These are some of the ways to do disciplined investment.
Low Initial Requirement
One can invest in SIP with the minimum of Rs.500 and can invest the maximum of his income possible for him.
If a person invests Rs.2000 per month for a period of 30 years, he can get a maximum of 75 lakhs approximately.
The amount invest by a person depends on his income budget.
Calculation of SIP
SIP calculation requires the regular date of investments, investment amount and maturity cost.
One can find many online tools for this calculation and for the manual calculation, one can use the XIRR.
How to Invest in SIP?
There are many fund managing companies. Many banks process the SIP by different schemes.
First, find a good fund company with better record in fund management and start investing with the minimum period of 5 years.
There are some of the best fund managing companies with good records. Some of them are SBI blue chip fund, Birla SL front line equity fund, HDFC midcap opportunities fund, etc. The SBI blue chip fund and the Birla equity fund are long term growth funds.
How Does One Select Schemes in SIP?
There are many factors prevailing in the selection of correct scheme in SIP. Considering these factors helps in maximizing the investment.
Factors on Selecting Schemes in SIP
All the mutual funds are different from each other. Every mutual fund scheme has its own terms and norms. Before investing in mutual funds, one should go through its norms.
Understanding the Feature of a Fund
As every fund is different, one should find the correct scheme by understanding the feature. Let’s see some factors on selecting schemes in SIP.
The Investor should not select a scheme based on the ratings given to it. As each investor is different, selection of schemes based on their ratings is not advisable.
Witnessing Previous Activity of the Fund
Investments should not be made according to the previous activity of the fund. The witnessed performance of the fund is not going to continue all the time. It will vary depending on the market trend.
Comparison between funds has been effectively helpful in choosing right and suitable fund for a person. Always one should compare same sized funds rather than comparing high investment fund with low investment fund.
Knowing the Risk of Investment
We know that all the investments are subjected to the market risk. Before investing in a fund, one should have the clarity about the level of risk.
Some funds have more shares in a particular sector. Those funds are somewhat risky. There will be a maximum raise of fund when the market is peaking up. But when there is a downfall, the maximum share of a particular sector will drastically lessen the output.
Overall Return of the Fund
The amount, a particular fund returns is also an important factor about investment. Some funds yield high returns and some yield low returns.
SIP is beneficial for those who wants to secure their future after retirement and basic home conditions like studies and marriage of children. Start investing early for the betterment of life using SIP.
Tohidul sekh - Nov 29, 2017
Hello Sir, I am tohidul sekh and i do want to invest on SIP, so which one will be the best.
SANKAR PRASAD JOISHY - Oct 4, 2017
Hello Sir, I am an BSc. 3rd year student and i do want to invest on SIP , so which one will be the best. Thanking you!
Rakesh Kumar - Oct 2, 2017
I have invest in SBI mutual fund and start a SIP. I have a SBI account in SBI nadaun branch distt Hamirpur (H.P) So send me information how start a SIP and get benefit.