Regularity and discipline – every investor is expected to conform to these two tenets. While the former enables wealth building, the later helps you make logical and informed decision without succumbing to greedy impulses. Did you know only 2% of Indians put their money in equities? So, majority are not used to making consistent investments in share markets. And this is exactly why we recommend SIP to kick-start your investment plans.
SIP is a term that keeps cropping up in this regard, especially when it comes to equity mutual funds. But many investors don’t really understand the concept of SIP. Let’s dig deeper into it.
SIP in detail
Every investment expert you come across will tell you that the best way to invest in mutual funds, especially equity funds, is through a Systematic Investment Plan or SIP. As the name suggests, SIP is nothing but investing smaller but regular amount in a mutual fund systematically (bi-weekly, monthly or quarterly), rather than a lumpsum in one go.
These days it is quite easy to access and shortlist funds that suit your requirements – third-party websites, banks and distributors among others are some relevant sources. If you’re a novice investor, it’s best you start with an SIP. A pre-agreed fixed sum is auto-debited from your savings on a fixed date (say, 1st of every month) and credited to the chosen mutual fund(s). As the entire process is automated, you can easily plan your monthly budget and other expenses around that. Do the homework and choose a plan based on your affordability, income slab and investment goals.
Criteria for choosing an SIP
An online search can easily get you everything you need to know about the mutual friends you shortlisted including their past returns. However, please make sure that the fund you pick meet the below criteria.
- A 500 Crore asset size can be a reasonable benchmark when selecting a fund. This doesn’t mean that funds below this Corpus are bad. It is just prudent to play safe as a relatively new investor.
- Vintage of the SIP mutual fund is another important factor. Keep 5 years’ reference point and check how the fund performed across markets.
- Reputation of the SIP fund house depends on how well they maneuvered through market highs without burning the investors.
Benefits of SIPs
|Monetary Benefits||Psychological Benefits|
|Compound interest ensures better long-term benefits compared to lumpsum investment||Builds the habit of investing/saving regularly in you|
|Allows investment at different market levels and benefit from rupee cost averaging||The automated payment means it is not something you have to remember every month|
|SIP can be started as small as Rs 500 and you can still invest without having to stretch your budget||It doesn’t need constant monitoring or research from your side – fund managers take care of it all|
|Flexibility – Due to frequent market fluctuations, you can buy more fund units when the markets are low and less when the markets are high for the same price.||Having an emergency fund for possible contingencies (like medical crisis or job loss) puts your mind at ease|
Best Time to Invest In SIP
There is no specific date that can be said to be the best date for an SIP. However, the beginning of the month would be a good time for SIPs as you would receive your salary at that time and would have enough money to invest.
Why is SIP a powerful investment tool
A brief glance at the most reputed and the largest funds in India shows that they have steadily outstripped the market over a long period. For instance, the SBI Blue Chip Growth Fund (one of the most sought-after in the country), has crossed 1000 Crore Corpus.
Say, you keep aside Rs. 5000 for SIP every month starting from Jan 2009. Every month, this amount accrues compound interest. If you were to withdraw this in Dec 2017, you would have had auto-debited Rs 5000 108 times – you invested Rs. 5.4 lakhs in 9 years. Now let us look at the possible annualized returns at 17%. With the power of compounding, the overall investment worth would be Rs. 11.38 lacs. See how regular and systematic investment more than doubled the invested money!
Differentiating an SIP and a regular mutual fund
|Periodic investments in a tenure||One-time investment in a tenure (lump sum)|
|Earns better during market lows||Earns better during market highs|
|SIPs can protect investments from potential market crash||Lumpsum investments lead to major loss during market crash, which happens often enough|
Even during phases of market volatility, you can continue to invest in SIPs and buy fund units at various levels. Buy less number of units during market high and get more units when the markets are low (for the same price). This is how the benefit of rupee averaging works.
Lumpsum Investment Vs SIP with an example
Lumpsum: If you had ₹2.3 lakhs to invest in Aug 2015. You invested the entire amount in lumpsum on 20 August 2015 in a diversified multi-cap fund (like HDFC Equity). Then, the markets crashed by over 1600 points on 24 August 2015, which you never anticipated.
So, how would your lump sum investment of ₹2.3 lakhs have fared? Immediately after a month, your investment would be down by more than -6%. If you had been brave enough to continue holding your investment, it would have grown to around ₹2.7 lakh by 21 June 2017. But most investors would have run away after seeing a major loss. Very few would have stayed invested.
SIP: You decided to start an SIP of ₹10,000 in the same fund for the same amount. Then, till 21 June 2017, you would have invested ₹2,30,000 and your investments would have grown to over ₹2.8 lakh. A return of more than 20% per annum!
This is the real benefit of investing through SIPs. We never know when the markets will crash. Hence, it is best to spread our investments over a period, instead of taking the risk of catching a peak through a lump sum investment.
How to invest in an SIP with ClearTax
Set Investment Goals – Mutual fund is no journey without destiny. Every fund has a specific goal and purpose and you need to choose one that suits your requirements. Or let us know your financial goals and income details and we will handpick the plans for you.
Choose – Make an informed decision based on your individual needs and choose an SIP mutual fund you want to invest in. You can also delegate this task to the ClearTax team if you find this cumbersome.
KYC – All our mutual fund investments mandate KYC documentation and a netbanking account and we offer the e-KYC option to upload all the documents online from the comfort off your home or office. There is usually no need to sign cheques and fill out forms. Our commitment to the environment rival our commitment to you.