1. SIP – Definition
An SIP lets you keep aside a certain sum recurrently in a mutual fund scheme (like ELSS). Did you know that less than 2% people invest in equity funds? One reason could be unawareness. It could also be due to the misconception that mutual fund investments are pricey. And that is exactly why putting money in a Systematic Investment Plan is a perfect way to maximize returns and build wealth.
If you are a beginner in investing, it is better to put your money in SIPs – be it monthly, quarterly or semi-annually. It will also prevent you from catching the market high and getting burned. A pre-agreed sum you can comfortably shell out per month can inculcate good savings habit as well as grow your wealth for your financial future. You can set it to be auto-deducted at the beginning of every month if you are a salaried person. Investing in Cleartax Invest SIP will serve your purpose as you will be presented with handpicked funds from top Indian fund houses.
2. How to customize SIP
Yes, you can customize your SIP. In fact, you can start with an amount as small as Rs. 500 (Rs. 6000 per year). No wonder they say that investing costs just as much as buying a pizza! Did you know you can even start a fortnightly, weekly or even daily SIPs? This is how customization works and you can use this to your advantage.
Many AMCs allow this to make it easier and convenient for their customers. Aside from this, there are also step-up SIPs that let you hike your SIP. For instance, if you invest Rs. 5000 per month, you can increase the amount by 10% or 20% in the following year. This combined with the power of compounding will accrue your savings at a faster pace. In the recent years, SIPs have been generating 15% to 18% returns. People often rely on these systematic investments to fulfill various financial goals.
3. Benefits of SIP
- Saving an amount habitually imparts staunch financial discipline. You will get into the habit of investing regularly and it will be easier to fight the temptation to spend all your salary.
- You do not have to constantly keep an eye on the market rise and falls. Investing lumpsum require you to assess the market movements and it can cause you to delay your investment decisions.
- If you set the amount to be auto-debited on your salary date, it will be easier for you to plan your monthly budget. You do not need to put any additional effort.
It averages out the expense ratio (mutual fund costs), which translates to more returns.
- This is because when you invest habitually over a term regardless of the market mood, you can own more units when the market is down.
- As mentioned above, power of compounding works here more. Starting small can be advantageous because it creates wealth faster and steadily.
- Small SIPs offer you more flexibility. As you go up the career ladder, you can even increase the monthly SIP amount accordingly.
- Investing in ELSS through SIP is non-taxable upto Rs. 1.5 lakhs per financial year as per Section 80C of the Indian Income Tax Act.
It is less stressful to invest small but manageable sum.
4. Disadvantages of SIP
- SIPs can miss the market highs: While averaging costs and investments, it also averages returns.
- Dilutes outcome: Now diversification and periodical payments can save you from heavy losses. But it will also prevent you from making high returns.
5. Points to remember before investing in SIP
Going for large-cap mutual fund (keep a reference point like Rs. 200 Cr or so) is a good idea if you are new to investing. It is because risk is relatively low. However, this doesn’t mean that funds with lesser assets are not good.
Don’t forget to consider the vintage of the mutual fund and AMC. Say, it should have been in operation for at least 5 to 10 years. The older the better. This will help you assess how the fund performed during different market cycles.
Use an online SIP calculator to keep your investment goal more tangible and realistic. It gives great pleasure to watch your money growing towards a certain corpus.
Do a check on the reputation of the fund house (direct plans) or intermediary (regular plans). You can easily find this information from the government mutual fund websites like AMFI. For instance, AMCs like HDFC, SBI, ICICI and DSP Blackrock among others are well-known and hence safe enough to invest.
For direct funds, you may also check with your bank if you can invest in SIP through them. For regular funds, there are many licensed intermediaries who will do all the research for you. Ideally, Use ARN (AMFI Registration Number) to find out more information about the funds like past performance and NAV. The ARN Code of Cleartax is ARN110027.