SIP 101: To invest or not to invest?

Mar 31, 2021

Suddenly changing times show us time and time again the value of building a contingency plan. When it comes to investment planning, it’s all about taking small, meaningful steps in the right direction. This is where a SIP comes in.

What is a SIP?

A Systematic Investment Plan (SIP) is a way to invest small amounts of your money at regular intervals to help you build your corpus and achieve your dreams. Investing in a Mutual Fund (MF) through a SIP is a smart move. It works by auto-debiting a pre decided amount from your bank account at the specified intervals.

How to choose a mutual fund?

Understanding what your goals are at the outset is vital. This clarity of what you want to achieve will help you ensure you choose the best mutual fund for your needs. Besides that, you should look for the following:

  1. Check the fund's performance over the last 5, 7, and 10 years.
  2. Since mutual funds diversify across several securities based on the scheme's investment objective, starting with a larger corpus is prudent.
  3. Check on the fund’s expenses and choose one with a lower expense ratio as it usually means higher returns.
  4. Investors can get tax deductions under section 80C of the Income-tax Act by investing in equity-linked saving schemes or ELSS funds up to 1.5 lakh per financial year. With a three-year lock-in period, this is much lower than other tax savings instruments like PPF, ULIP, FDs, etc.

How does SIP work?

SIP mutual funds help you create wealth. The decided-upon amount is automatically deducted from your bank account at a predetermined interval - monthly, quarterly, or even annually. Every time the amount is debited, it is invested in your chosen mutual fund.

In exchange for your money, you are allotted a set number of units. For instance, let’s assume the Net Asset Value (NAV) of your mutual fund is Rs 20 right now. If you invest Rs 1,000 in this fund, 50 units of the scheme will be allotted to you.

As the NAV of the mutual fund increases, so will the value of your investment. If the NAV becomes Rs 30, then the 50 units bought at Rs 1000 will now be worth Rs 1,500.

Why should you consider investing in a SIP?

As a prudent investor, here’s why you should go for a SIP.

  1. It disciplines you into investing regularly.
  2. It’s largely automated, making it very convenient.
  3. Rupee cost averaging helps you beat market fluctuations and secures your investment from market volatility.
  4. By investing early and staying invested for a long time, you can benefit from the power of compounding by reinvesting your profits.
  5. Investing in mutual funds through SIP allows you to own small quantities of various stocks with a smaller investment.

Finally, SIP is one of the easiest ways to begin investing in mutual funds and creating wealth for your future. It helps you save without straining your current finances, making it popular with investors of all ages. Your most significant responsibility here is doing your homework when selecting the fund and making sure the amount chosen is paid on time. Yes! It’s as simple as that.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.