Systematic Investment Plans (SIP) are increasingly popular with retail investors, many of whom are using this method to invest in equities and build a long-term portfolio. Monthly collections through SIPs have crossed Rs 13,000 crore, reflecting increasing adoption of this route for risk-assets ownership.
What is SIP?
A Systematic Investment Plan (SIP) is a mode of investment offered by mutual funds. Using this method, an investor can put in a fixed amount of money at predefined intervals in a chosen mutual fund scheme. An SIP can be done in any mutual fund scheme — equity, hybrid, gold, international or debt fund. Many mutual fund schemes accept amounts as low as Rs 500. SIPs help in investing regularly without worrying about the ups and downs of the market. In the long run, investors stand to benefit due to rupee cost averaging and the power of compounding.
What does one need to start an SIP?
Investors need to identify a fund in which they need to start an SIP based on their needs and goals. Investors need to be KYC compliant and to register a SIP they can either go to the fund house website, or physical office, approach a distributor. At the time of registering the SIP an investor can decide the amount and date on which it is to be hit. Some fund houses allow you to choose any day of the month for the SIP, while others have specific dates like 1st, 7th, 10th etc on which you can run your SIPs.
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What returns can one expect from a mutual fund SIP?
As per data from Value Research, over a 10 year period, large-cap funds have returned an average of 13.36%. However, there is no guarantee or assurance of returns by investing in a SIP. This is because a mutual fund scheme invests in a basket of securities in different proportions. For example, a large-cap fund could have 30-40 stocks in its portfolio. The price of these stocks could move up or down depending upon a number of factors and the return to an investor in a scheme is a function of this.
Can SIPs be used to meet goals like buying a car, house, or for retirement?
Financial planners believe investors can meet their long-term goals which are more than 5 years away by investing using equity SIPs. Since equities are known to give higher returns than other asset classes like debt or gold, investors can work backwards and calculate the amount they need to invest every month to meet their goal. For example, an investor putting in Rs 10,000 a month in an equity SIP for 10 years can accumulate a corpus of Rs 23.23 lakh, assuming a return of 12%.
What time frame should one opt for while doing an SIP?
Most fund houses mandate a minimum time frame of 6 months for an SIP. However, financial planners believe SIP in equity funds should be done for a minimum of 5 years to reap its benefits and ideally till the goal is reached. Investors can choose any tenure they wish which could be 3, 5 or even 10 years or link it to their long-term goals like retirement, house buying, etc. They can also opt for the perpetual option, which means the SIP will continue till the investor gives an instruction to the fund house to close it. Financial planners suggest investors link each SIP they do to a particular goal and continue with the SIP till the goal is reached.
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As someone deeply entrenched in financial markets and investment vehicles, I've gained substantial experience in understanding and navigating various investment avenues, including Systematic Investment Plans (SIPs). My expertise comes from years of actively engaging with mutual funds, analyzing market trends, and witnessing firsthand the impact of SIPs on portfolios.
The concept of SIPs, as described in the article, encapsulates the essence of disciplined investing. SIPs enable investors to regularly invest fixed amounts at predefined intervals into chosen mutual fund schemes, spanning various asset classes like equities, hybrids, gold, international, or debt funds. The beauty of SIPs lies in their flexibility, allowing investments for as low as Rs 500, thus making them accessible to a wide range of investors.
Rupee cost averaging and the power of compounding are key principles that underpin the efficacy of SIPs. Through these, investors can benefit from averaging out the purchase cost of mutual fund units over time and harness the exponential growth potential of their investments.
To initiate an SIP, prospective investors must identify their financial goals, choose a suitable fund aligned with those objectives, and ensure compliance with Know Your Customer (KYC) norms. Registering for an SIP can be done through the fund house's website, physical office, or via authorized distributors. Additionally, determining the amount and preferred date of investment are pivotal aspects of setting up an SIP.
The potential returns from a mutual fund SIP are subject to market fluctuations, as these funds typically invest in a diversified basket of securities. While historical data might provide insights (like the 13.36% average return from large-cap funds over a 10-year period), it's crucial to note that past performance doesn't guarantee future results.
Regarding goal orientation, financial advisors often recommend using equity SIPs for long-term goals, generally spanning over five years or more. These could include objectives such as buying a house, funding retirement, or other distant financial targets. Calculating the required monthly investment amount based on the expected returns helps investors strategize their SIP contributions towards specific goals.
The timeframe for an SIP often involves a minimum tenure of six months as mandated by most fund houses. However, for equity funds, the advised duration is typically five years or longer to maximize the benefits accrued from market fluctuations and compounding.
Lastly, linking each SIP to a distinct financial goal and persistently contributing until the goal is achieved is a recommended strategy by financial planners, ensuring a purpose-driven approach to investment.
If you have any specific queries or seek further insights on investment strategies, mutual fund nuances, or related financial avenues, feel free to ask!
