Are you new to the world of investments and wondering what a SIP is and how to start a SIP investment?
When I was young, I liked putting my savings in a piggy bank. As I grew up, I sought an investment similar to my piggy bank exercise. I was looking for an investment that would help me invest in small bits according to my comfort. And I could do that with mutual funds.
Mutual funds helped me invest in smaller but regular instalments through Systematic Investment Plans (SIPs).
When it comes to investing, regularly making relatively small, measured investments can be more convenient than significant lump sum investments sporadically.
Let’s understand SIP investments and how you can start investing in them.
There are two ways in which you can invest in mutual funds:
In SIP, you issue a mandate with the bank to deduct small amounts regularly from your account and automatically invest in your scheme at a predefined frequency. The frequency may be daily, weekly, monthly or annually. Monthly SIP is a popular SIP since it is easier to match it with your salary date and manage monthly expenses.
Next, let’s understand how to start a SIP investment.
We humans are a rational species. Everything we do has a reason, let alone our investments. Therefore, to start a SIP, you can first decide its purpose. What are these purposes? These purposes are your goals.
Mutual fund investments are effective ways to invest for your financial goals regularly. You can divide these goals into short-term, medium-term and long-term.
Goals like renovating your house and going on a short family vacation are short-term financial goals. These are goals with a horizon of one to three years.
Goals like reducing a home-loan debt burden, buying a new car, going on an international vacation with family and accumulating wealth for your kid’s higher education are medium-term financial goals. These goals have a horizon of three to five years.
Goals like retirement planning and accumulating wealth to start your own business is long-term financial goals. These goals have a horizon of more than five years.
Now that you know your goal horizons, you can start a SIP for them.
You can start investing for your financial goals by setting up a SIP amount and date. For short-term goals, you can invest in low-risk funds, such as debt-based mutual funds. Since your risk-taking capacity increases with your goal horizon, you can invest in funds with a mix of debt and equity or even index funds for your medium-term goals. The longer your goal horizon, the more can be your risk appetite.
Lastly, you can invest in equity-based mutual funds for your long-term goals. These funds have a high-risk profile, therefore, are better suited for long-term goals. Investing in a SIP can help you turn market volatility in your favour. Let’s understand the reason behind it?
The rise and fall of stocks in the market are mainly based on investor sentiments. Therefore, when these investors are optimistic about their stock investments, they buy more stocks. It increases the stock price, and the market moves upward.
Similarly, when the investors think their investment value might decline, they sell their shares, thus bringing down the share price. Therefore, markets tend to be dynamic and volatile, not static and steady. They tend to have their cycles of growth, slowdown, booms and busts.
Let's understand how market volatility can affect big lump sum investments and regular, small investments differently. For instance, you have saved a large amount of money over time and wish to invest in an equity-based mutual fund. Now, equity-based mutual funds invest predominantly in equities. Let's say you invested it all together in an equity-based mutual fund as a lump sum.
Your investment may go up or down over time, depending on the market situation. As it turns out, the risk of market volatility impacting the performance of your investments is larger when you invest it as a lump sum.
If the markets go down after you have made your lump sum investment, you stand to lose that much on your entire investment, which was a large amount to begin with. In this case, unfortunately, market volatility works against you. However, when you invest in small, equal parts regularly, let’s say every month, you have market volatility.
How is that possible?
This is possible through rupee cost averaging.
Even if the market goes down after making your first small investment in the first month, you can use this market volatility to your advantage.
Let's understand this with an example.
You invested ₹5000 in an equity mutual fund monthly through SIP. Since the Net Asset Value (NAV) of a mutual fund is ₹50, you bought around 100 units of the fund for the first month. The cost per unit of a mutual fund is its NAV.
If the market goes down the next month, the NAV of your fund will decrease. Your cost per unit now is, say, ₹40 per unit. You can now buy more. You can buy around 125 units of the fund with the same SIP amount.
However, if you had invested as a lump sum, you might not have this chance to average the rupee cost of your investments by investing at regular intervals.
If the market goes up the next month, you will be able to buy lesser units. However, the larger number of units you purchased last month would already have appreciated, and the higher NAV now can be averaged against the earlier lower NAV.
This spreading of the risk and rewards over regular time intervals while investing is called rupee cost averaging.
If you wish to reach your financial goals with investments in small and manageable instalments, then starting a SIP is something you need to check out. Whether your goals are long-term, medium-term or short-term, there are investments that can match them in mutual funds. Apart from your goal horizon, you can consider your risk appetite for investing in mutual funds.
Beginners might get confused by the financial jargon and operational steps required for opening a regular SIP with a mutual fund house or a stockbroker.
On Fi Money, SIPs are automated based on your habits. You can set up FIT Rules that help you invest in a mutual fund automatically, when you shop online or order food and so on.
As it turns out, you may already know SIP in its earlier, simpler form.
What is it?
You might have heard of or used an RD or a Recurring Deposit with your bank. When you open an FD or Fixed Deposit with a large amount in a bank, it is a lump sum investment.
However, when you open an RD (Recurring Deposit), it is akin to a SIP. Here, you issue a mandate to the bank to invest a fixed amount typically every month in the RD.
Starting a SIP is similar to starting an RD.
That's why investment experts believe that SIP, like an RD, averages risks and returns over time and is better suited to earning stable returns in the long term.
Starting a SIP investment in a mutual fund is similar to starting an RD in a bank. In this case, you issue a mandate to the fund house to debit your account and invest in the fund at regular, pre-defined intervals. In the case of a stock investment SIP, you need to issue a similar mandate to your stock broker.
On Fi Money, you can invest in mutual funds based on your lifestyle. This is through something called FIT Rules that automatically invest for you each time you shop online or order food, or it can even invest for you daily, weekly or monthly.
The indicative rate offered by the SIP investment can differ based on the type of mutual fund you select.
Debt-based mutual funds can offer you stability, while equity-based mutual funds can help you beat inflation in the long run.
Comparatively, equity-based investments may offer higher rates of returns over the long term but may have more volatility over shorter periods. This makes them riskier than their debt counterparts.
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