Mutual funds offer a facility that helps you inculcate the discipline of investing regularly. This is called the Systematic Investment Plan or SIP, in short. SIP is a simple way where you can invest a pre-decided amount in a mutual fund scheme every week, month, quarter or half year with no hassle of having to remember to invest and the consequent paperwork. All you need to do is issue standing instructions to your bank to debit your account each week/month/quarter/half year on a specified date by the amount you want to invest – and you are done!
Advantages of SIP
In addition to helping you inculcate discipline in your investing with minimum effort, SIP helps in a number of ways:
- It helps you use market fluctuations smartly (in case of SIP investing in an equity scheme). When stock markets are volatile, using the SIP facility, you will receive more units for the same investment amount when markets are down at the time of your SIP investment, and fewer units when the markets are up at the time of your SIP investment. Eventually, the average cost of your investment will be lower than the NAV of the equity scheme. Let’s understand this with an example.
Your total investment = Rs 6,000
Total number of units you have received = 489.26 units
Average cost per unit = Rs 12.26 (Rs 6,000 / 489.26 units)
Average NAV = Rs 12.33
As you can see, the average NAV over the last 6 months is higher than the average cost per unit due to the benefit of using SIP.
- With the help of SIP, you don’t need to keep track of when the markets are up (so that you can sell) or down (so that you can invest). With regular investing through SIP, you benefit from the rise and fall with no effort. Besides, investing is a long term activity where timing your investment and exit becomes irrelevant.
- SIP investing doesn’t need you to invest large amounts at one time. You can comfortably invest modest amounts (as low as Rs 500 – Rs 1,000) each month. This becomes a relatively painless way of investing. However, here is a cautionary note: make sure you are investing enough to fulfil your financial goal for which you have initiated your SIP investment. For instance, if you have a goal to be a home owner 5 years from now for a home worth Rs 25 lakh, assuming an annual investment return of about 12% from equity investing, the monthly SIP you would need to make is about Rs 30,000.
- Take advantage of compounding through SIP. Compounding means earning income on income. In case of investing in mutual funds, it means opting for the growth option (where you don’t receive dividends; instead, your returns remain invested in the scheme and the value is reflected in the NAV). If you take the dividend option, you will receive the dividends (which reduces the value of NAV proportionately). To understand how the growth option helps take the benefit of compounding, here is an example:
- SIPs help in diversification. As you know, diversifying your investments across different asset classes (equity, debt, property, gold, etc.) and securities within an asset class (say, equity of different companies from different sectors) is important to reduce investment risk. With the SIP facility, you can diversify your investments even with modest investment amounts. For instance, were you to invest Rs 1,000 in the stock markets directly, you would probably get a couple of shares of a MNC whose stock is priced at about Rs 500 per share. However, this amount of Rs 1,000 invested through SIP in an equity diversified fund, will be invested across different companies from different sectors depending on the investment objective of the scheme.
Convinced about the benefits of using SIP? The actual investing process is as simple as 1-2-3.
3 steps to SIP
Here is how SIP works:
Step 1: Select the mutual fund scheme for your SIP investment.
Step 2: Complete the paperwork – fill in the application form and the SIP transaction form, complete the ‘Know-Your-Customer’ or KYC requirements, issue standing instructions to your bank to debit your account on the selected date every month (or week, quarter, etc.) towards your SIP investment or issue post-dated cheques for the SIP amount to the mutual fund.
Step 3: Submit all these documents along with your initial investment amount (to invest in a mutual fund scheme, you need to initially invest a lump sum (usually a minimum of Rs 5,000) after which your SIP investing starts).
To conclude, ‘time is money’. Not timing. In other words, trying to decide when to invest in equity (timing the markets) will not take you far. What’s important is to invest regularly (using the SIP facility) irrespective of where the markets are headed.
Team FinanceInsights
October 22
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