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SIP Meaning and Benefits of SIP

SIP

With the rise in income of middle class, growing financial literacy and ease of investing, the general population is taking an active interest in mutual funds. Most of the salaried employees and even businessmen are taking the SIP route to investing in mutual funds. In this article, we will see the different types of SIPs, and what best suits your needs

Before that, we should see what is an SIP, and how to invest in one.

SIP stands for Systematic Investment Plan. As the name makes it evident, it is an investment plan to invest systematically at regular intervals. All you need to do is set up a SIP schedule, either online or through your agent/bank, and a fixed SIP amount will be auto debited from your account monthly or quarterly, as per your convenience. Depending on the Net Asset Value (NAV) prevailing on that date, corresponding number of units of the mutual fund will be added to your folio.

The concept of a SIP is simple: a regular investment. SIPs work like a recurring investment of a fixed amount that directly is debited from your account on a predefined date. Once you pay the desired amount, the mutual fund house will allocate a certain number of units of the scheme where you put in your money. This depends on your scheme’s Net Asset Value (NAV) for the day. With every SIP instalment, you are allotted additional units of the scheme.
Since, every time the scheme units are bought at different rates, therefore, with the same SIP amount of money invested at regular intervals, your money would buy fewer units of the mutual fund when markets are up and more when they are down. Thus, an SIP enables you to lower the average cost of your investment and reduce the risk of your investment by spreading your purchase price over time. This is known as rupee cost averaging.

Moreover, an SIP enables you to regularly increase your investment amount by a fixed amount and get the benefit of compounding as you earn returns on the returns generated by your investment. This is called power of compounding.

STARTING A SIP INVESTMENT

You can begin your SIP by visiting Karvy.com or your nearest bank branch. You can also initiate an online process. Once you finish this, you would be required to submit your KYC documents to the concerned authority. Here, too, you can choose to opt for the e-KYC form that allows you to provide all your details digitally.

Here is the list of documents you would be required to submit.

– Identity proof i.e. Aadhaar, card, passport, voter ID, driving licence
– PAN card
– Address proof
– A passport-sized photograph

Once this is done, a representative from the bank or the finance institution will get in touch with you, as this is mandated by the Securities and Exchange Board of India (SEBI). You can complete the IPV in two ways. You can either visit any of the following institutions and submitting the original copy of the above-mentioned documents:

– KYC registration agency (KRA)
– AMC
– Mutual fund agent/distributor
– Mutual fund registrar
– Karvy office

How do you choose the right MF

– Financial goal
– Investment time horizon
– Risk tolerance level
– Fund’s performance
– Fund’s performance consistency
– Fund manager’s experience
– AMC track record
– Expense ratio

Once you choose the fund, you can submit the Mutual Fund application form.

Reasons to invest through SIPs

– As little as Rs 500
One big advantage of making investments through SIPs rather than a lumpsum amount is that you can put in as little as Rs 500 per month in your investment.

– Lessons in managing money
Also, a monthly deduction from your account every month will keep you better prepared in managing your money. So, keeping that in mind, investing through SIPs makes more sense for those starting their careers.

Rupee Cost Averaging
– In a volatile equity market, during a SIP purchase, you would be buying more units during a slump and less during a blooming period. As a result, you decrease the cost per unit.

– Emergency fund
SIPs can act as an emergency fund that you can immediately withdraw for an occasion or a medical emergency. However, these SIPs are taxable, as they have no lock-in period.

Different types of SIP
– Flexible SIP
– Top-up SIP
– Perpetual SIP
– Trigger SIP

Advantages of SIP investments

– SIPs are flexible and are an affordable investment option. Furthermore, they save you time as you can do an auto debit from your bank account

– If you begin investing through SIPs early, you are expected to get higher returns, as the compounding effect is longer

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