A Systematic Investment Plan (SIP) is an investment scheme where you place funds in a mutual fund at regular intervals to generate profits over time.
Before knowing how to invest in SIP, you have to understand a little more about it. An SIP helps you save periodically and provides high rates of interest on returns. Although they are on mutual funds and thus include a risk factor, SIPs are popular investment schemes for individuals who want lump sum periodic returns which often overcome the risk factor.
SIPs give you the full freedom for customization. You can fix the investment amount, mutual fund, and the plan.
These are closely similar to recurring deposits (RD). The only difference between these two is that investments in an SIP go to a mutual fund rather than a financial institution.
The minimum amount that you can invest in a SIP is Rs. 500. Financial institutions offer variable investment tenures with the minimum being 6 months. You can put your money in a SIP daily, monthly, or quarterly. You can choose to invest in any of the four SIP plans. These are Top-up SIP, Flexible SIP, Perpetual SIP and trigger SIP.
Here is a description of each of the SIP plans:
1- Top-Up SIP
If you choose to invest in these plans, then you are allowed to increase your investment amount periodically.
2- Flexible SIP
Investing in this plan allows you to decrease your investment amount as per the cash flow.
3- Perpetual SIP
Investing in this SIP allows you to redeem your fund whenever you are required as end date is not mandate in this SIP.
4- Trigger SIP
This is the ideal investment option for those who don’t have a deep knowledge in SIP as investing in this plan allows you to set NAV, index level and start as well as end date.
A Guide on SIP Investments
Follow these tips to get a brief idea on how to invest in SIP:
Choose the amount you want to invest
The amount you input will differ with the investment frequency. For example, go for a smaller amount if you plan to invest on a monthly basis. On the other hand, infuse a larger amount if you plan to invest on a quarterly basis.
Choose the duration
Selecting the duration of a SIP is critical. You have to set it depending on whether your financial goals are short-term or long-term. Experts however advice to invest on a long-term for guaranteed strong returns over time considering that stock will inflate into higher values.
Select the mutual fund
There are various mutual funds to choose from that lenders offer. The primary distinguishing factor is their duration and rate of interest. Compare the same when learning how to invest in SIP.
Fulfil the necessary requirements
You will have to fill an application form with all your essential details. Companies may also require KYC documents, address proof, and a cancelled cheque.
Provide the payment method
Depending on the investment frequency, you either have to provide a post-dated cheque or an ECS mandate.
An ECS mandate will automatically debit your account in a fixed date and forward the money to the mutual fund.
You will also have to select the date when you want your account to be auto-debited. Companies let you choose either a particular date or multiple dates.
Following these points will help you figure out how to invest in SIP. Now, take a at the best benefits to such an investment.
Reasons to Invest in a SIP
Regulated by the government
Government bodies like AMFI and SEBI control the SIP market. The rules and regulations introduced by them have made SIPs a secure investment market.
Take advantage of compounding
One of the critical benefits of SIPs is the power of compounding. The interest that you earn on your investment is compounded annually. Thus, you get to have a large pool of funds at the end of maturity.
Benefits of income tax
Equity linked savings schemes includes tax deductions on the returns after maturity. Such schemes follow up from Section 80C and help you receive maximum tax benefits of Rs. 1.5 Lakh cumulatively per financial year.
Higher rate of interest than other investment options
SIPs can offer you up to 2x times the rate of interest in comparison to standard fixed deposits and recurring deposits.
No particular market timing
SIPs are not dependant on the market performance. You don’t have to worry about the market being bearish or bullish. Thus, you don’t have to pick a particular time to invest, a vital pointer to consider if you want to learn how to invest in SIP.
Great savings options
Lastly, SIPs are one of the ideal ways to generate a substantial amount of funds for the future. It is one of the best saving options as their high ROI can help you increase your savings multifold.
SIPs generate return of investments over time as per the maturity period. They are out-and-out investment schemes and as such, they will obviously be unable to meet immediate monetary requirements if and when they come.
In such situations, short-term advances are the only way forward. Financial institutions such as Bajaj Finserv offer Personal Loans with fast approval procedures and attractive terms & features.
Now that you know how to invest an SIP, look for the available options in the market, compare them, and go ahead with an investment. Bear in mind all the pointers you have learnt here and apply them to get the most suitable terms & conditions.