An SIP or a Systematic Investment Plan can give you great returns in the long run. Learn how to make the most of this feature.
Everybody keeps talking about Systematic Investment Plans (SIP) in Mutual Funds. Questions on your mind?
- What is the hype all about?
- Is it worth venturing into?
- How can I make sure that the SIP works?
- Should I stop the SIP at some point?
We answer these and more. Read on.
What is a Systematic Investment Plan (SIP)?
An SIP is similar to your bank Recurring Deposit (RD). You need to invest an equal amount every month. Only, here you will be investing in a Mutual Fund and for however long you want. No tenure restrictions. You can do SIPs in Equity Mutual Funds (that invest in stocks) or Debt Mutual Funds (that invest in debt instruments like Government bonds).
Additional Reading: Difference Between Recurring Deposit and SIP
How does an SIP help?
When you invest a lump sum, especially in Equity Mutual Funds, you don’t know whether you invested when the market was high or low. And only when the markets are depressed can you make maximum profits. But even the experts don’t know when the market will hit its bottom. This is where an SIP helps. A Systematic Investment Plan averages out the cost of investing when you continue investing over the long term. Check out the below table.
|Month||Fund NAV (Rs.)||Invested amount||MF Units bought||Invested Amount||MF Units bought|
|Lumpsum Portfolio Value||37500||SIP Portfolio Value||44071|
|Average cost||8.00||Average Cost||7.20|
Here when you invest a lump sum in a Mutual Fund, you get a smaller number of units and the cost of purchase is higher. But under SIP, you get more units, the average cost of purchasing is less and your portfolio value is also higher. This is a scenario where the market is highly volatile. Look at the Net Asset Value (NAV) of the fund (for the uninitiated, this is the cost of the fund). It seems to be going up and down, indicating that the market is fluctuating. So, the conclusion is that an SIP helps average out the cost of investing in a volatile market. This is exactly how the current equity market is.
Additional Reading: 5 Thoughts To Consider Before You Make A Lump-Sum Mutual Fund Investment
How to make the most of SIPs
- Align it with your goals – The best way to invest in SIPs is to assign it to a goal. This will help you stay disciplined because you will want to reach the goal. Also, you will not be tempted to dip into the investment for any other purpose because you have earmarked it for a particular purpose. For instance, for a short-term goal like buying a car, start SIPs in Debt Mutual Funds and for long-term goals such as your kid’s education, SIPs in Equity Mutual Funds would be the best.
- Step up your SIP – Whenever you get a promotion, salary hike or when your lifestyle improves, ensure that you step up your SIPs. This way, you can ensure that your investment is in line with your standard of living.
- Keep reviewing your funds – Even if you did thorough research before choosing funds for your SIP, you need to keep reviewing your funds. Are they performing in line with their peers? Check. Are they doing better than the category average? Check. Are they giving decent returns? Check. If you find anything amiss, see if you should be switching funds. If you find it difficult to make an informed decision, take the help of a financial expert.
Want to calculate the returns on your investment? Click on the link to try our SIP Calculator.
Should you stop your SIP?
In order to get the best return from your SIP, you shouldn’t stop your SIP until your goal (linked to the SIP) is reached. You can, however, consider switching funds if the funds you are investing in are underperforming.
Remember to stay invested for at least 3 or more years to gain from your SIPs.