Good News Only: Investing in SIP is much easier and is a cup of tea for everyone now.
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In this article, we will learn all about SIP and also determine how we can invest in the same.
These days, there is a Buzz about doing a Systematic Investment Plan (SIP); even people who are not aware of investment products are advised to do an SIP.
People with no idea of mutual funds and equity markets are doing SIP in equity mutual funds and selecting stocks directly, as recommended by so-called experts.
But have we questioned whether we are doing SIP correctly and using the right products?
SIP is not meant only for equity mutual funds; it can also be used in other products. Remember, every investment carries risk, and SIP in equities is not an exception.
In any investments, we should look at our requirements, goals, and most importantly, our risk-taking appetite and the time frame we have for our goals.
Today, we will determine if SIP is good for you and how it should be done.
What is SIP?
SIP or Systematic Investment Plan is an investment strategy that allows an individual to invest in an investment product regularly for a fixed duration.
While it is primarily popular for investing in equity mutual funds, it can be done in Debt and Liquid funds. In SIP, we can fix the frequency of our investment, and if it is automated, a certain fixed amount shall be debited from our bank account weekly, monthly or quarterly.
Advantages of SIP
SIP has become popular due to several advantages:
- Investment in SIP promotes financial discipline, and since the money is debited from a bank account, an individual will be focused more on saving every month.
- It allows investors to start investment with a lower amount and can also set instructions to increase the SIP after some interval, known as 'Step Up.'
- In a falling market, it benefits investors as one gets more units for the same SIP amount.
Pre-work before thinking of starting SIP
If you are new to SIP investments, never jump to setting up SIP on the portal but do some ground work. Following are the steps one can consider before setting up SIP.
1. Set Financial Goals and make a financial plan.
Whenever we travel, we determine our destination and the day and time to reach there. Later, we decided on our mode of transport and the risk attached to it in terms of delay and safety.
Similarly, we must choose how much amount we need, why we need it and when we need it in our financial journey. Only after fixing these parameters can we decide the investment products and whether it should be through the SIP route or a one-time bulk investment.
Therefore, the first step is to set Financial Goals and a detailed financial plan.
2. Assess Risk Tolerance
Assessing risk is the most crucial step, and overlooking it can be fatal, and the person may not be able to reach his financial goals. Imagine a situation where, at retirement age, one doesnt have enough money as planned because they did SIP in the wrong product.
A classic example can be jumping into equity markets through SIP at 65 years without proper knowledge.
Different people have different risk appetites; a young IT professional with no dependents will have a far higher risk appetite than a 50-year-old banking professional with 3-4 dependents and a housing and car loan.
Therefore, it is important to determine how much risk you can take based on your age, certainty of regular income, obligation towards dependents, and commitment to pay back loans, if any.
A single job loss during an economic downturn can derail our investment plan if we fail to asses our risk profile.
3. Create a Budget
We can create a budget for investments based on our monthly income and savings. This should have some flexibility, as over-ambitious SIPs can lead to default.
Job loss or stagnant income with rising expenses will jeopardize the SIP plan. Per our Budget, we can always change the SIP plan by decreasing or increasing the amount.
4. Choosing wisely your Investment product and scheme
We should finalize the product depending on our goals, time horizon, and risk appetite. It can be a popular equity mutual fund, debt fund, or liquid Fund. Under each of the products, one can see the track record of the last 5-10 years (it is freely available on several websites) and finalise a scheme or Fund. In an equity mutual fund, one should focus on the historical CAGR in the last 5 to 10 years, the fund manager’s track record, and the Fund’s size (AUM). Substantial large-size equity funds may give low returns, but there are always exceptions.
Two ways of investing in mutual funds
There are broadly two ways to invest in joint Fund
1. Direct Method
You can go to the respective Fund’s website and set your SIP. In a direct method, there are no additional charges as there is no intermediary. Therefore, it is the cheapest way to invest.
2. Indirect Method
You can also choose to invest through your broker or bank; however, in this case, the broker or the platform will levy additional broker charges. Some new-age brokers do not charge extra for every SIP. Opening a demat account with these new-age brokers is convenient and can be done online in less than 15 minutes.
Setting up and monitoring your SIP
1. Setting up the SIP in mutual Fund
After the finalization of the schemes or funds, the following steps need to be followed to complete the process:
- Register on the Fund's website and complete the KYC process. If one wants to do it through some platform or Broker, opening an account is the first step.
- Once the account is opened and KYC is done, the next step is to enter the amount of SIP and choose the frequency of SIP(weekly, monthly, quarterly, etc).
- Next, we have to choose the duration of investment, which can be a few years to even 10-15 years, based on your financial goals.
- For medium-term goals such as buying a car or house, one can keep a SIP for five or more years, but one needs to be careful here as equity mutual funds are a risky asset, so it is better not to set up an SIP in equity mutual fund for less than three years.
- For debt funds, one can keep even one year's SIP.
- As our income keeps increasing, so should our SIP. Therefore, there is an option of 'Step Up' where, at our chosen frequency (half yearly or yearly), our SIP will increase by a certain amount.
2. Monitor and review your Performance
We should review our fund’s performance periodically but not more than once a year. We should not hop funds too frequently chasing the best performing fund in the market as funds take time to perform based on their style of investing (Contrarian, momentum, deep value etc). If a fund shows a CAGR return of say 15% in last 5 years, it is not necessary that investors earned the same return, as they might have exited in few months or a year, which most investors do as per statistics.
So, stick to a fund after your research and give it some time. You may take advice from a registered investment advisor if you are still waiting for the funds.
What are the Non-Equity options for SIP?
- One can also do SIP in debt funds if one is conservative or for short-term goals.
- If you require money in less than 3-4 years, avoiding equity funds and opting for less risky debt funds or hybrid funds with lower risk is better.
- If the requirement of a Fund is within one year, one can opt for a liquid Fund, which primarily invests in government securities and bonds, or one can even opt for Recurring Deposits, a form of SIP of the old era.
Never do SIP in equity funds for short term (less than 3 years).
Final Thoughts
SIP is one of the best ways to invest in a disciplined and flexible way, but we have to choose the right product that suits our risk profile and may help us reach our financial goal.
Selecting a suitable duration for SIP is very important, and sticking to a fund for sufficient time is essential. One can start SIP anytime, but for best results, one should begin early in equity funds as it takes time to compound money, and there is no shortcut.
If anyone tells you to invest in an equity mutual fund for just 1-2 years through SIP and promises very high returns, you should run away from that person and never look back. It is your hard-earned money; therefore, you should do your research, have a long duration for our SIP and enjoy the journey.
There is no shortcut to becoming rich quickly, and SIP is not the route, but in the long term, if the investment is made through SIP, the probability of reaching your financial goals is very high.
So what are you waiting for? Go and Sip?
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