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Just saving a bit of money every month from your pay check might not be enough to ensure your financial security. It is necessary to grow your savings through investments and there are multiple investment styles and options to choose from. If you are just starting with your equity investments, it might be a good option to opt for a systematic investment plan (SIP). However, while SIP is a convenient way to get started, how to invest in SIP and what to invest in might still might be a challenging question to answer.
So read on to find out what makes SIP investments a good option from beginners, how to start investing in SIP and key factors to consider when choosing your systematic investments.
Why is a Systematic Investment Plan Beneficial
SIP, or Systematic Investment Plan allows individuals to make disciplined investments in a mutual fund of their choice. As part of SIP investment, a fixed amount gets deducted from the investor’s bank account on a specific day every month and units of a mutual fund are bought. When the price of units is high, fewer units get bought, while at low Net Asset Value of fund units, more units are bought.
This simple investment strategy can provide 4 key benefits to investors:
1. Rupee cost averaging – helps average out the cost of investing in mutual funds
2. Disciplined savings – helps develop a habit of saving regularly among investors
3. Flexible investments – allows investors to control how much they invest
4. Convenience – investors can choose to start, pause or stop investment at any time
5. Compounding – promotes long-term investments that can benefit investors
As a result of these key benefits of SIP, this investment route has continued to grow in popularity among investors. But many are still concerned about how to make SIP investments and choose suitable mutual funds to invest in. Read on to know the answers to these key questions
How to Invest in SIP Online and Offline
As technologies have developed, ways to invest in SIP have also evolved. Now you no longer have to fill out multiple forms or sign and submit post-dated checks to make your monthly systematic investments in mutual funds. Currently there are 3 key routes using which you can invest in SIP whether you choose the online or offline route – through a fund house, through an intermediary or through a registrar and transfer agent (RTA). Below are the details:
a. Through a Fund House
As per mandate of SEBI, mutual fund houses or asset management companies (AMCs) are required to maintain representative offices throughout the country. You can visit any of these offices in-person and start investing via SIP in the mutual fund of your choice. AMCs also operate their own websites where you can register and conveniently start investing in SIP online. This route allows you to choose either the direct or regular plans of mutual fund as per your convenience. The limitation of this way to invest in SIP is that your choice of mutual funds is limited to only schemes offered by your chosen fund house.
b. Through an Intermediary
An intermediary is a third-party individual or individual who facilitates your mutual fund investments. Typically, these entities are termed as distributors and you can invest in SIP or make lump sum investments in the mutual funds of your choice. Traditionally, mutual fund distributors only offered regular plans of mutual funds, with the emergence of online investment platforms, you can now opt for direct plans of mutual funds too. The main benefit of this model is that you can invest in mutual funds of multiple AMCs through this route, however, many intermediaries do charge an annual or monthly fee for their services.
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c. Through a RTA
Registrar and Transfer Agent or RTA are SEBI-registered organizations that facilitate record maintenance for mutual fund houses. RTAs also have representative offices all over India and you can visit these offices in person to start making mutual fund investments. Alternatively, RTAs also operate websites that allow you to invest in SIP and via lump sum in multiple schemes. Currently, there are two RTAs operating in India – CAMS (Computer Age Management System) RTA and Karvy RTA. You can invest in CAMS-operated mutual funds at a CAMS RTA office or through their website. While Karvy-managed mutual fund investments can be made at a Karvy RTA office or via their website. You can opt to invest in either regular or direct plans of mutual funds through a RTA.
How To Choose Schemes to Invest In via SIP?
Now that you know the different routes you can use to invest in SIP, you need to understand how you can choose a suitable mutual fund investment. Factors you need to keep in mind when making this choice are:
1) Risk Tolerance
When you are participating in the financial market, you need to have a clear understanding of how much risk you are willing to tolerate. Risk tolerance or ability to take risk with your investment differs from one investor to another. Typically, younger investors with fewer financial responsibilities tend to have higher risk tolerance. Whereas, older individual with greater financial responsibilities tend to prefer lower risk investments.
2) Investment Goals
Your financial goal whether it is to save for a new car or to ensure a comfortable retirement also has a bearing when you are choosing to invest in a mutual fund via SIP. You must know the reason behind why you are investing before choosing a specific option from various types of investments.
This is important because once you have the purpose clear, you can cherry pick the top performing funds and build a strong portfolio for yourself. For instance, for long-term goals like retirement, equity mutual funds are a suitable investment while for short term investment goals like saving for a holiday, debt schemes would probably be a better fit.
3) Past Performance of the Scheme
As part of the process of how to invest in SIP, the fund schemes of your choice matter a lot. After all, they are the ones that will provide you with the return you want. So, you need to consider the past performance of the scheme when making your choice. Make sure you consider the long-term performance of the scheme when making the selection. While mutual fund returns might not be guaranteed, a fund with a proven track record can increase the chance of higher long term SIP returns for you.
4) Date & Duration of SIP
3) Past Performance of the Scheme
As part of the process of how to invest in SIP, the fund schemes of your choice matter a lot. After all, they are the ones that will provide you with the return you want. So, you need to consider the past performance of the scheme when making your choice. Make sure you consider the long-term performance of the scheme when making the selection. While mutual fund returns might not be guaranteed, a fund with a proven track record can increase the chance of higher long term SIP returns for you.
4) Date & Duration of SIP
If you are learning how to invest in SIP, you will realize that one of the best things about SIP is that your funds will be deducted automatically from your account. You would not need to manually transfer the money from your own savings account to your SIP account. This transfer will happen on a particular date every month, this is known as a mandate transaction.
So, for this, you need to fix the date of the SIP. In addition to this, you also need to set the duration of your SIP. This will be on the basis of your financial goals. If you are having trouble deciding the duration, you can consult a financial advisor.
The above 3 factors are just a few of the many factors you could consider. Incorporating additional factors like investment strategy, fund manager credentials, scheme attributes, asset allocation, etc. can help you further improve your selection for making SIP investments.
Procedure and Documents Required to Invest in SIP
Once you have picked the mutual fund scheme of your choice, then you need to complete the necessary formalities as listed below before you can start SIP investments:
- You are required to fill the application form.
- You are required to give a cheque of monthly SIP amount. This will be only for offline mode. In the case of an online mode, you need to provide a ECS form.
- You will be required to provide a cancelled cheque.
- You will be required to provide a residential proof as well as KYC form.
The above format is specifically for the offline route. The online route is much more streamlined and with the introduction of Aadhaar-based OTP verification, you can complete the entire process without submission of any paper documents.
Once you have picked the mutual fund scheme of your choice, then you need to complete the necessary formalities as listed below before you can start SIP investments:
- You are required to fill the application form.
- You are required to give a cheque of monthly SIP amount. This will be only for offline mode. In the case of an online mode, you need to provide a ECS form.
- You will be required to provide a cancelled cheque.
- You will be required to provide a residential proof as well as KYC form.
The above format is specifically for the offline route. The online route is much more streamlined and with the introduction of Aadhaar-based OTP verification, you can complete the entire process without submission of any paper documents.
Frequently Asked Questions (FAQs)
1) Why should I learn how to invest in SIP?
When you learn how to invest in SIP, you create financial assets for yourself in a disciplined manner. This ensures you have a secondary source of income as well as financial protection in the future.
2) Is investing in SIP risky?
SIP returns depend on market conditions, so there is some risk in systematic investments. But this risk is reduced to some extent due to the benefit of rupee cost averaging. According to this approach, even when the market is low, you can buy more units of a particular funs and reduce your overall purchase cost. On the other hand, if the market is high, you can buy fewer units, ultimately averaging out the cost of investment.
3) Can my child learn how to start SIP investment?
While there is no minimum age for learning how to invest in SIP, an individual does need to be above 18 and above to start SIP. Parents or guardians of minor child can investment on behalf of minor child if they are the primary holder of the joint mutual fund investment account.
4) Can you give me any tips on how to start SIP online?
If you want to learn how to start SIP online, follow the key steps below:
- Provide all the necessary documents.
- Be compliant with KYC requirements.
- Register yourself as a member on the AMC website.
- Pick your mutual funds. Select the date and duration of your SIP.
5) What is the least I can invest in SIP?
The minimum amount that you can invest in SIP is Rs. 500 in most cases. However, this minimum amount can be higher on lower for specific funds based on decisions taken by the fund house or fund manager.
Sources:
https://www.mutualfundssahihai.com/en/what-systematic-investment-plan-sip
https://scripbox.com/mf/how-to-invest-in-sip/
https://www.motilaloswal.com/article-details/what-are-the-10-tips-to-pick-a-winning-mutual-fund-/2054
https://www.hdfcbank.com/personal/resources/learning-centre/invest/what-is-sip-and-how-to-invest-in-sip
https://www.indiainfoline.com/knowledge-center/mutual-funds/what-is-sip-and-its-advantages
https://www.fincash.com/l/risk-sip-investment-plan
https://www.mutualfundssahihai.com/en/can-minors-invest-mutual-funds
https://www.hdfcbank.com/personal/resources/learning-centre/invest/what-is-sip-and-how-to-invest-in-sip
https://economictimes.indiatimes.com/mutual-fund-screener/sip-starting-rs-500
ARN No: Sept22/Bg/27B
