What is SIP?

Asset Management Companies (AMCs) offer investors a strategy called Systematic Investment Plan (SIP) and allow investors to invest a fixed amount of money at regular intervals (such as monthly or quarterly) in a disciplined manner in a chosen mutual fund scheme. An investor can simultaneously set up multiple SIPs with multiple AMCs in different funds or schemes.

Benefits of SIP:

1. Regular investment: SIP allows investors to invest a fixed amount of money regularly, typically through automatic deductions from their bank account. This disciplined approach helps inculcate a savings habit and ensures regular investments without a need to time the market.

2. Rupee cost averaging: With SIP, investors buy more units when the fund’s net asset value (NAV) is low and fewer units when the NAV is high. This strategy is known as rupee cost averaging. Over time, it helps reduce the average cost per unit, potentially leading to better returns.

3. Flexibility: SIPs offer flexibility regarding investment amount and tenure. Investors can choose the amount they wish to invest periodically, per their investment objective and affordability. Additionally, SIPs can be started or stopped at the investor’s convenience.

4. Power of compounding: Since SIPs involve long-term regular investments, they benefit from the power of compounding. Compounding here refers to the ability of an investment to generate earnings on both the initial capital and the accumulated returns. A fund manager reinvests the dividends the schemes receive, and the profits booked in a growth option. Over time, compounding can significantly boost the overall returns.

5. Disciplined investing: SIPs promote a disciplined approach to investing by automating regular investments. It helps avoid impulsive investment decisions driven by market fluctuations.

6. Affordability: SIPs allow investors to start investing in small amounts, making mutual funds accessible to many individuals.

7. Mitigating market volatility: SIPs enable investors to average out the impact of market volatility by investing a fixed amount at regular intervals. It reduces the risk associated with supporting a lump sum amount at a single point in time.

8. Long-term wealth creation: SIPs, especially when combined with the power of compounding, can help in long-term wealth creation. By consistently investing over an extended period, investors have the potential to accumulate significant benefits over time.

9. Objective-based investing: SIPs are particularly useful for achieving specific investment Objectives. Investors can accumulate the required funds systematically by aligning the investment amount and tenure for a desired investment objective.

Things to do while investing through SIP in Mutual Funds

You must choose a fund to start your Systematic Investment Plan (SIP). But first, you should do these things.

1. Know the suitability of the Mutual Fund Schemes: Different investors have different investment goals, risks, and timeframes. That’s why there is no one-size-fits-all scheme. An investor should choose a mutual fund scheme matching their needs and preferences. Investment horizon is one of the factors that affect this choice. It means how long an investor plans to keep their money in a specific investment vehicle.
2. Consider inflation-adjusted return: Consider how inflation will affect your future needs when starting a SIP. Inflation makes things more expensive over time, so you might not have enough money later if you don’t account for it; even if you invest in multiple schemes, you could still fall short of your goals if you ignore inflation.
3. Know your risk tolerance: Risk tolerance refers to the loss an investor can handle while making an investment decision. Knowing your risk profile is vital to choosing appropriate asset allocation w.r.t the investment objective and time horizon.
4. Choose the schemes carefully: Mutual funds offer a variety of schemes to invest in, such as equity, debt, or hybrid funds. Choosing a scheme that suits your risk level, desired returns, and time frame for achieving your investment objective would be best.
5. Maintain consistency: To succeed with SIP, you must invest regularly and stick to your plan patiently. You can stop a SIP when you reach one goal and divert the fund for another purpose. But it would be best always to choose a scheme matching your risk and return needs.
6. Monitor and review: Once your SIP is set up, regularly monitor the mutual fund’s performance, and review your investment strategy. Stay informed about market trends and changes in the mutual fund’s investment objective or contact a Mutual Fund Distributor to help you.

Things to avoid while investing through SIP in Mutual Funds

After we have discussed essential points on Things to do in SIP in our previous post, let’s discuss things to avoid in this post.

Following are the things that you should not be doing while investing through SIPs:

1. Trying to Time the Markets: Don’t time your entry or exit. It is almost impossible to predict the markets. Just maintain the habit of regular investing, and you don’t have to worry about timing the markets. It would be best if you kept SIPs regardless of market conditions.
2. Relying only on the fund’s past performance: Past performance doesn’t guarantee a future return. Only because the fund was able to generate good returns in the past couple of years doesn’t mean that it’ll continue to do so. Though it is a good indicator, you must not solely select a fund based on this. Analyze the performance across market conditions and pick a fund that has fared well.
3. Investing with the help of Tips: A scheme that suits others doesn’t necessarily mean that it will fit your investment objectives because risk-taking abilities vary from one to another and with different investment objectives. You need to pick funds that suit your needs and investment objectives. Thus, don’t go by with suggestions and tips from others. Perform your analysis or contact a mutual fund distributor.
4. Don’t Panic When Markets are Volatile: The market is volatile, so market-linked investments do not guarantee returns. However, markets tend to recover after a fall. And a bull phase isn’t permanent. So, when you know your time horizon and have done the asset allocation correctly, ensure you are invested throughout. Don’t panic looking at the market movements.
5. Don’t Discontinue/ Exit Your SIPs: Exiting or discontinuing your SIPs before realizing your investment objective is not the right approach. Investing in the long term and not stopping your SIPs midway will help you achieve the desired objectives.
6. Multiple Funds with the same Investment Objective don’t help: Don’t invest too many funds that will expose your holding to the same assets. Always aim for diversification. Invest across such categories that will help to stabilize your portfolio. Diversification tells you to use different assets; when markets are volatile, your portfolio may not fluctuate too much.
7. Not Having SIPs for Specific Investment Objectives: You have Many investment objectives to achieve in the future that may be in the range of short-term to long-term or from the next few months to the next 10,20, or 30 years. So, it would be a mistake to start one or two SIPs without carefully considering the investment objectives you want to achieve. Such an approach is equivalent to taking a random bus without knowing your destination.

You must complete the KYC process to invest in mutual funds in India. To complete the KYC application form, visit a mutual fund distributor and start investing in Mutual Funds by providing the necessary details.