When we think about investing in Mutual Funds we assume that we need to invest a lump sum amount for a specific period. This is yet one of the reasons why commoners shy away from mutual funds. What if I tell you that instead of investing a lump sum amount in a Mutual Fund, you can invest a small fixed amount at fixed intervals? Read on to find out!
What is SIP?
A Systematic Investment Plan (SIP) is an investment option through which you can choose to invest a nominal amount on a weekly, monthly, or quarterly basis in the Mutual Fund of your choice. Since you can invest an amount as small as 500rs, SIP is considered to be a boon to small investors. It also saves retail investors from the volatility of the market. SIP is somewhat similar to Recurring Deposits, it facilitates disciplined investing. SIP also gives you the freedom to increase or decrease or stop your installments at any time. SIP investment is convenient since the SIP amount decided can be debited directly from your bank account.
Types of SIP
There are four types of SIP available in the Indian market;
Top-Up or Step-up SIP:
Step-up or Top-up SIP plans allow its investors to increase the amount of SIP for consecutive SIPs. For example, if your initial SIP amount was 5000rs, you may choose to increase the SIP amount to 6000,7000 and then 8000 as per your convenience. Through Top-up SIP you get to accumulate a lofty investment.
Flexible SIP as the name suggests gives its investors the freedom to increase or decrease the SIP amount as and when required by the investor. This type of SIP helps you manage investment along with other financial commitments.
Investments in Mutual Fund schemes are usually done for a specified period like 5 years, 8 years, etc. But through perpetual SIP you may invest in a Mutual Fund scheme for an unspecified period. Perpetual SIP is suggested for investors who are willing to invest for a long period.
In Trigger SIP an investor has the freedom to set a trigger point for this investment. The investor may set a high trigger point on reaching the target he may retrieve the investment or transfer it to another scheme. The investor may also set a low trigger point at which he may retrieve the investment. Trigger SIP is suitable for investors who can predict the market but this type of SIP is risky for retail investors.
Lump-Sum Vs SIP
When you plan to invest a lump-sum amount in a mutual fund, your entry time in the market is something that you must be careful about. Entering the market during its low is considered to turn out profitable in the long run. A lump-Sum investment earns better during market highs but it also impacts the most during a market crash.
On the other hand, when you invest through SIP you get the benefit of entering the market at different times ie. low and high. This gives you the power of cost averaging. SIP investment remains unaffected by market fluctuations, especially from a market crash.
If you have a lump-sum amount handy then waiting to invest it slowly into the market would be unnecessary. You can invest in lump-sum but make sure to time it right. But if you are a salaried person or someone who would like to invest a small amount regularly then go for SIP investment.
How to Invest in SIP?
The very first step to investing in SIP is to select a Mutual Fund scheme based on your risk-taking ability. The process of investing in SIP is similar to the process of investing in a Mutual Fund. Read our blog on What is Mutual Fund? How to Invest in Mutual Fund?
You can invest your regular SIP amounts through online or offline mode. For online mode, you will need to fill the Electronic Clearing System (ECS) form through which you can give a standing instruction to your bank to auto-debit your SIP amount. For investing through offline mode, you will have to visit the Asset Management Company(AMC) for complying with all formalities and pay SIP amounts through bank cheques.
More and more investors are getting attracted to Mutual Funds fur to the various alluring schemes provided by AMCs. It was initially considered that investment in Mutual Funds required huge amounts. Since the introduction of SIP, it has been benefitted salaried people who wanted to invest small amounts from their monthly salaries. SIP is surely a great investment option to a mutual fund that keeps you unaffected in the unsteady market.