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What is a SIP?

Systematic Investment Plan.

What is a SIP? 

“Little drops of water make the mighty ocean”

An SIP enables you to invest in mutual funds in a systematic, automated fashion. If you’re new to investing, it’s a good idea to stick to a monthly SIP since you probably get your salary paid on a monthly basis.

For some investors who are afraid of long term commitments like PPF or Insurance plan, SIPs are the answer. They are flexible:

  1. SIPs are done in open-ended funds where the investors can invest and take out the money anytime.
  2. There is no fixed tenor for running SIP. Once the SIP tenor is fixed, it can stopped in between or could be continued even after the tenor by placing the request with respective mutual fund company.
  3. Full and partial withdrawal is possible during or after the SIP tenor. The SIP amount can be increased or decreased.
  4. The SIP amount can be increased or decreased.

Through a simple Google search, you can easily pull up all mutual funds in India and their historical returns. Ensure that the mutual fund(s) you select meet the following criteria:

  1. The mutual fund has been in duration for at least 5 years (the longer, the better).
  2. The “Fund Family”, or Fund House, is well reputed. In general, if you can recognize the Fund Family (such as HDFC, Reliance, SBI, Birla Sun Life), you are probably good to go.
  3. Ideally, the SIP is in conjunction with the bank you’re already banking with. Contact your relationship manager at your bank. He/she can get you set up.

Is SIP safe or not?

SIP is a very safe method to invest in mutual funds. If you invest in a mutual fund lump sum, depending on the market condition, you could end up paying a very high price for a mutual fund. To avoid this, you should invest in mutual funds when the markets are not overvalued. This obviously requires a good knowledge of the markets. This is called timing the market. 

Can SIP be stopped?

Yes. Unlike fixed deposits (FD) and recurring deposits (RD), you can stop an SIP any time you want. After stopping paying for an SIP plan, you can either choose to redeem your money from the mutual fund or continue to remain invested in the fund.

If you use SIP to invest in tax saving ELSS mutual funds, you can save tax too. You can claim tax deductions of up to ₹1.5 lakh under Section 80C by investing in ELSS mutual funds.

Can SIP amount be reduced/increased?

The procedure to do so is very complicated. But there is a solution to this problem. You can simply start a new SIP in the same fund with the increased amount.

Can SIP be started online?

Yes, you can easily start an SIP online. To start an SIP online using Wealth Bhai, make sure you have signed up on wealthbhai.com . Upload necessary documents (PAN, address proof, and bank statement) and then choose a mutual fund you want to start an SIP in. Go to the mutual fund page on wealthbhai.com and follow instructions.

Does SIP have a lock in period?

If you are investing in an open-ended mutual fund, there will be no lock-in period for your SIP as well. It completely depends on the mutual fund you invest in. Some mutual funds, do have a lock-in period. ELSS mutual funds have a lock-in period of 3 years. Many other mutual funds have lock-in periods too. Mutual funds that have lock-in periods are called close-ended mutual funds.

Can SIP save tax?

If you use SIP to invest in tax saving ELSS mutual funds, you can save tax too. You can claim tax deductions of up to ₹1.5 lakh under Section 80C by investing in ELSS mutual funds. 

Does SIP have exit load?

The exit load of an SIP depends entirely on the mutual fund. If the mutual fund specifies an exit load for a period, then there will be an exit load on the SIP also. Most equity funds have an exit load of 1% if redeemed before a year from investment and no exit load if redeemed after a year. The exit load is calculated upon the value being redeemed.

Is SIP better than RD?

SIP has the capability to give much higher returns than RD. The return you get on your SIP depends on the mutual fund you invest in. There are debt mutual funds that are considered low risk and then there are equity mutual funds that are considered high risk. Unlike RD, the rate of return isn’t fixed in case of mutual funds.

Is SIP good for long term?

Yes. In fact, it is better to invest in SIP for the long term. Instead of waiting and accumulating money to invest, you start investing whatever amount you are able to save. This way, your money is always invested.

Is SIP and mutual fund the same thing?

SIP is a method used to invest in mutual funds. You can invest in mutual funds in two ways: lump sum and SIP. When you invest lump sum, you put in a large amount of money in a mutual fund in one go. In SIP, you invest smaller amounts of money on a regular basis – usually every month.

Which SIP to invest?

Which SIP you invest in depends on your needs. If you are willing to take risks, you can check out small and mid cap mutual funds. On the other hand, if you want moderate risk, you can check out large cap mutual funds. You can also check out debt mutual funds if you want to be exposed to very low risk.

Learn all you need to know about SIPs here.

The Power of an SIP

Suppose you set aside 10% of your monthly salary towards an SIP, and your monthly salary is Rs. 60,000. A cursory glance at some of the largest mutual funds in the country shows that many have consistently outperformed the overall market over a large span of time. For example, one of the largest mutual funds is the SBI Blue Chip Growth Fund. It has over 1000 Cr. in assets and launched the fund in June of 2006.

What are the benefits of SIP?

Which SIP you invest in depends on your needs. If you are willing to take risks, you can check out small and mid cap mutual funds. On the other hand, if you want moderate risk, you can check out large cap mutual funds. You can also check out debt mutual funds if you want to be exposed to very low risk.

Estimated returns from SIP into an Equity Mutual Fund (at an assumed rate of 12% p.a.)

The best time to invest is… regularly.

If you invest smaller amounts regularly over a period of time you will buy your investments at an average price. You get to take advantage of any market dips (and pay a lower price) and at the same time reduce your risk of buying just before a market fall.

If you wait to save up large lump sums to invest you potentially risk :

a) Missing out on compound return and,
b) Being more impacted by short term market movements.

Ultimately, if you have a long-term investment mindset dollar cost averaging can reduce anxiety about losing money when you invest. The only downside is that if markets don’t dip, you’ll end up buying higher and higher but at least you’ll be making a profit on your earlier purchases.

Happy Investing!

                                                                       

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