Last Updated on May 24, 2022 by Aradhana Gotur

Many first-time investors grapple with this question of how to invest in SIP and often confuse SIP with a type of investment. SIP or Systematic Investment Plan is, however, only a mode or method of investment and not an investment product in itself. SIP is an easy, smart, and convenient way to automate investment in mutual funds in a disciplined and timely manner. This article explores how to invest in SIP and the nuances of investing in SIP.

What is SIP?

A Systematic Investment Plan, commonly known as SIP, is one of the best ways to invest in mutual funds. SIP helps to stagger investment and also gives the benefit of rupee cost averaging. Most importantly, if you invest in mutual funds with a SIP, you don’t have to time markets!

Remember, SIPs and mutual funds are not the same. SIP is merely a method to invest in mutual funds, the other method being a lump sum.

How do SIPs work?

When you invest in a SIP, you invest a small sum regularly in a mutual fund scheme of your choice. A fixed amount is deducted from your bank account every month. SIPs usually allow you to invest periodically, whether it’s weekly, quarterly, or monthly.

For instance, if your SIP is scheduled for the 10th of every month, then a predecided amount will be debited and invested towards the mutual fund every month on that date.

How to invest in SIP?

Follow this step-by-step guide to understand how to invest in SIP:

  1. Understand the objective of investment and your risk tolerance level: For this, you need to know your investment goals—your kid’s education, or marriage, or a new car? You must evaluate your risk appetite before investing. Usually, the higher the age and financial obligations, the lower is the risk tolerance. 
  2. Choose a mutual fund for your investment: The selection should be based on your risk profile and your personal financial goals, and other analysis parameters such as fund returns and expense ratio. 
  3. Fill up the application form at your preferred AMC 
  4. Submit a cheque of monthly SIP
  5. Provide a canceled cheque towards KYC and bank account verification
  6. Provide residential proof: Gather documents such as driving license, bank statement, utility bill, passport size photos, and checkbook. You need to have Aadhaar Card or PAN for investments in mutual fund schemes. 
  7. Complete the Know Your Customer (KYC) process: You need to comply with the KYC process for investing in SIPs, during which the mutual funds company will register your personal details, including but not limited to your name, date of birth, mobile number, address, etc. You can also opt for e-KYC. 
  8. Select the date of SIP: On this date, your money will get auto-debited from your bank account. Pick a date according to your income schedule, that is, for after you receive your salary or business income.  
  9. Decide the duration of SIP 
  10. Start your SIP investment

Alternatively, if you already have a trading account, you may start a SIP directly with the mutual fund house or your broker using the online method. Instead of lump sum (one-time) investment, you will choose the SIP option that allows you to invest in small quantities on a regular basis.

How much should you invest in SIP?

SIPs do not have an upper limit on the periodic investment amount. You can even start with as little as Rs. 500 per month. However, the ideal amount differs from investor to investor. If you’re wondering – “How much should I invest in SIP per month?” here are some pointers for you:

1. Study your financial goals: Is it an emergency fund or a retirement corpus? Let’s suppose you are building an emergency fund, then investing about 3 to 6 months of pay in a year is generally followed. Divide that amount into small pocket-friendly amounts for a monthly investment in SIP. However, you will need to increase the amount and the investment tenure for post-retirement planning.

2. Measure your risk profile: This is important because if you take uncalculated risks, you will have to deal with losses. This is especially true if the investment horizon is short-term. However, it is also true that if you play too safe, it will not yield desired results.

3. Consider tax efficiency: According to The Income Tax Act’s Section 80 C, investments of up to Rs. 1.5 lakh in ELSS funds are eligible for tax exemption. Hence, you can save up to Rs. 46,800 in taxes. Now, “how much should I invest in ELSS? —The answer is simple, the amount should certainly be lower than what you might need to invest in non-tax-saving funds.

4. Use the 50:30:20 rule: In case of doubt, trust the 50:30:20 rule. It takes care of all aspects of quality life. How do you apply this rule? You reserve 50% of your monthly income for essentials like grocery supplies, utility bills, etc., 30% for entertainment like movies, eating out, and vacations, and the remaining 20% for investing.

If you want to invest more, you can evaluate cost-cutting in the first two categories. Remember to invest at least 20% before making any expenses for the month, lest you get carried away by impulse buying.

What are the benefits of SIPs?

Other than how to invest in SIP, investors often wonder if SIPs are worth their money. Well, from the popularity of SIPs, there are no brownie points for guessing the right answer. 

Let’s take a deeper look into the benefits of SIPs:

Provides the opportunity of rupee cost averaging

When you invest in a SIP, your cost gets averaged out. This is mainly because of the market cycle—it is bearish, bullish, bearish, and so on. Regular investments in a SIP when the market is bearish will mean more units to invest in at a lower price. When the markets go up, the appreciation in the worth of your holding will be all the more lucrative. 

In short, when the markets are down, you buy more units, and when the markets are at their peak, you get lesser units. This way, your cost gets averaged out.

Has the perk of the power of compounding

Through the power of compounding, you not only get returns on the money you have invested but also on the gains. This way, you are able to create a substantial amount of wealth over a period of time. 

For instance, if you have, you have invested Rs. 1 lakh in a mutual fund in 1 year, the return of 1 year is 15%. So by the end of the year, this amount will be Rs. 1.15 lakh. 

Now, with the power of compounding, in the next year (assuming the rate of return remains 15%), it will provide the return on investment amount of Rs. 1.15 lakh, and not on your original investment of Rs. 1 lakh. In this way, in the second year, you will earn interest on interest. 

By the end of the second year, the amount would be Rs. 1.32 lakh. In this way, the power of compounding will help you to grow your money substantially.

Instils discipline towards investing

SIPs bring discipline to your overall investment approach. For instance, you earn Rs. X every month, and if you are unable to control your spending within a given budget, it might happen that by month-end, you are left with zero savings. 

But, when you invest in SIP, you will be compelled to follow a disciplined investment regime. If you maintain the regularity of first saving and then spending, you will likely not face any financial hardships.

What is SIP calculator?

With the SIP calculator, you can get an idea of the returns on your mutual fund investments made through SIP. The tool calculates the wealth gain and the expected returns for your monthly SIP investment. 

The calculators are designed to give an estimate on your mutual fund investments, as the actual returns offered by a mutual fund scheme vary, subject to various factors.

To quote Brijesh Parnami, CEO, Essel Wealth Services, “(The) higher the tenor, higher is the growth. This is the fundamental principle. However, all the investments in mutual funds are subject to market risks.” Although a SIP may be initiated in any mutual fund of your choice for any tenure, the generally followed investment horizon is at least six months and a minimum of five years for decent capital appreciation. Spend time doing thorough research on which mutual fund to invest in before starting your SIP. Once the choice is made, you may simply activate SIP in the mutual fund instead of lump-sum investment. Invest wisely and safely!

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