Investing in Systematic Investment Plans (SIPs) is a popular and convenient way to achieve long-term financial goals.
Whether you’re planning for retirement, saving for your child’s education, or wanting to build wealth, SIPs can help you accomplish your investment objectives in a systematic and disciplined manner.
What Is a Systematic Investment Plan (SIP)?
A Systematic Investment Plan (SIP) is a type of investment approach that allows you to consistently (monthly or quarterly) invest a fixed amount of money in your preferred investment tool.
In short, SIP is the opposite of making lump sum investments. One can make a lump sum investment either once or more, but it’s non-regular and non-systematic.
Through SIPs, you can reap the benefits of rupee cost averaging. It allows investors to buy more units of the asset when the market is down and fewer units when it is up. This reduces the impact of market volatility on your overall investment.
Overall, SIPs are a convenient and disciplined way of investing over the long term.
Benefits of Investing in SIPs
There are several benefits of investing in SIPs.
1. Disciplined investing
In SIPs, investors must regularly invest at fixed intervals. Thus, they can inculcate disciplined investing habits.
2. Rupee cost averaging
SIPs help reduce the impact of market volatility as investors buy more units when prices are low and fewer units when prices are high.
For example, let’s say you want to invest $100 every month for the next five months.
In the second month, Bitcoin (BTC) price fell to $18,000. The same $100 will now get you 0.0055 BTC.
The pattern continues for the next three months, with BTC price fluctuating between $20,000 – $18,000
At the end of five months, you have invested a total of $500 and purchased 0.0263 BTC. Your average cost is $19,000, which is lower than the highest price ($20,000) of Bitcoin (BTC) during that period.
This is a much simpler example. In real life, markets are way more volatile and this difference could be huge.
3. Power of compounding
SIPs allow investors to take advantage of the power of compounding.
For example, let’s say you invest $100 and get an annual return of 10%. At the end of the fifth year, you would get a return of $61.05 (i.e.61%), bringing your total balance to $ 161.
But after 10 years, your initial investment of $100 would have grown to $259. It is over a 159% increase in just an additional 5-year period. This is the power of compounding.
SIPs are a convenient way to invest. You can automate the investment process and make regular investments without worrying about timing the market.
Also, SIPs offer flexibility regarding the investment amount, frequency, and duration.
SIP Vs. Lump Sum Investment
SIP and lump sum investments are two ways of investing in mutual funds.
Here are the differences between the two.
1. Investment amount
In SIP, investors invest a fixed amount at regular intervals. In contrast, lump sum investments require a larger amount in one go to get meaningful returns.
2. Market timing
SIPs help investors avoid the risk of market volatility by investing regularly, irrespective of market conditions. While lump sum investments require a little bit of timing the market.
3. Cost averaging
SIPs offer the benefit of rupee cost averaging. But it’s not the case in lump sum investments. With SIPs, the cost of your investment averages out.
How to Invest in SIPs: Step-by-Step Guide for Beginners
Below is the step-by-step guide on how to invest in SIPs.
- Step #1: Determine your investment goals and risk tolerance. Generally, SIPs are recommended for long-term investment goals, such as retirement planning, wealth creation, or children’s education.
- Step #2: Identify an asset that aligns with your investment objectives and risk profile.
- Step #3: Open an account with the respective platform that offers that asset.
- Step #4: Submit KYC documents (KYC form, PAN card, and address proof) to complete the account opening process.
- Step #5: Choose the SIP frequency (monthly, quarterly, etc.) and the investment amount you want to invest.
- Step #6: Set up an auto-debit mandate to enable automatic deductions from your bank account on the SIP date.
- Step #7: Review your investment portfolio periodically and make changes if required.
- Step #8: Consider increasing your SIP amount periodically to benefit from the power of compounding. As a rule of thumb, increasing the SIP by a minimum of 5% every year is advisable.
- Step #9: Stay invested long-term to reap the benefits of SIP investing. Around 5 to 7 years is a good time frame for long-term investing.
Common Mistakes to Avoid When Investing in SIPs
Below are some common mistakes to avoid when investing in SIPs.
- Starting with a high SIP amount that is not affordable in the long run.
- Stopping or pausing the SIP during market downturns can defeat the purpose of rupee cost averaging.
- Investing in SIPs for short-term gains rather than long-term wealth creation.
Investors should be aware of these mistakes and make informed decisions while investing in SIPs.
Investing in SIPs can be an excellent way to build wealth and achieve financial goals.
By following the step-by-step guide outlined in this article, beginners can easily invest in SIPs and reap the benefits of long-term wealth creation.
It’s essential to start investing early, be disciplined and patient, and make informed investment decisions based on your risk appetite and financial goals.
So, start your SIP investment journey today and watch your money grow over time. Remember, every small investment you make today will go a long way in securing your financial future.
1. What is the minimum amount required to invest in SIP?
The minimum amount required to invest in Systematic Investment Plan (SIP) varies based on your investment goals and the asset you are investing in. As a rule of thumb, increasing the SIP by a minimum of 5% every year is advisable.
2. What is the ideal duration for investing in SIP?
The ideal duration for investing in SIP depends on various factors. It includes one’s investment goals, risk tolerance, and financial situation.
Generally, SIPs are recommended for long-term investment goals, such as retirement planning, wealth creation, or children’s education. Investors should invest in SIPs for at least 5 to 7 years to achieve their investment goals.
3. What is the difference between SIP and mutual funds?
Mutual funds are investment vehicles that pool money from various investors to invest in stocks, bonds, or other securities.
SIP (Systematic Investment Plan) is a method of investing in mutual funds. SIPs offer investors the convenience of investing regularly in mutual funds. They are a way to invest in mutual funds in a systematic and disciplined manner.
4. What are the tax benefits of investing in SIPs?
Investing in SIPs offers tax benefits to investors.
SIP investments in equity-linked saving schemes (ELSS) are eligible for tax deductions up to INR 1.5 lakh under Section 80C of the Income Tax Act.
Also, SIP investments in regular equity and debt mutual funds held for more than one year and three years, respectively, are subject to long-term capital gains tax, which is lower than short-term capital gains tax.