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SIPs or Systematic Investment Plans have become increasingly popular in the last few years and many individuals have discovered the charm of SIP and the easiness it brings to investing.

However, many investors are often confused about systematic investment plans and a lot of investors think of SIP as a product. It is not uncommon to come across a query - can I invest in SIP to achieve my financial goal?

SIP a tool, not a product


Having already revisited what are mutual funds, how they work and what are the popular types out there, one should understand that SIP is not a product, but an investment vehicle offered by many mutual funds to investors, allowing them to invest small amounts periodically instead of lump sums.

SIPs or Systematic Investment Plans have become increasingly popular in the last few years and many individuals have discovered the charm of SIP and the easiness it brings to investing.

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Another point to make clear right off the bat is that SIP is merely a tool that helps you to invest regularly in a mutual fund schemes, mostly in equity mutual fund schemes. A SIP helps you to stagger your investments in equity mutual fund schemes over a period. The frequency of investment is usually weekly, monthly or quarterly.

Most mutual fund advisors do not recommend investing a lumpsum in equity mutual funds.

They believe that staggering investments over a period, depending on the quantum of money, is a better way to invest in equity mutual funds and avoid catching the market at a certain level. And yes, it has proved to be a convenient tool for salaried investors to regularly invest in mutual funds.

Are SIPs worth it?

SIP investment in mutual funds is considered a good investment option for novice investors or investor who are planning to invest for their retirement in their 20's as because SIP investment in mutual funds reduces the effects of market volatility and yield good returns when taken for long-term.

SIP brings about financial discipline and consistency to your investment and savings. It helps you to invest regularly without wrestling with market mood, index level, etc.

SIP puts an end to all savings-related predicaments
Let’s say you want to put a fixed amount every month in a mutual fund scheme, but you can’t seem to find the time. When you do have the time, you might be worried about market conditions and think of postponing your investments. Or you might be thinking of investing more if the mood is optimistic. SIP puts an end to all these predicaments. The money is automatically invested regularly in a scheme without any effort on your part.

Let’s now summarize why SIPs have grown as a popular option, especially among salaried individuals.

Perks of systematic investment plan (SIP)

• Power of compounding

As is the case with compounding, one’s returns themselves start earning and the profit starts piling up at an enormous pace. In layman terms, the earning from investments that are not spent but reinvested over a period can generate greater returns.

To know more about how the power of compounding multiplies your hard-earned money, read further into: 

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• Rupee-cost averaging

Equity markets are inherently volatile. A stock index never moves in a straight line, so investors need to be ready for volatility. In fact, it is the volatility that allows one to pick up more units when prices are low.

You, as an investor, must always look at the long-term performance across market cycles to see the complete picture of returns for a mutual fund.

Therefore, in SIPs, investors need not worry about the right time to enter the market. Rupee-cost averaging allows a customer to opt out of this stage.

You, as an investor, must always look at the long-term performance across market cycles to see the complete picture of returns for a mutual fund.

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When he/she becomes a regular investor, their money fetches more units when the price is low and lesser when the price is high. During the volatile period, it may allow one to achieve a lower average cost per unit.

To read more about cost averaging and how it helps you reap benefits, can refer to the previous detailed story on a related concept.

• Flexibility and convenience

Although it is advisable to continue SIP investment with a long-term perspective, a subscriber can discontinue it at any time (advisable to consider this option in times of necessity or an urgent requirement for cash).

A customer can also increase or decrease the amount being invested.

SIP is a hassle-free mode of investment.
One can issue a standing instruction to the bank to facilitate auto-debits from an individual’s bank account. These debits can be weekly, fortnightly, monthly and bi-monthly, depending on the choice of the investor.

• Disciplined investing

If you want to be a successful investor, you need to be disciplined. SIPs make you invest fixed amounts at regular intervals, thereby committing to regular saving. Every investment is a step towards attaining one’s financial objectives.

It has been consistently seen that over a longer term (5 years or more), mutual funds through SIPs continue to provide higher returns than several debt instruments which still today is the go-to investment option for Indian households. So, by getting into a discipline of investing periodically in SIPs, you can reap long term benefits.

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How SIPs work?
This method of investing is like the recurring deposit (RD) facility offered by banks, where one deposits a fixed sum of money regularly (into RD account) and reaps the benefits of compounded returns on invested capital.

With the SIP mode of investment, the money is deployed in selected equity or debt mutual fund scheme. All one needs to do is select a scheme, define a regular investment amount, pick a date for the monthly deductions, and set the investment tenure. Once set up, the fund house automatically deducts the monthly payment from your bank account and invests it in the scheme.

There is no doubt that SIP itself is a tried and tested way of investing. It is an ever-evolving, convenient investment option. However, to attract more investors to mutual fund schemes and offer innovative ideas, fund houses have added several new features to the popular SIP option over the years to complement the regular form of investing and help in the accumulation of wealth faster.

Evolution of SIPs

Step-up SIP facility offered by mutual funds allows one to gradually increase the monthly investment amount at regular intervals over the years by a percentage.

Flexi SIP option provides the flexibility to either increase or decrease the instalment amount in any month as per the availability of the cash. This can be set in combination with the Trigger SIP option.

With Trigger SIP, one can set either an index level, NAV trigger, capital trigger, or time-based trigger. This is to take advantage of any market movement in anticipation.

Flexi SIP option provides the flexibility to either increase or decrease the instalment amount in any month as per the availability of the cash.

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Like all investments, even these investments are subject to market risk, but to gain more from the risk, this is a new option introduced by market participants.

Launch of Smart SIP

One of the latest options is the Smart SIP facility offered by some asset management companies (AMCs) and distributors.

Smart SIP is an intuitive way of investment, where the investor’s money is invested based on the prevalent market conditions. Under the option, an individual aim to time their SIP investment to generate higher returns and create an alpha as compared to the regular SIP.

Smart SIP involves factor-based investment technique using an algorithm to evaluate certain valuation indicators such as price-to-earnings (P/E) ratio and decide the SIP contribution amount. In this facility, the regular investment amount is tweaked as per the prevailing market conditions.

Here is an example of Smart SIP
When the market valuations are high, one would buy less units of equity mutual fund or temporarily park the money in different investment avenue, or not invest at all for that period. When the market valuation dips, a higher number of mutual fund units will be bought. It is like a Flexi SIP option, but investment amount control is reliant on the way the market moves, and accordingly, it is deployed into equities or not.

Careful of fund allocation

You must be careful with fund allocation as it is an important step in SIP investment. Always be choosy in the selection of funds and make sure that you do not have an excess number of equity mutual funds.

Instead of investing in too many funds, it is advisable to invest only in three to four funds that have been consistently performing well over the past years.

In the beginning, it is important to build a well-diversified as well as a balanced portfolio. This will ensure a good start for your investment. Investing in a combination of large-cap-oriented, small- and mid-cap funds, multi-cap funds can be a good call.

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How much to invest in SIP?

Before we go into how one can go about investing in SIP, it is also important to know how much to invest in a SIP.

Well, it is often advised to invest at least 50 per cent of your money into equities in the above-mentioned asset classes. It will assure you a robust return over a period. However, for that, you are required to be patient.

You should keep in mind that capital market investments are always associated with some amount of risk or volatility. And, this may affect your returns. That is why long-term equity investments are always better, as market irregularities get corrected over a period.

Stay invested

Therefore, it is advisable to stay invested till the market evens out. If you keep moving out of your funds you enter new assets whenever there is a dip in the market, it will only increase your expenses. Moreover, will also reduce the overall return that your fund is expected to earn.

Exiting midway will only make you miss out on many good market days that could have fetched you quite a high return.

This means you should have an in-depth knowledge of how to invest in SIP in India. As the capital market is mostly volatile, it is quite natural that your fund will experience both profit and loss from time to time.

It is advisable to stay invested till the market evens out. Exiting midway will only make you miss out on many good market days that could have fetched you quite a high return.

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But the trick is to stay invested as long as possible to make your money grow. It is possible only when you know how to invest in SIP in India. Also, it is wrong to exit your funds or stop the SIP even when the market is under-performing.

Here is an example of how to go about investing in a SIP:
Let's say your monthly salary is INR 60,000 or about Dh3,000 and you set aside 10 per cent of your monthly salary towards a SIP, which comes to INR 6000 (Dh300).

A detailed investigation on the largest mutual funds in India will help you see how several funds have consistently outperformed the overall market over a large period. Take for example SSI blue Chip Fund. It is one of the largest mutual funds in India, which was launched in June 2006. The fund has over INR 10 billion in assets and this was achieved within a period of 10 years.

If you have started investing in this plan through SIP from June 2006, INR 6000 will be automatically taken out from your fund every month. The money will be invested into the fund on a monthly basis. This is exactly how we take care of the two basic tenets of investments as mentioned above – consistency and discipline.

As Systematic Investment Plan (SIP) automatically takes out INR 6,000 every month, the consistency of investment is maintained. This also ensures a disciplined investment as the mutual fund company invests the money on your behalf.

And by the power of compound interest, the INR 6,000 that you keep aside every month, accumulates over the years to turn into a huge amount of money.

For example, if you have started investing from June 2006, then till March 2015, the number of times INR 6000 has been auto deducted from your account is 106. So, total INR 636,000 (6000 x 106) (Dh 31,231) has been auto debited from your account and got invested in the capital market.

You will get something close to 17 per cent as the overall return (annualized compounded return).
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NRIs and SIP investing

If you are an NRI you can invest online. To know more about how NRIs can invest in mutual funds in India and to remind themselves about risks foreign exchange pose on your income you can read this. 

To get your KYC done to invest in mutual funds via SIP, you must provide certain details, such as your name, date of birth and mobile number.

Log onto the website of the fund house of your choice and provide the required details, such as a soft copy of your PAN Card and Indian address proof (either your local Indian address or any of your blood relatives).

This is just the one-time thing you need to do, and you are then eligible to invest in multiple funds. You can then start your SIP online once your KYC is done.

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For SIP investments in India, you need to visit the website of the fund house you wish to invest in and look for 'Register or 'New Investor' link. Fill in the basic details when prompted and create your Username and Password for online transactions.