Life is full of varying aspects that range between tangible ones to intangible ones. The queer aspect however is, many a time, intangible aspects appear easier to handle than the tangible ones. Some categories that fall under the tangible aspects are performance in studies, achievement in business volume and finance aspects of personal and official life. Some intangible aspects that call for help or deep thinking pertain to the mental, emotional and psychological arena. These intangible aspects prevail over every second of our life in different velocities. The differing velocities and nature of issues each one of us face makes life interesting many times and sometime make it miserable too
Coming to the tangible aspect of life, our achievements in terms of target oriented performance and Finance is a couple of aspects that fall in this category. Every organization sets goals in terms of numbers and business volumes to be achieved in specific periods of time. When it comes to personal life, Finance is one of those major aspects that are tangible or rather measurable in nature. Setting up finance related goals year on year or for longer periods of time enable measurement of the same. Such finance goals can be short term or long term in nature.
The nature of financial goals depends mainly on the type of the product we choose to invest in. This decision is influenced majorly by the individual commitment towards which we plan the same. Some financial products like Insurance policies, Fixed Deposits and Recurring Deposits are considered traditional and conservative in nature. While Recurring Deposit and Fixed Deposit among the same, is short term in nature they can also be long term depending upon the preference of the Investor. Insurance policies are mostly long term in nature and are beneficial only when they are so. One of the modern investment options that yield maximum benefits as well as considered safe is Mutual Fund. Saving through SIP (Systematic Investment Plan) in particular is easy way to accumulate money in the maximum profitable manner. So what is SIP – Systematic Investment Plan?
What is SIP – Systematic Investment Plan?
It will be easy to understand the concept of SIP when explained in comparison with one of the conservative savings options people have been aware for years. Let us look at what exactly a SIP is through various definitions in order to get clarity over the same in the perfect manner.
- SIP or Systematic Investment Plan is a product very similar to Recurring Deposit in terms of modality
- As the very name suggest, SIP is systematic in nature through periodic investments
- The amount invested is usually fixed in nature
- The fixed amount invested in a periodic manner is invested in Mutual Fund schemes
- The confirmation of investment amount received in the form of SIPs is in the form of units allocated to the Mutual Fund account of the investor
- These unit bought every time upon investment of fixed amounts of money implements a suitable savings option all by themselves
Now that we have clarity over what a SIP is actually, it is of utmost importance to understand what Mutual Funds are. Now, you may think as to why you must understand about Mutual Funds to make investments through Systematic Investment Plan (SIP)? This is important because SIP’s belong to Mutual Funds. Let us look at in detail about Mutual Funds and their nitty gritties in detail.
What is Mutual Fund?
The buzz word of today is Mutual Fund. The terminology Mutual Fund creates a lot of interest in people though the modality of its operations appears cumbersome to understand for many. Mutual Fund in reality is one of the most profitable financial products of the day which offers high levels of safety to investors. Let us understand what Mutual Fund is exactly so we get clarity over how SIP relates to the same in real time.
- Mutual Fund is a professionally managed financial product where the funds of many investors are pooled together and invested in profitable venues
- Generally, such pool of money is invested in finance venues like instruments that belong to short term money markets, precious metals and similar commodities, bonds and stocks
- Every fund’s objective differs between one class of investors and the others
- This type of investment gives tremendous opportunities to investors to invest any value of amounts as per their comfort level
- When investments in Mutual Fund are routed through companies, professional Fund Managers manage the tracking and investment activities
- Such routing is handled through Trustees, Sponsors or Asset Management Companies operating for the purpose
- These Mutual Fund management bodies act as per the rules and regulations set by the SEBI and ensure the investors earn profitability in a reliable and secured manner
- The pool of money that belongs to different types of investors are invested in products that differ in risk levels to balance out the profitability
Types of Mutual Fund Schemes
Mutual Fund Schemes are of different types. Understanding each type of Mutual Fund in a clear manner will help one comprehend SIP in a clear cut manner.
Mutual Fund Schemes can be divided into many types based on the maturity period of the same. Some such types are explained below.
Open Ended Fund
- Open ended fund offers the maximum liquidity option among the others
- As the very name refers to, investors can invest or redeem from such funds all through the year based on the prevailing NAV rates
- Owing to the flexible redeeming options, Open ended funds do not have a fixed maturity date
Close Ended Fund
- Close ended Fund, as the very name implies, has fixed maturity period attached to the same
- Closed Ended funds are generally listed in stock exchange
- Close ended Funds can be subscribed at any point of time when a new product is launched but the maturity period is limited to 3 to 6 years
- Interval Funds are a mix and match of Open Ended and Closed Ended types of Mutual Funds
- Such type of funds may get listed in Stock Exchange or may not too
- Interval Funds can be sold or redeemed at the NAV prevalent during predetermined periods accepted by the Investors
Mutual Fund Schemes can be divided into many types based on the investment objectives and some such types are given in detail below.
Growth or Equity Funds
- The main objective of such funds is Capital Growth from a long term angle
- Owing to the long term capital growth objective, the money invested in such type of funds are usually reinvested in Stocks
- Investors who buy shares under this category of Mutual Fund are considered as owners of the Fund portfolio to the extent of investment they have made
- Minimum 65% of corpus accumulated under this type of funds are invest in securities that are equity related in nature
- Looking at it from the end investment point of view, the funds under this category are typically invested across many industry verticals
- These funds are typically for such investors who are ready to wait long term and capable of taking high risk
Income or Debt Funds
- As the very name suggests, the corpus from this pool of funds are invested in Income Securities and Debt Instruments.
- Some such Income Securities are instruments belonging to the Money market, Gilts which are known as Government Securities, Corporate Debentures and Bonds
- Investment made in this type of funds helps preserve capital in an intact manner
- Minimum 65% of these funds are invested in Income securities
- Money invested in this type of fund offer a steady income to investors since the same is low risk in nature
- The regular earnings they offer to investors make them less volatile than Equity funds
- This type of fund is mostly for those investors who wants their capital to be safeguarded from high risks volatile market fluctuations
- The investment objective in this type of fund is pre determined as in other types
- As the name suggests, this type of fund is invested in both Fixed Income Instruments as well as Equity to strike a balance of growth and risk
- Balanced Funds offers capital appreciation to Investors in a steady manner contributing to stabilized returns
- Investors to target moderate growth along with regular income go in for investing in this type of fund
- Approximately 60% of money invested in this type of fund is reinvested in Equity while the balance 40% is invested in Debt Instruments to maintain a healthy ratio
Liquid or Money Market Funds
- All investments made for a period less than 91 days fall under this category
- This type of fund is usually invested in short term instruments which are safe havens for investment
- Some such short term instruments in which this type of fund is invested are Commercial Paper, Certificates of Deposit and Treasury Bills
- This type of fund offers three fold benefit to investors namely assured moderate Income along with Capital preservation and high levels of liquidity
- Typically individuals and corporate who have surplus funds invest in this type of fund to keep their idle money busy
- No credit risk is involved while investing in this type of fund
- This fund is one of the safest options for investors who are highly risk conscious since the investment is made only on Government Securities
Tax Savings Funds or Equity linked Tax Savings
- This type of investments are made by investors specifically to avail Tax benefits as specified under the Income Tax Act of India
- Under this fund, investment is made primarily in Equities
- Invest in such funds is considered as highly Growth oriented
- Investors who target to double their money during mid or long term go in for this fund
- This fund suits investors with high appetite for risks
- This type of fund is closely related to various types of Indexes like Nifty, BSE Sensex etc…
- This fund is invested only in those stocks that are listed in Stock Exchanges
- The stock’s weightage in the listing decides the weightage of the amount invested under this fund
- Owing to this dependency, the returns from such funds is also decided by the performance of the stocks listed in the exchanges
Sector Specific Funds
- As mentioned in the Scheme information document, investment under this fund is done only in specific industrial sectors
- The returns that investment in this type of fund is highly dependent on the performance of the specific industries invested in
- This type of fund is suitable for investors who have a high appetite for risk taking
To summarize, let us have a look at funds and the usual avenue their investment is parked at
- Growth or Equity Fund in Stocks
- Fixed Income Funds in Corporate and Government Bonds
- Money Market Fund in Treasury Bills and similar fixed income securities that are short term in nature
- Balanced Fund in Income Securities and Equities
- Sector Specific Fund in particular sectors like Pharma, Automobile etc.
- Index Funds in Nifty, CNX ETC…
- Fund of Funds in Mutual Funds that belong to other categories
Whatever we invest in SIP – Systematic Investment Plan gets reinvested in Mutual Fund Schemes. This is why a clear understanding of the different types of Mutual Funds is important. We will now venture into how SIP’s exactly work so it throws more clarity in your understanding about the same.
The working of SIP – Systematic Investment Plan
How exactly does a Systematic Investment Plan work? Let us look at the same in detail.
- A SIP is nothing but easy installments of money invested by the investors in specific financial products
- The fixed amount you agree to pay month on month is automatically debited from your Bank account in fixed periodicities
- The Company that acts as the middle man invests your money in various funds taking Rupee Cost Averaging into consideration
- In return to the money you invest in SIP, specific number of units is allotted to your SIP account in the same periodicity the investment is made
- The ongoing market rates which is termed as NAV (Net Asset Value) acts as the basis for deciding on the quantities of units to be allocated
- The units thus purchased using the money invested through SIP at the market prevailing rates makes investors benefit out of the power of compounding and Rupee Cost Averaging
Now that we know how exactly SIP works, the ambiguities that still continue to eat up our mind are Rupee Cost Averaging and the Power of Compounding. What are these and in what way do they contribute to the investors? Let us look at these concepts in a detailed manner. This will give us a clear idea as to how investments in SIP yield high profit to investors.
Rupee Cost Averaging
What is this concept called Rupee Cost Averaging? How does it contribute to the profitability of Investors? Let us look at the concept in detail to get a clear understanding about the same.
Timing one’s entry into the Mutual Fund market appears to be a herculean task particularly for those who are new to SIP and Mutual Funds. The volatility of the markets takes one off the hook confusing them the maximum possible extent. A clear understanding of the Rupee Cost Averaging concept will help you remain calm and clear about your investments through SIP.
- Decide on the scheme of investment you want to go in for
- Decide on the SIP amount you will be paying during this term
- Decide on the periodicity of the payment – like if it is going to be weekly, monthly or quarterly
- As you continue to pay, do not worry about market ups and downs
- The recurring amount of money you invest on a periodical basis will fetch you more units when the market price is low and vice versa
- This will balance out the losses you may have otherwise acquired during low tides in the market by fetching you higher return during the high tides
- This automatic balancing act is termed as Rupee Cost Averaging
Let us look at the same with an example.
- Say for instance you have started investing Rs. 10,000/- per month in SIP.
- You continue paying the amount month on month
- If at any given point of time frame if the market is high, the number of units that will be allocated for the amount will be low
- In the same wave length, if at any given point of time frame if the market is low, the number of units that will be allocated for the amount will be high
- When averaged out, the ups and downs in the market rates would have never affected the return on your investment.
- In sharp contrast, it would have fetched a higher rate of interest than the traditional finance products like Fixed Deposit or Recurring Deposit
This is what is termed as Rupee Cost Averaging which acts as a value adding concept to investments in SIP.
The next important concept we need to understand whole investing in SIP is – Power of compounding.
Power of Compounding in SIP
The concept of power of compounding can be fully experienced only when investments are initiated during early stages in life.
Power of compounding implies that the return on investment is on both the principle invested by you an investor as well as the interest accrued in a periodical manner.
Compounding is that concept in which the interest on Principle also earns interest. Over a period of time the interest on the principle plus interest earns interest and the cycle continues to grow the money in huge levels.
Let us look at this through an example
- You are investing Rs. 10,000/- in a SIP every month
- The performance of the market is good earning you an interest rate higher than the traditional finance products like Fixed Deposits. Assuming that the return is around 10% percent, the interest accumulation to your initial investment of Rs. 10,000/- will be 11,000/-. Next month, at the rate of 10.3% (market decided rate) the interest will be calculated for 11,000/-
- This way, as months pass by, your money keeps multiplying in a fast paced manner since the interest amounts your investment fetches also gets reinvested in the market.
- This makes your earn more interest every passing month.
- As the interest increases the return towards the total amount invested also increases further increasing the return owing to the astonishing concept termed as compounding.
It is to be noted that the word ‘Interest’ is used here just to explain the concept in an understandable manner. The return on the SIP investment however will be in the form of Units allocated as per the NAV as per the market rate. This market rate is termed as interest in layman’s terms.
To put it in a nutshell, the concept of compounding is capable of transforming what is termed as Investment into an income generating asset all by itself. This is made possible by allowing the interest accumulation on your basic investment to accumulate over long periods of time.
Thus, compounding by itself acts as a highly powerful concept. The Multiplier Effect it generates makes the growth of your investments highly geometric than arithmetic. Compounding increases the rate of return, making the investment curve a steeper one.
Start investing early. Invest for long periods of time. This will allow you to experience the complete benefit of the concept called Compounding.
Common mistakes to avoid while investing in Mutual Funds through SIPs
Investing in Mutual Funds has remained a taboo for many till recent days owing to the lack of understanding of the same. However, today, major chunk of Investors are opting to invest in Mutual Funds particularly through SIPs – Systematic Investment Plans.
Misconceptions make investors commit mistakes. This is applicable to any field. When it happens in the field of finance and investments, the mistakes done may be costly ones. When it comes to finance, wealth building must is a prudent goal rather than losing money through mistakes. Particularly with gold mine financial products like Mutual Funds, any prudent investor must be able to mint money to a large extent. Let us look at some common mistake that investors make while investing in Mutual Funds through SIP – Systematic Investment Plans.
- Investing small chunk of amounts
This is one of the greatest mistakes that many investors who invest in SIP do. Investors, particularly the first timers invest in SIP, starts investing as minimum as Rs. 1,000/- per month. This amount is more so decided by many first time investors just to test the depth of waters called SIP. While there is nothing wrong in testing the waters, due to the low quantum levels, the yield will not be as attractive as an amount of Rs. 5000/- per month. This may sometimes demotivate the investors to understand the worth of SIP in its true colors.
Though this is a mistake unknowingly done by many investors, particularly the new entrants, course correction can be quickly taken. There are no restrictions to the number of SIP investments an individual can make. Once you have tested waters starting a SIP for a lower amount and got a pulse of how the scheme works, start another SIP for a higher amount. This will help you taste the real flavor of SIP in all its sumptuousness.
- Investing in wrong Mutual Fund Schemes
Many first time investors and sometimes even experienced ones commit the mistake of investing their SIP in wrong Mutual Fund schemes. This mistake happens for many reasons including lack of knowledge about the best performing product in the market. Sometimes investors get carried away by the recent trends that prevail in the market or their previous experience with a scheme. They decide to go by the past and invest in the same product they went with while the market trend for the scheme might have changed towards the negative by then.
Another scenario why such a mistake happens is the decision of the investors to invest in a sector or industry that is high yielding due to its growth. There is nothing wrong in investing in industries or sectors. However timing matters the most in such investments. Moreover by the time the investor accumulates huge chunk of money in the same, the sector might have lost its market flavor. This may fetch low returns to the investors in sharp contrary to their expectations otherwise.
- Investing for too short periods of time
There are many financial products that are tailor made for short term investment. SIP though is not one among the same. Many new investors invest in SIP products with a wrong outlook towards the time frame of the same. The thumb rule to invest in Mutual Fund Schemes through SIP is patience. SIP is that type of investment whose real success depends on the two major concepts we saw earlier – .Rupee Cost Averaging and Power of Compounding.
If your SIP investment needs to yield an attractive return then you will have to give the time frame required for these two concepts to work out. The effects of both Rupee Cost Averaging and Power of Compounding can be experienced to its fullest capacity only when accumulation of investment is allowed. Investing in Mutual Fund through SIP by itself is a high yielding finance scheme that works out well only when investment is made for longer periods of time. Any impatience with respect to the investment period will not yield the otherwise high yield once can anticipate from SIP investments.
Remember, your SIP investment planning must have a solid link to your financial goals. Ensure both your financial goals and SIP investments are long drawn in nature so that you can taste the high yield you wanted to without any hassles. Investing in Mutual Fund through SIP is one of the safest modes to grow your money in a fast paced manner. However, give it the time frame it may require to make you rich by setting your expectations pertaining to time frame right.
Benefits of investing in Mutual Funds through SIP – Systematic Investment Plans
Investing in Mutual Funds through Systematic Investment Plan (SIP) inculcates certain habits and practices in the investors. Such habits as well as the tangible returns on investments act as huge benefits to investors on the long run. Let us look at some of the major benefits investing in Mutual Funds through SIP offers to investors.
- Inculcates discipline in approach
SIP is a financial arrangement which needs to be done in a consistent manner. Not only is the amount of investment committed to be paid is fixed by nature but also the periodicity in which it needs to be paid remains constant. This periodic commitment makes small chunks of savings build into huge collection of investment in an easy and simplified manner. The bulky huge return on investment that such a disciplined approach towards investment yields thus makes the investors benefit both in tangible as well as intangible means.
- Monitoring is not a Herculean task
Investing in Mutual Funds though Systematic Investment Plan (SIP) is an easy task. Monitoring the status of the investment from time to time is also equally an easy task. SIP investment is absolutely streamlined through well set processes. Be it the set of responsibilities of the intermediaries or the systematic processes that keep the investors well informed in a periodic manner, each aspect is well defined. SIP investments fall under a financial body that has complete control over the end to end process of investment in Mutual Funds through SIP. This helps the investors to track the status of their investments right from the time of the same till the period they want the same to continue. This is why we said tracking the performance of their investment done through SIP is not a Herculean task.
- Rupee cost Averaging concept safeguards interests
Unlike many other financial products, investing in Mutual Funds particularly through Systematic Investment Plan (SIP) ensures reduction of risk for investors. The inherently built feature termed Rupee Cost Averaging makes this investment option called SIP a safe avenue for investors to invest in. Rupee Cost Averaging helps investors buy stakes when the market performance is low and less when the performance of the same is high. This ensures that no investor loses huge chunk of money at any point of time during their investment. Thus, Rupee Cost Averaging concept acts as a huge advantage to those investors who invest in Mutual Funds through SIP.
- Convenience combined with simplicity
One of the major benefits that investing in Mutual Funds through SIP offer is ease of payment options. Investing in SIP on a periodical basis does not cause any practical hassles to the investors since the process is a highly simplified one. The investor has the option to either give enough number of postdated Cheques towards the periodical payment of their amounts. The other option that any investor has is to go in for the auto debit facility before the stipulated date in fixed periodicity. This safe guards investors from standing in long queues for payment and updation reasons. Investment in SIP can be done by the investors sitting in their own place of convenience at all points of time.
- Benefits of Compounding – The best advantage
One of the major benefits that investors can enjoy when they invest in Mutual Funds through SIP is the benefits of Compounding. Any investor can reap the benefits of this concept termed as compounding when they start investing in SIP right from early stages of life. Even when the amount that is invested in SIP is small in quantum, starting early in life and investing the same for extended periods of time fetches huge benefits to investors. In fact, the benefit of compounding can be fully enjoyed by investors when they meet these two conditions as a thumb rule. SIP is the only financial products which can make investors experience the benefits of compounding to the fullest extent.
- Investor need not wait for market timing
One of the main issues investors who go in for Mutual Fund investments through SIP complain about is the right timing to enter into the market. Not all investors are finance experts and so it is not fair to expect the perfect decision pertaining to timing every time. This makes investing in SIP look like a cumbersome and risky process. In reality, anytime is good time to start investing in Mutual Funds through SIP. This is not the advantage available with any other finance product in the market place. SIP is a finance product that fetches profits to the investors through the concept termed as Rupee Cost Averaging. The return on investment to SIP investors gets averaged out through this concept making anytime a suitable one to start investing in SIP. This eliminates the worry of investors to wait for the right timing to invest in Mutual Funds through SIP or going in search of financial advisors to understand the same.
- The tremendous power of initiating SIP early
Aged people at home have recommended savings as a habit to be inculcated in people right from their childhood. Developing the habit of savings right from one’s early years helps them accrue reasonable chunk of money as they grow up. This chunk helps people manage their growing needs coming in handy during all such times. SIP is one modern financial product that supports initiating savings habit right from early stages of life. Anyone who starts investing in Mutual Fund through SIP right from their early stages in life reaps the maximum benefit out of the same than others. Starting early is the key when it comes to SIP since this yields the maximum benefits to the investors than those who start late. When you start SIP early, you experience the astonishing results of Power of compounding as well as Rupee Cost Averaging in the most effective manner.
- Wealth creation through SIP investments
One of the greatest advantages investors gain out of investing in Mutual Fund through SIP is the huge wealth it creates for them over a period of time. The return on investments that SIP offers to investors is usually unbelievably huge and is incomparable to other financial products in the market. This is precisely the reason why return on investment from SIP is termed as wealth creation than just another investment option. Saving in small chunks in a comfortable manner and fixed periodicity builds your money from a mole to a mountain stature. This is made possible by the excellent concepts involved in SIP namely Rupee Cost Averaging and Power of Compounding.
- SIP facilitates planning and achievement of Financial goals
Many among us are in the habit of setting short term and long term financial goals to meet certain commitment of ours in a timely manner. Investing in Mutual Funds through SIP is the best way to achieve one’s long term objective since the benefits are huge when the timing is an extended one. Financial goals can be easily achieved when investment is in Mutual Funds through Systematic Investment Planning. Set your financial goals. Implement the same by investing in SIP. Stat early so that you can achieve your long term financial goals on time or even before hand. Remember, long term financial goals and investment in SIP goes hand in hand.
The above are some of the major benefits prudent investors investing in Mutual Funds through SIP can benefit from. Understand the concept of SIP in a clear cut manner and become one among the wealthiest investors in the globe.
Myths about SIP debunked
As is the case of many effective things in various fields, various kinds of myths prevail in the case of investments in Mutual Funds through SIP. Let us look at some such myths that prevail in the SIP arena of Mutual Funds.
- What does SIP stand for?
SIP actually stands for Systematic Investment Plan, taking its name from the fixed amounts and periodicities in which the same is invested by investors. However, people who consider the abbreviation of SIP as Small Investors Plan mislead them into thinking that SIP is only for small time investors. This attracts only those investors who deal with small chunk of amounts to invest in SIP.
Debunked – This is a wrong notion which qualify to remain a myth. SIP stands for Systematic investment Plan where investors invest standard amounts in Mutual Funds in fixed periodicities and mode.
- SIP must be started only when the market is low
Many investors, particularly the first timers, wait for the right timing to invest in Mutual Fund market through SIP. In reality, investing in Mutual Fund through SIP is an ongoing financial activity which need not be timed at all. The twofold basis of SIP Rupee Cost Averaging and Power of Compounding makes SIP investments strong at all points of time. This makes SIP a congenial finance product to be initiated at any point of time without waiting for the right time to come.
Debunked – SIP features makes it an anytime investable product for all types of investors. So the myth that SIP must be started only when the market is low or when the market is not high is just a myth. There is no valid acceptable truth in this at all.
- SIP returns are not as high as it is said to be
Many investors who enter into a professional agreement for making periodic payments through SIP expect the results to be magical. They start comparing the return on their investment with that of the same from other financial venues right from their first month. SIP, in sharp contrast with most of the financial products in the market, yields high returns on investments only on the long run. SIP is not a product one should go in for if they expect immediate results. When you expect immediate results, the concerned financial product will be high risky one. SIP is a safe product to invest in and so does all the savings for you in a prudent manner.
Debunked – This myth does not hold waters since return on investment in SIP is high over extended periods of time. In fact the returns from investment in SIP are most of the time higher than most other finance products in vogue. So, investment in SIP of course yields huge returns to investors and there is not an iota of doubt in the fact.
- Investing lump sum amounts is wiser than small amounts
One of the traditional approaches people have is about investing huge sum of amounts in finance products for time periods suiting their needs. People prefer to invest lump sum amounts for long duration of time. This happens to be their first option. Their second option seems to be investing lump sum amounts for duration of time that differ according to their needs. The third opinion that is strongly imbibed in the minds of conservative investors is investing small amounts is one of the unwise things to do.
Debunked – SIP is a financial product that is not taxing on the investors. SIP allows investors to decide on their own small chunk of amount they want to invest in a periodical manner. SIP also allows the investors the benefit of making investments in the mode that is most comfortable for them. SIP being a financial product that is exclusively designed for small chunks of periodical investments, this myth about investments gets debunked.
- Committing to pay SIP cannot be ended in between
Many investors, particularly the first timers have a huge mind block pertaining to the continuation of SIP once they initiate the same. For instance, someone who wants to start a SIP for Rs. 5000/- per month is more worried about the number of months they intend to plan the same. While their initial willingness will be for only 24 months, they are perturbed by the fact if they can close the same before the period if requirement arises. With this ambiguity in mind, they withdraw their plans to invest in Mutual Funds through SIP.
Debunked – It is not that SIP investments initiated by investors cannot be closed in advance than the period of time they planned during initiation. SIP investments started for a specific period of time in mind by investors can be closed in advance in case of exigencies. While closing early may impact the return on investment based on the market performance at that point of time, it is not something that is impossible.
- If I default paying a SIP installment I may have to pay huge penalty
Many detain themselves from paying SIP for the fear of defaulting and attracting huge penalties. The fear of losing the money that has been paid till then stops investors from investing in Mutual Funds through SIP. Many others hesitate to start SIP investments lest they lose the chance to continue the SIP in the forth coming months if they default in between.
Debunked – In reality, when an investor defaults payment of a SIP installment, they do not lose all the money they had invested till then. They don’t lose the opportunity to continue pay the other installments further in the forth coming months. The investor is not charged any penalty or fine for defaulting payment for a month or two in between. The maximum that happens when an investor defaults one or two installments in between is losing out the chance for purchasing units during those months.
- Cannot invest lump sum and SIP in the same scheme
Many investors are under the impression that when they invest in SIP they cannot invest a lump sum in the same scheme. For instance an investor is investing Rs. 5000/- in a Mutual Fund scheme through SIP. He wants to invest Rs. 25000/- in the same Mutual Fund Scheme while the SIP is still ongoing. Investors are under the notion that this cannot be done
Debunked – This is just a myth. An investor who is investing in a particular Mutual Fund Scheme through SIP can invest any lump sum amount they want to invest in the same scheme in a parallel manner. There is no restriction laid on this by any governing body.
- Lump sum investments and SIP investment in Mutual Funds are different
Many investors are under the impression that there are different Mutual Fund products available for lump sum investments and SIP. This makes them feel that instead of going in for SIP investments, they can accumulate the money and invest in Mutual Fund products that are for the purpose.
Debunked – In reality, investments can be made in the same Mutual Fund products in lump sum or through Systematic Investment Plans. Investing small chunk of amounts in Mutual Funds through SIP works highly beneficial on the long run since it takes care of Rupee Cost Averaging.
- Investing in Stock Market yields high return than investing in SIP
Investors who are avaricious about reaping huge benefits through their investments feel investing in stock markets yields higher return than investing in SIP. This statement is partially true. Yes. Investing in stock markets yields higher returns than investing in Mutual Funds through SIP. However, when the high levels of risks involved in investing in stock markets are concerned, the huge returns are not a guaranteed one. There have been many situations in the past when huge losses have been acquired by investors who invested in Stock Markets.
Debunked – Investing in Mutual Funds through SIP is one of the safest options of investment in the finance market. Not only does it guarantee profitable returns when compared with other financial products but also high yield in a safe manner.
- Duration of SIP must be declared in the beginning and cannot be changed later
Many investors who hear about investing in SIP restrain themselves from doing so for the fear getting locked up in a finance product for long periods of time. Many plan to start an investment towards a specific goal that must be met during a particular period of time. The wrong notion that when you start a SIP you cannot cut short or extend the period of the same in between makes them hesitate investing in one.
Debunked – SIP is one of those financial products which can be started anytime during the year and ended in the same way. There is no restriction as to the closure of SIP in between. Any investor can decide when he wants to stop investing in a particular SIP at any point of time during the year.
- I cannot change the amount of SIP in between
Even those investors who have been investing in Mutual Funds through SIP have many ambiguities one among the same being increasing SIP amount. Many existing SIP investors are under the impression that they cannot top up their existing SIP amount in between. The financial product portfolio in SIP is considered to be not permitting such increase in periodic amount in between.
Debunked – The SIP amount you have been investing in Mutual Funds in a periodic manner currently can be increased with changing times. For instance, if you are paying Rs. 3000/- SIP per month and want to pay Rs. 2000/- more to the kitty, you can do so. Make use of the step-up or top-up options available in typical SIP investment set up.
Steps involved in investing in Mutual Fund Schemes through SIP
Investing in Mutual Fund through SIP is a well set process. It captures pertinent information about the Investor and his financial aspects. All key information pertaining to the customer is collected in order to protect their interest as well as that of their investment. Let us look at some of the pertinent steps involved in investing in Mutual Funds through SIP – Systematic Investment Plan.
- An investor who wants to invest n Mutual Funds through SIP needs to have a PAN number. It is important that he gets a PAN number for himself before he ventures into investing in Mutual Funds through SIP.
- He must hold a Bank Account in which he is assigned a MICR (Magnetic Ink Character Recognition) of his own
- This Bank Account which will have an IFSC (Indian Financial System Code) and this is important for processing all financial dealing pertaining to the investor
- The investor would be asked to submit a cancelled Cheque from the Cheque Book of the Bank Account that is in his name and active.
- Any investor who wants to invest in Mutual Funds through SIP needs to be compliant to the Know Your Customer (KYC) aspects. This is mandatory as per the Prevention of Money Laundering Act of 2002 as per SEBI, one of the key money regulators in India for the Mutual Fund sector
- The KYC process is uniform for many financial products and processes like Portfolio Managers, Mutual Funds, Stock Brokers, Depository Participants, Collective Investment Schemes and Venture Capital Funds.
The documents required for the common all important KYC (Know your Customer) process are listed below.
- Document for Address proof. Such documents include but is not limited to recent (last 3 months) Landline Telephone Bill, recent (last 3 months) Gas Bill, recent (last 3 months) Electricity Bill, Bank Passbook in which the investor is the account holder, recent (last 3 months) Bank Statement in which the investor is the account holder, Residence Sales Agreement or Lease Agreement where the property in the name of the Investor, Ration Card which has the Investor’s name, Driving Licence of the Investor and the Passport of the Investor
- Some documents accepted as proof of identity for the KYC process are Driving License of the Investor, Voter ID Card of the Investor, Adhar Card of the Investor and his PAN Card
- Photo of the investor taken recently (in the last 3 months)
- All the copies of the above documents must be duly attested by the Investor and produced along with originals at the time of initiating the investment
- If for any document original is not available,
- In the case of the investor being an Indian national, attestation along with Name, Designation and Seal must be obtained from – Manager of a Multinational Bank, Co-operative or Commercial Bank, Gazette Officer and Notary Public.
- In the case of the investor being an Non-Resident Indian, attestation along with Name, Designation and Seal must be obtained from – Officials working in overseas branches of Banks that are registered in India and who are authorized to approve such investments, Judge, Notary Public, Indian Embassy officials in the country the Investor resides in and Court Magistrate.
- Once you are KYC compliant, to invest in Mutual Fund through SIP investments, fill in two forms each for one purpose.
- Investments in Mutual Fund cannot be made through SIP in the case of minors. Only parents or court appointed guardians can invest in SIP on behalf of the minor children
- Look out for the specific products you are planning to invest through SIP namely
- Growth – No dividend is paid periodically to the investor but grows continuously till you pay the SIP
- Dividend Payout – As the name suggests dividend is paid to the investor as per their choice of term namely monthly, quarterly, half yearly or annual
- Dividend reinvestment – Under this option, the dividend is reinvested every month offering compound power to the investment
- You can invest in Mutual Funds through the SIP option either through an offline mode or an online one.
- You may choose to go in for regular plans or direct ones. Ascertain the same from the sources that act as your contact or information available online before investing.
- You can start investing in Mutual Funds through SIP with the help of
- Financial Brokers, Finance Advisory Companies or Banks involved in the business
- Financial advisors who do this in an independent manner
- AMC office of the Company in which you want to invest in
- Banks who distribute specific Fund Schemes from time to time
- Online Portals available for the purpose
- Online Trading Account or Demat Account if you already present in the Stock Market
Once you start investing in Mutual Funds through SIP, you can make payments towards the same through the following modes.
- EFT – Electronics Funds Transfer from your Bank Account to the specified Mutual Fund account
- ECS – Electronic Clearing Services – Where you maintain the uniform amount committed to be paid in a periodical manner through SIP and the Mutual Fund company takes the same from your account in specified periodicity
- NEFT – National Electronic Funds Transfer – where you can transfer the concerned amount sitting at your place to the concerned Mutual Fund SIP account
- RTGS – Real Time Gross Settlement – Where you can transfer funds from your account instantaneously to the beneficiary account
Invest in Mutual Funds through SIP (Systematic Investment Plans) and benefit in a huge manner through Rupee Cost Averaging and the power of Compounding. Happy Investing.