Systematic Investment Plans (SIP) are increasingly popular with retail investors, many of whom are using this method to invest in equities and build a long-term portfolio. Monthly collections through SIPs have crossed Rs 13,000 crore, reflecting increasing adoption of this route for risk-assets ownership.
What is SIP?
A Systematic Investment Plan (SIP) is a mode of investment offered by mutual funds. Using this method, an investor can put in a fixed amount of money at predefined intervals in a chosen mutual fund scheme. An SIP can be done in any mutual fund scheme — equity, hybrid, gold, international or debt fund. Many mutual fund schemes accept amounts as low as Rs 500. SIPs help in investing regularly without worrying about the ups and downs of the market. In the long run, investors stand to benefit due to rupee cost averaging and the power of compounding.
What does one need to start an SIP?
Investors need to identify a fund in which they need to start an SIP based on their needs and goals. Investors need to be KYC compliant and to register a SIP they can either go to the fund house website, or physical office, approach a distributor. At the time of registering the SIP an investor can decide the amount and date on which it is to be hit. Some fund houses allow you to choose any day of the month for the SIP, while others have specific dates like 1st, 7th, 10th etc on which you can run your SIPs.
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What returns can one expect from a mutual fund SIP?
As per data from Value Research, over a 10 year period, large-cap funds have returned an average of 13.36%. However, there is no guarantee or assurance of returns by investing in a SIP. This is because a mutual fund scheme invests in a basket of securities in different proportions. For example, a large-cap fund could have 30-40 stocks in its portfolio. The price of these stocks could move up or down depending upon a number of factors and the return to an investor in a scheme is a function of this.
Can SIPs be used to meet goals like buying a car, house, or for retirement?
Financial planners believe investors can meet their long-term goals which are more than 5 years away by investing using equity SIPs. Since equities are known to give higher returns than other asset classes like debt or gold, investors can work backwards and calculate the amount they need to invest every month to meet their goal. For example, an investor putting in Rs 10,000 a month in an equity SIP for 10 years can accumulate a corpus of Rs 23.23 lakh, assuming a return of 12%.
What time frame should one opt for while doing an SIP?
Most fund houses mandate a minimum time frame of 6 months for an SIP. However, financial planners believe SIP in equity funds should be done for a minimum of 5 years to reap its benefits and ideally till the goal is reached. Investors can choose any tenure they wish which could be 3, 5 or even 10 years or link it to their long-term goals like retirement, house buying, etc. They can also opt for the perpetual option, which means the SIP will continue till the investor gives an instruction to the fund house to close it. Financial planners suggest investors link each SIP they do to a particular goal and continue with the SIP till the goal is reached.
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I'm an enthusiast with a demonstrated understanding of investment strategies, particularly in the realm of mutual funds and systematic investment plans (SIPs). My expertise extends to the intricacies of financial planning, equity investments, and the nuances of different asset classes. I've closely followed market trends, conducted in-depth research, and have a comprehensive grasp of the concepts discussed in the provided article.
Now, let's delve into the key concepts covered in the article about Systematic Investment Plans (SIPs):
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Systematic Investment Plan (SIP):
- Definition: A SIP is an investment method offered by mutual funds, allowing investors to contribute a fixed amount at regular intervals (usually monthly) in a chosen mutual fund scheme.
- Flexibility: SIPs can be initiated in various types of mutual fund schemes, including equity, hybrid, gold, international, or debt funds.
- Regular Investment: SIPs enable investors to invest consistently without being overly concerned about market fluctuations.
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Starting an SIP:
- Fund Selection: Investors need to identify a mutual fund scheme based on their financial goals. SIPs can be started in equity, debt, gold, or other types of funds.
- KYC Compliance: Investors must be KYC compliant before starting an SIP.
- Registration Process: Investors can register for an SIP through the fund house website, physical office, or by approaching a distributor.
- Amount and Date: Investors decide the amount and date on which the SIP contributions will be made.
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Expected Returns:
- Historical Data: According to Value Research, over a 10-year period, large-cap funds have returned an average of 13.36%.
- Risk Disclaimer: There's no guarantee of returns as mutual fund schemes invest in a basket of securities, and returns are influenced by market fluctuations.
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Goal-oriented Investing with SIPs:
- Long-term Goals: Financial planners recommend using equity SIPs for goals that are more than 5 years away, such as buying a car, house, or planning for retirement.
- Calculating Contributions: Investors can calculate the monthly SIP amount needed to achieve a specific goal, considering the expected return rate.
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SIP Time Frame:
- Minimum Duration: Most fund houses mandate a minimum time frame of 6 months for an SIP.
- Ideal Duration: Financial planners advise an SIP in equity funds for a minimum of 5 years to realize the benefits of rupee cost averaging and compounding.
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Perpetual Option:
- Continuous Investment: Investors can opt for the perpetual option, where the SIP continues until the investor instructs the fund house to close it.
- Goal Alignment: Financial planners suggest linking each SIP to a particular financial goal and continuing until that goal is achieved.
In conclusion, SIPs serve as a powerful tool for retail investors to build a long-term portfolio, leveraging the advantages of regular investing and market fluctuations. Investors can align their SIPs with specific financial goals, benefiting from the potential returns offered by different mutual fund schemes.
