What is SIP Investment and How to Start SIP Investment
If you have ever asked a colleague how he makes sure to invest every month without thinking about it, his answer would most likely be that he has a SIP running. A Systematic Investment Plan is one of the easiest ways to start investing in mutual funds for Indians and has become the default choice for first-time investors.
What is SIP investment meaning? An SIP is a process where one invests a pre-determined amount of money at regular intervals into a mutual fund scheme instead of making a lump sum payment.
An SIP involves investing a fixed amount periodically instead of making a one-time payment. It is ideal for most investors since it removes the burden of deciding when to invest, as it automatically captures the discipline of regular investing. Moreover, since the amount you invest every month stays the same, you end up buying more units when the value of the mutual fund scheme is low and fewer units when its value is high, thus averaging out the cost of your SIP every month.
An SIP, on its own, is not exactly a financial instrument but rather a process that allows one to invest in mutual fund schemes.
How to start Mutual Fund SIP Investment?
Rupee-cost averaging
Since you are investing fixed amounts regularly, you end up buying more units when prices are low and fewer units when they are high, thus averaging out the cost of your units.
Compounding
When your SIP earns returns, they are re-invested automatically. This loop of returns on returns eventually adds up, increasing the amount of your SIP corpus. Hence, financial planners highly suggest that the earlier you start investing in SIP, the better.
How to Start SIP Investment for Beginners: Step-by-Step
To start your SIP journey, you need to first complete the KYC process. This usually requires you to submit your PAN, a government-issued ID proof and address proof, and a passport-sized photograph. Many mutual fund companies offer an online KYC process these days, which is much easier and only requires you to provide your fingerprints and a photo with your Aadhaar card.
Once you have completed the KYC process, decide the goal and time frame for your SIP
Decide on what you want to use your SIP for. Be it a new vehicle, is it to buy a car or a house after 5 years, retire in 25 years, save up for your child’s education after 15 years, or something else entirely?
Next, you decide on how to start a mutual fund SIP investment scheme based on the time frame you picked. Longer time frames usually require you to go for equity, hybrid, or other growth-oriented mutual fund schemes, whereas shorter time frames require you to go for safer and more stable debt fund schemes. You should always go for a fund with a consistent and proven track record and look at its expense ratio and fund manager. It is important to remember that past performance is not indicative of future results.
Once you have decided on a scheme, you have to decide on the amount and date you want to invest. Go for an amount you can afford to pay every month so that you don’t feel strained financially. You can decide on what date you want to make the payment according to your salary cycle, and most mutual fund companies allow you to start an SIP on any date of your choosing.
Finally, you have to set up the automatic debits to your bank account and keep track of your investments. The auto-debit date for most SIPs comes a few days after your salary date, which means that you will have to arrange the date of your SIP accordingly. After setting up your SIP, remember not to change your investments frequently as it might hamper your returns.
Minimum Amount to start SIP Investment
One of the reasons why an SIP has become so popular across India is that it requires a minimum amount to start SIP investment. According to SEBI norms, most mutual fund companies keep their cut low. In reality, most mutual fund companies allow you to start an SIP with as little as ₹500 a month, and some even have a minimum deposit of ₹250 or ₹100 a month, also called “Choti SIPs”. There is no real upper limit for an SIP, and you can invest anywhere from ₹1,000 to ₹10,000 to ₹1,00,000 in your SIP every month depending on your needs and financial situation.
SIP vs Lump Sum Investment? Which is better?
- Have a steady income and want to invest a little every month.
- Have no idea about the market or want to avoid the risks that come with investing too much at once.
- Want to invest for the long term.
- Are a new investor who wants to get their feet wet.
Whereas a lump sum is better if:
- You have a large amount of money you want to invest, but you do not think you will be able to reach your goal in time if you invest in smaller installments.
- You have a decent amount of money you want to invest in a certain mutual fund scheme, and you think now is a good time to do so.
- You understand that you have to be careful if you decide to invest a large sum at once.
In reality, most investors use a combination of a lump sum and an SIP, and there is nothing wrong with that. The two mechanisms are completely different, and neither has an inherent advantage over the other. What really matters is that you start investing and that you keep investing, no matter what.
A Word on Risk
Mutual funds are not risk-free, and no one who is worth his salt should tell you otherwise. That is why an SIP is a great mechanism for first-time investors, as it helps them ease into the world of investing without putting too much money at risk at any given time. However, it is important to remember that most equity-oriented mutual fund schemes do not have a consistently good performance track record and that market cycles are completely unpredictable.
Past performance of a fund, therefore, is no indicator of its future performance, and you should always carefully consider your own financial situation before making any investment decision.
Building a Wider Financial Plan:
A SIP in either equity or debt mutual fund schemes forms the backbone of a financial plan for most Indians. However, it is important to remember that a financial plan should also include assets in other investment classes to diversify your portfolio. If you already have an established SIP in equity mutual fund schemes and want to learn more about what other assets most financial planners suggest including in a diversified financial portfolio, you should read into P2P lending.
P2P lending platforms offer alternate investment avenues for people looking to build their financial portfolios. Since they are separate from mutual fund schemes, they help most investors achieve proper diversification in their investment holdings. If you are looking to learn more about how P2P lending diversifies, you should check out this blog on the LenDenClub blog about P2P lending and asset allocation.
Frequently asked questions
No, an SIP is only a mechanism that allows one to invest in a mutual fund scheme. A mutual fund scheme itself is a financial instrument.
Yes, most mutual fund companies allow one to stop or pause an SIP at any time.
Usually, one missed payment is not a big deal since a lot of mutual fund companies allow one to resume an SIP once one has made a payment. However, if you miss a couple of payments in a row, the mutual fund company might cancel your SIP subscription. The fund house itself does not penalize you, but your bank might if there are any auto-debit charges.
Final thoughts
Team LenDenClub
LenDenClub is India’s largest peer to peer lending platform which started operations in India in 2015. We have been helping lenders diversify their portfolio beyond traditional investment instruments ever since.