What is SIP?
Systematic Investment Plan (SIP,) is a facility offered to investors by mutual funds to invest a fixed amount of money at pre-defined intervals. In SIP investment, the fixed amount is auto-debited from the bank account and is assigned several units, as per the present Net asset Value (NAV). The minimum fixed amount of money can be as low as Rs. 500, while the pre-defined SIP intervals can be on a weekly/monthly/quarterly/semi-annually or annual basis. The SIP route of investments gives an investor the scope to invest in a time-bound manner without any burden of thinking about the market dynamics and stands to benefit in the long-term due to average costing and power of compounding
What are the types of SIP?
SIPs have garnered spectacular acceptance and popularity over the last decade, particularly due to the envisioned long term benefits, favorability, convenience, financial discipline and protection they offer. There are four different types of SIPs under which one can invest-
Top-up SIP:
This Systematic Investment Plan allows you to increase or decrease your investment amount at regular intervals. For example if there is a rise in your income, you can increase your investment amount respectively, so that you can make the most out of the increased income as well as the mutual fund scheme.
Flexi Systematic Investment Plan:
in this type of Systematic Investment Plan, you can choose to pay different SIP amounts on a monthly or daily basis. As an investor, you are getting the full advantage of paying whatever amount you want to pay instead of being bound to paying a fixed amount. You may pay a huge amount at once into your SIP account when you receive a bonus or based on your cash flow and avoid next month’s installment. This is very reasonable even if you face situations of cash crunch when you can practically skip the installment. But be cautious about the market conditions and then head on to invest in it, as market risk is inevitable.
Perpetual SIP:
Unlike other types of Systematic Investment Plans that are generally for a fixed period of 1 year, 3 years, 5 years, this type of SIP investment does not have an end date and one can keep investing for as long as they want. With this scheme, you get to redeem the fund whenever you choose to redeem it. However, with no end date, financial discipline and goal-based approach are not there which can lead to one’s financial satisfaction.
Trigger SIP:
This type of Systematic Investment Plan is suitable for people with a good understanding of financial markets. You are allowed to set the NAV, index level, SIP start date or event, etc. Since the SIP mutual fund type encourages speculation, it is not desirable or much recommended.
What is a SIP Calculator?
- An SIP calculator is a simulation or an online tool, which allows investors to estimate the SIP return over some time even before you actually start your investment.
- Investing through SIPs in mutual funds is one of the most popular investment options for the millennial.
- SIP calculators are designed to give potential investors an idea about their mutual fund investments. However, the actual returns offered by a mutual fund scheme varies depending on various factors and it does not account for the exit load and expense ratio (if any).
- It works by the values of investment, frequency of investment, duration of investment, and the expected returns.
Why one should invest in SIP?
People make investments to maximize the profit they gain out of a long, medium, or small term. Systematic Investment Plans are the simplest and best way to achieve long-term as well as short-term financial goals. The benefits associated with investing in Systematic Investment Plans are as follows-
- It provides a disciplined approach as a fixed amount from your account is deducted every month ad invested in your choice of fund options.
- Investors can invest in a SIP mutual fund starting with a minimum amount of Rs.500 and continue a plan suitable to their budget, preventing the investor from investing more than his/her capacity.
- SIP can act as a great emergency fund in case of any contingencies. SIP plans in India provide the scope to create wealth over a long period and minimize any risks related to equity fluctuations.
- We keep hearing the phrase ‘mutual fund is subject to market risk.’ Since the mutual fund market keeps fluctuating, with the benefit of rupee cost averaging, the investors can invest in more units when the market is low and fewer units when high. As a result, investors can decrease and increase the cost per unit.
- Power of Compounding is a concept in which the interest earned on invested amount gets accumulated and compounded over a long period. This can result in greater amounts as compared to a one-time investment.
Process of investing in SIP
The process to invest in a SIP is very simple and hassle-free.
- With a pre-determined fixed amount, you can invest in a SIP mutual fund on a monthly or daily basis, depending on your convenience. Before investing, use a SIP calculator to determine your goals and requirements and check a minimum of five years of status from investment and research market trends.
- You will fill up an application form and a SIP mandate form with the date of investment or the SIP date and submit it to the office of Mutual Fund/Investor Service Centre or nearest service centre of Registrar &Transfer Agent.
- After getting your KYC, choose a fund and specify the amount that will be debited from your account to the Mutual Fund Account every month. It has to be in multiples of Rs.500.
- After giving standing orders to your bank along with details of your bank account linked, the amount you want to invest will be auto-debited every month.
Best SIP Plans of 2020
Here are the top 10 SIP mutual fund schemes suitable for SIP investment in 2020:
|
FUND NAME |
1 year Year Returns | 3 Years returns | 5 Years return Returns |
|
ICICI Prudential Bluechip Fund |
11.90% |
13.17% |
9.20% |
| DSP Tax Saver | 17.40% | 13.08% | 11.17% |
| Franklin India Equity Fund | 6.50% | 9.03% | 7.90% |
| ICICI Prudential Value Discovery Fund | 3.40% | 6.08% | 6.32% |
| Axis long term Equity Fund | 16.48% | 17.05% | 12.01% |
| Nippon India Tax Saver (ELSS) Fund | 1.04% | 4.04% | 2.86% |
| DSP Equity Opportunities Fund | 14.96% | 12.53% | 11.06% |
| Motilal Oswal Long Term Equity Fund | 15.31% | 14.61% | – |
| Aditya Birla Sun Life pure Value Fund | -7.01% | 2.26% | 4.51% |
| HDFC Equity Fund | 9.01% | 11.50% | 7.06% |
*3/5 year returns are annualized. The Data based on NAV of direct growth variant of schemes as on December 09, 2019.
How to choose the best SIP plans in 2020?
If you are a first-time investor, here is a clear guide to choosing the Systematic Investment Plans suiting your needs. Keep in mind the following factors and decide upon choosing a SIP.
- How long you want to invest in SIP matters. You should keep in mind factors like tax, market risks, and returns. It is advised to invest for longer SIP plans to gin maximum return. Make sure you have an idea about the next five years’ reference points and performance of funds across markets.
- You should always check on the reputation of the fund house you are about to invest in. See if these funds can handle the market fluctuations with no issues faced by investors. An Rs.500 Crore asset size is to be considered as an appropriate benchmark while choosing funds.
- Set an investment goal according to your requirements while investing in a Systematic Investment Plan.
- According to the goals you set, choose the SIP as well as check the past performance of the funds you have to mind to invest in. Then finally choose one that suits your goals the most.