Systematic Investment Plan (SIP) – Best way to Invest
Investing in an SIP can help you make the most of your money. This is because the interest is compounded each year, thereby giving you better returns. Regular contributions towards SIP usually balances out market dips, and helps you inculcate a habit of saving and investing is a more disciplined way. Furthermore, you gain high returns and can even make your savings inflation-proof with SIPs.
Some other benefits include tax deductions under Section 80C and being able to invest as little as Rs.500. However, in order to avail these benefits and make the most of your SIP investment, it is important to invest in an SIP the right way. Take a look at how you can do it.
What is SIP ?
Systematic Investment Plan, commonly referred to as an SIP, allows you to invest regularly a fixed sum in your favorite mutual fund scheme/s. In SIP, a fixed amount is deducted from your savings account every month and directed towards the mutual fund you choose to invest in.
Benefits of Investing in SIP
With SIP, you can start investing in small amount and reap big returns. It’s a simple and convenient way to track your investments. It also brings financial discipline.
You can invest in a disciplined and phased manner using SIP. It allows you the convenience of starting your investment with as low as Rs 500.
Rupee Cost Averaging
No need to time the market. Buy more units when markets are low. This reduces your overall cost of investment..
Power of Compounding
Compound interest ensures better long-term benefits compared to one time investment
2X Higher Returns
As compared to the conventional FDs, ELSS gives higher returns to beat inflation in an efficient manner.
SIP or One-time : How should I Invest?
Often first time investors get confused choosing between an SIP investment or one-time investment.
|SIP Investment||One Time Investment|
|Periodic investments in a tenure||One-time investment in a tenure (lump sum)|
|Earns better during market lows||Earns better during market highs|
|SIPs can protect investments from potential market crash||One-time investments can lead to major loss during market crash, which happens often enough|
How to Choose a SIP
The internet will provide you with the A-Z of the mutual funds you shortlisted including their past returns.
However, please make sure that the fund you pick meet the below criteria.
₹500 Crore Asset Under Management
A 500 Crore asset size can be a reasonable benchmark when selecting a fund. This doesn’t mean that funds below this Corpus are bad, but it is not advisable.
Duration of SIP
The duration of SIP mutual fund is an important factor from a risk, return and tax point of view. Keep 5 years reference point and check how the fund performed across markets.
Reputation of the SIP fund house is an important factor while choosing a plan as it tells how well they were able to handle market highs and lows without letting their investors feel the impact.
Select an SIP based on your financial goal
In order to select atop SIP according to your financial goals, it is always better to speak to a fund advisor. Ensure you are informing them about your long-term and short-term goals. This will allow the fund houses and experts to gauge your time line and risk appetite. You can also use an SIP calculator like this need calculator to work backwards from the amount you want to save for.
Use your calculations and expert help to find the best SIPs. Opt for a longer tenor, as the more time you stay invested, the higher your returns will be. Even if the amount you put forward regularly is low, choosing long-term plans will allow your savings to grow with the interest compounding every year. Additionally, the rupee cost averaging system, over a longer stretch of time, will stabilise your returns and ensure growth for your investment.
One beneficial way to invest in a high-yielding top SIP is to select a fund house that assures growth on your investment.
Choice of Tenor
Whether you pick a small-cap or a large-cap SIP, the potential of gain in both cases are high. This is owing to the fact that the returns on SIPs are calculated through rupee cost averaging. This means the longer you stay invested with SIPs, the higher is your return. However, in case you are unsure, you can choose an SIP for just 6 months too. FDs allow you similar flexibility.If you want to claim tax benefits, then for both, staying invested for a minimum period is must. In case of FDs it is 5 years and for SIPs, backed by ELSS, it is 3 years.
Once you consider these factors, as well as your goals, you can easily decide to invest in one over the other. However, it is best to include both SIPs and FDs in your portfolio to fulfil different needs and create a balanced folio.