Factors That Make SIP Investments A Good Financial Habit

Effective financial planning is imperative to secure your future. Besides saving and limiting your expenses, it entails putting your money to work. A strategic way to go about this is to invest your wealth in lucrative avenues like Mutual Funds.

Contrary to popular belief, you do not necessarily need a large sum to invest in the same. Sure, a lumpsum investment is an option wherein you invest a sizeable amount in your preferred Mutual Funds in one go. However, you can always go for a Systematic Investment Plan or SIP if you do not have sufficient investible capital.

What is SIP?

Often, investors face a shortage of funds. This prevents them from investing altogether. In times like these, SIP serves as a viable option. It is an organised means of investing in a Mutual Fund regularly. When the investor sets up a SIP with any Mutual Fund scheme, a small, predetermined amount is debited from their bank account at fixed intervals. It is then invested in the scheme for the agreed tenure.

How to calculate SIP returns?

The primary objective of any investment is to garner returns. To estimate the returns of your SIP investments, you can avail of a SIP Calculator. It is a free online tool that computes the amount of returns your SIP investment will yield in the future. It guides you in planning your investments well in advance. Moreover, it helps you determine an appropriate investment amount to achieve your monetary objectives. So, how does the calculator work?

The tool requires you to enter relevant details of your investment, like:

The monthly investment amount you wish to investThe tenure of the SIPThe expected annual rate of return

Once you input the abovementioned units, the calculator uses a simple mathematical formula to compute the expected returns at the end of your investment tenure.

Let us take an example for further clarity. Suppose you start a SIP of Rs. 10,000 in a Mutual Fund generating a Compounded Annual Growth Rate of 10% for a period of 5 years. Now, the total future value of your investment will be Rs. 7,80, 824. Your estimated returns will be 1,80,824. Both of these values will be reflected by the calculator.

Note that the return on any SIP investment depends entirely on the market's movement. As the same cannot be predicted accurately, the rate of return may vary, leading to a difference in the expected and actual returns received at the end of the investment tenure. Hence, keeping track of such things through a Share Market app is advisable.

Beneficial factors of SIP

A SIP enables you to invest in a disciplined manner. It improves your financial hygiene and empowers you to take accountability. Besides, the factors listed below encourage you to stay committed to your plans.

Low initial investment

One can start investing in Mutual Funds through a SIP with as little as Rs. 500. This makes the plan an affordable way to invest each month without burning a hole in the investor's pocket. The best part is that they can also increase their monthly investment if they get an income hike. Most Mutual Fund houses offer a step-up feature through which investors get to modify the investment amount as they want.

So, even if they start with Rs.500 every month, they can work their way up over the years. Such a strategy will help them accomplish their investment goals faster.

Power of compounding

Compounding is when the returns you earn on your investments start garnering returns. It is a simple yet highly effective phenomenon which leads to substantial growth. When you start investing regularly through SIPs, your returns get reinvested. With time, this results in a snowball effect wherein your potential returns expand manifold.

The best way to reap such perks is to invest through the scheme for an extended period and as early as possible. Even a five-year head-start can engender a positive influence on your returns.

Rupee cost averaging

NAV denotes the performance of a Mutual Fund scheme. It expresses the market value of the securities possessed by the scheme. Rupee cost averaging is a concept wherein your buy more units when the Mutual Fund's Net Asset Value or NAV is low and vice versa.

This practice averages out your buying costs throughout the tenure of your investment. It saves you from the hassle of timing the market when you invest through a SIP.

Fewer risks

In a lumpsum investment, you invest all your funds in one go. This implies that you must invest at the right time to get good returns. Although you gain significant yields from this approach, the downside is that you also face heavy losses if things do not go right. Hence, SIP investments are ideal if you wish to dodge such risks, especially as a new investor. Since it does not mandate you to invest a sizeable amount, you rest assured that your stakes are not under major threat.

Convenience

SIP is a highly convenient mode of investing. It offers you the opportunity to grow your wealth despite limited market knowledge. Many fund houses take standing instructions from their clients to manage their monthly investments.

How to start a SIP investment?

Applying for SIP is relatively easy, thanks to the availability of online fund houses. Below are the steps you must follow to start such an investment:

Step 1: Select a reliable AMC (Asset Management Company) and visit their website

Step 2: Next, comply with the KYC requirements. Ideally, you have to submit your identity proof, address proof, and recent photographs for this formality. Nowadays, you can also choose the e-KYC option, wherein you can complete this step online without visiting AMC's website. You simply need to get on a video call for In-Person-Verification to confirm the details.

Step 3: Register or Sign up with the AMC's website

Step 4: Choose an investment amount, scheme plan and tenure. Usually, investors opt for regular plans or direct plans. However, you can always choose between a growth option, dividend reinvestment option, or payout option. If you are confused about the investment amount, use the SIP Calculator. Most AMCs provide it to help you make a sound decision.

Step 5: Pick a payment mode and date on which you wish to start your SIP investments. Ideally, you get to choose from payment options like Net Banking, NEFT/RTGS payment, etc.

Step 6: Once you have submitted your details and made the payment, you will receive an acknowledgement via email and SMS. If you make the payment within the cut-off timing of the concerned scheme, the units are allotted to you on the same day.

In most cases, you can choose your next SIP date after 15-21 days from the first investment date. The AMC notifies you of the same through SMS and email before the next instalment due date.

Conclusion:

SIP investments empower you to treat your finances wisely. When you start investing a fixed amount each month, you manage your wealth with more discernment that further guides them in fulfilling your goals.

 

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