If you are a young investor considering mutual funds or someone looking to add MFs to your portfolio, a systematic investment plan i.e. SIP may be the most practical step towards making a move in this direction.
An SIP allows investors to deduct a fixed sum into your preferred MF scheme each month directly from your bank account and spread out your investment over time. The monthly interval also helps build financial discipline for the long run.
How do SIPs work? How is it different from lumpsum investment?
Investing through an SIP means that your purchase units of the MF each time you invest in a fund. The number of units are equivalent to the amount invested. For e.g. for each unit costing ₹10, and investment of ₹500 each months gets you 50 units. This means that the price can fluctuate as per market performance and your units cost most or less during troughs and peaks.
However, the spreading out of your investment over months, more often than not averages your cost of purchase toward the lower side, despite market volatility. This means that you end up paying less on average per unit, when compared to lumpsum investment.
In lumpsum investment, you put in a full large amount into your preferred MF at the cost at the time of investment. Here, you lose out on what’s termed as rupee averaging, which gives you benefit of reduction in price for the same units during market downturns.
| SIPs | Lumpsum |
|---|---|
| Periodic investments in a tenure | One-time investment in a tenure |
| 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 |
| Source: Clear Tax | |
What are the advantages of an SIP?
- Easy and convenient: It’s much more practical for most regular investors to set aside a monthly amount for investment rather than invest a full pot at once. This can range from ₹100 to ₹1,000 or even more, depending on your comfort. In any case, ₹1,000 once a month for 12 months is more achievable than ₹12,000 lumpsum in a single month. Further, the auto-debit option frees you from the burden of remembering to make regular investments.
- Rupee cost averaging: When you buy MF units at different price points, you make the most of rupee cost averaging, which raises the chances of your profitability.
- Financial discipline: SIPs also help you inculcate financial discipline in your investing habits. Edelweiss MF’s Radhika Gupta advises genz to view this a hack to ensure all savings possible. “Oh… tax is deducted at source! Why not do the same with your savings? That’s SDS — Savings Deducted at Source. Automate your SIPs, RDs or FDs before you even see the money,” she suggests.
How can I start an SIP? Step-by-step guide
- Choose an asset management company (AMC) i.e. ICICI Prudential, HDFC, Nippon, Kotak and more or an aggregator i.e. Zerodha, Groww, etc. to invest in a mutual fund.
- Complete the know your customer (KYC) process before starting to invest.
- At the time of investing, you need to opt for SIP or lump sum, depending on your needs.
- For SIP, you will have to a separate form instructing your bank to allow regular debit from your bank account towards the purchase in the selected schemes. This may take the bank 7 to 30 days.
- Choose the frequency (whether you want monthly or fortnightly) and number of SIPs (12 or 6) you want to go for.
- Mutual funds allow you to set up SIP for any period from 6 months onwards with no upper limit.
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
