If you are new to the world of investing, you may have come across the term SIP or Systematic Investment Plan, which is a widely-used investment tool for mutual funds that enables investors to invest in a methodical and well-regulated way. However, is this strategy suitable for beginners who are just getting started with investing?
This article will delve into the details of SIP and examine whether it is a viable investment option for novice investors.
What is SIP?
SIP or Systematic Investment Plan is an investment option offered by Mutual Funds. It allows investors to invest a fixed amount of money at regular intervals, such as monthly or quarterly, into a mutual fund scheme. SIPs offer the convenience of investing small amounts starting from as low as INR 500 per month, similar to a recurring deposit. Investors can set up standing instructions with their bank to automatically debit the amount every month.
SIPs are gaining popularity among Indian MF investors as it offers a disciplined approach to investing without worrying about market timing and volatility. SIPs are a great way to enter the world of long-term investments and maximize returns by starting early and investing regularly.
For those who are new to the investing world, the process can be intimidating, as the stock market shows its volatility, and there is always a risk of losing money. Thus, many experts suggest beginning with a simple and low-risk investment strategy. Systematic Investment Plan (SIP) is a strategy framed to assist investors in mitigating risks and creating a long-term investment portfolio for themselves.
However, the question remains as to whether SIP is suitable for beginners.
In this article, we will take an in depth tour of SIP and assist you in determining if it aligns with your investment objectives and risk tolerance.
Understanding the basics of SIP
- Systematic Investment Plan (SIP) is a mutual fund investment method.
- Rather than making a lump-sum investment, an investor can invest a fixed amount of money at regular intervals, like monthly or quarterly, through SIP.
- The fixed amount invested at regular intervals is utilised to purchase mutual fund scheme units.
- The number of units bought is dependent on the current market value of the mutual fund scheme at the time of the investment .
- With time, the investor’s portfolio grows even more as more units are added to their holdings.
- Another primary advantage of SIP is that it allows the investors to average out the investment cost by investing regularly, which in turn reduces the impact of market volatility on their portfolio.
- SIPs are a preferred choice for beginners because of their low-risk factor and they don’t even require a significant initial investment.
- Additionally, SIPs provide the benefit of compounding returns, which helps to grow an investor’s portfolio over the long term.
- SIPs are offered by various mutual fund companies and can be started with a minimum investment amount, which varies by company and mutual fund scheme.
Advantages of SIP for beginners
- Disciplined Investing: SIPs promote disciplined investing as they require a fixed amount of money to be invested at regular intervals, which could be monthly, quarterly, or annually. This habit of regular investing can lead to better returns in the long term.
- Affordability: SIPs are an affordable investment option for beginners as they can be started with a minimum investment of just Rs. 500 per month. With a small monthly investment, you can gradually build your portfolio and work towards achieving your financial goals.
- Professional Fund Management: Professional fund managers with years of experience and expertise in managing investments typically manage most SIPs. They analyze market trends and make informed investment decisions on your behalf, which can result in better returns and lower risks.
- Rupee Cost Averaging: The Rupee Cost Averaging principle governs SIPs, which implies that you buy more units of the mutual fund when prices are low and fewer units when prices are high. This averaging-out of investment cost can reduce the overall investment risk.
- Flexibility: SIPs provide investors with a high degree of flexibility, allowing them to adjust their investments as per their financial situation. Investors can start, stop, increase or decrease their investment amount, making it easier to align their investments with their financial objectives and risk tolerance.
- Compounding Benefits: As SIPs are a long-term investment option, they can benefit from the power of compounding. Compounding occurs when you earn interest on both your principal investment and the interest earned. This can lead to significant portfolio growth over the long term.
Things to keep in mind before starting a SIP
- Define your investment goal: Before you begin investing in a SIP, it’s essential to have a clear understanding of your investment goal. This could be anything from buying a house or car to saving for your child’s education or planning for retirement. Identifying your investment goal will help you choose the right SIP that aligns with your investment objectives.
- Determine the investment amount: Once you’ve identified your investment goal, the next step is to determine the amount of money you need to invest to achieve your goal. You can estimate this amount by looking at the current and future costs of the commodity or service you wish to buy.
- Prepare a finance schedule: After determining the investment amount, it’s important to prepare a finance schedule to determine the tenure of your investment. You need to decide whether you need the money in the short term (2 years), mid-term (5 years), or long term (10 years). This will help you choose the right SIP that aligns with your investment horizon.
- Identify the investments: Once you have a clear understanding of your investment goal and the amount required, the next step is to identify the right asset class that will help you achieve your investment objective in the decided time frame. You can choose from various asset classes, such as equity, debt, or hybrid funds, depending on your investment objectives.
- Choose the right SIP scheme: With various SIP schemes available in the market, it can be overwhelming to choose the right one. You can conduct your research or visit an asset management company or fund house to determine what SIP scheme would be the best fit for you. Ensure that you choose a scheme that aligns with your investment goals, investment horizon, and risk profile.
- Monitor regularly: It’s important to monitor the performance of your SIP scheme regularly. If you have invested for the short term, you need to keep a close tab on your scheme. However, if you have invested for the long term, you must monitor your scheme at regular intervals to stay updated about its performance. Regular monitoring will help you make informed decisions and adjust your investment strategy, if required.
What is the minimum investment amount required to start a SIP?
The minimum investment amount required to start a SIP may vary depending on the chosen mutual fund and investment platform. Typically, the minimum investment amount ranges from Rs. 500 to Rs. 1,000.
Which types of SIPs are suitable for beginners?
Beginners can choose from different types of SIPs, including equity SIP, debt SIP, hybrid SIP, index fund SIP, tax-saving SIP, and more. Each type of SIP caters to different investment goals and risk profiles.
Is it possible to make early withdrawals from a SIP?
Yes, it is possible to make early withdrawals from a SIP, but it may result in exit loads or penalties. It is advisable to read the fund’s terms and conditions before investing.
What is the recommended investment duration for beginners?
The recommended investment duration for a beginner’s SIP depends on their financial goals and risk tolerance. However, it is generally advisable to stay invested for at least 3-5 years to achieve better returns.
Can I modify the SIP amount and frequency after starting it?
Yes, most mutual fund investment platforms allow investors to modify the SIP amount and frequency after starting it.
For those who are new to investing and prefer a less risky approach, SIP can be a brilliant option. It helps to establish a disciplined approach towards saving and investing at the same time it also provides the opportunity for long-term wealth creation. It has a low investment requirement, a lot of flexibility, and the ease of use makes it an attractive choice for beginners.
However, it’s important to do your research and understand the risks involved before starting a SIP, just like with any other investment option. Choosing the right fund and having a crystal clear investment objective is very essential for success.Simultaneously, patience is the key since SIP is a long-term investment and immediate returns should not be expected.
In summary, SIP is a great investment option for beginners who are planning to start building their investment portfolio. By being disciplined, patient, and making sound investment choices, SIP can help accomplish long-term financial goals.