Systematic investment plan or SIP is a mode of investment in mutual funds. Through SIPs, you can invest a particular amount of money at a fixed interval in your chosen mutual fund at a specific interval. It could be per month, fortnightly, or weekly. However, most investors are in the dilemma of how much money they should invest via SIPs. If you, too, have this question, read on to find out.
As the name suggests, a systematic investment plan or SIP is a systematic mode of investment. Systematic because the amount of money you invest is fixed, and so is the frequency. While mostly systematic investment plans (SIPs) are monthly, it’s not uncommon for them to be weekly, fortnightly, or even daily on some occasions.
In SIP, a fixed money is debited from your account on a specific date and invested in your chosen mutual fund. SIPs bring discipline into investments, imbibe a disciplined savings habit, and act as a kind of forced savings.
Starting a SIP in a mutual fund is simple. If you are doing it for the first time, you must be KYC-compliant. Most fund houses have the option of e-KYC where all you need to do is enter your PAN and Aadhaar to register online. Once you are KYC-compliant, you can start as many SIPs as you want in any number of funds.
After filling up the application form and giving standing instructions to your bank, the amount will be deducted from your account on a specific date and invested in your chosen fund.
Now comes the important question about computing the right SIP amount. While there is no right amount as such, there are certain things you need to keep in mind while going about the entire process. These include:
Not every goal warrants an equal amount of money. For example, if you are building an emergency corpus via SIP, the amount of money you would probably require will be equivalent to six months or a year’s expense. On the other hand, if you are building funds for your child’s higher education or your retirement, the corpus required would be much higher.
Hence, choose a SIP amount depending on the goal you wish to achieve. For example, if you want to build a corpus close to Rs. 1 crore for your retirement and have 30 years to do so, a SIP of a little over Rs. 4,400 in an equity fund offering annualized return of 10% can help you do the job for you. If the duration is 25 years, the SIP amount jumps to over Rs. 7,500.
For long-term goals, it’s advisable to start systematic investment in mutual funds early to give your money the power to compound with time. You can use online SIP calculators to compute the corpus and the SIP required.
While SIPs don’t warrant a large amount, to maximize benefits you need to stay committed to your SIPs. Hence, choose a SIP amount that you can continue with comfortably for an extended period. To do so, take stock of your cash flow and existing liabilities. Gauge how much you can contribute towards your SIP and start with that amount. The beauty of SIP investment is that you can top-it up anytime.
As said, investing through SIPs imbibe a disciplined savings habit and, most importantly, helps you stay invested for a long period during market ups and downs. The real benefit of SIPs in mutual funds is when markets are down. They allow you to accumulate more units at the same price when they are down. Known as rupee cost averaging, it enables you to get risk-adjusted returns in the long run.
When you continue your SIPs for a long period, it brings compounding into play that has a multiplier effect on wealth. Hence, it is advisable not to pause or exit your SIPs due to short-term blips.
As evident, setting goals is the first step towards deciding the right SIP amount. Your SIP amount depends primarily on the goal you are saving for. While short and medium-term goals may not warrant a huge amount, long-term goals do demand an extensive corpus. Once your goal is fixed, you can compute your SIP amount and get started.
This is another essential factor in computing the SIP amount. Note that SIP investment is made in a mutual fund and different funds carry different risks - high to very high. You can know about a fund’s risk from its riskometer. Choose a fund for SIP that aligns with your risk appetite.
Selecting a SIP is basically choosing the mutual fund to invest in. It’s vital to opt for a fund whose objective aligns with your goals and risk tolerance. Also, check the fund’s long-term performance and invest in a fund with a consistent track record.
As said, allocating money for SIP investments depends on your goals and investible surplus. Put an amount that you can continue with for a long period.
Note that it’s the fund that generates returns and not the SIPs. Average returns vary across funds.
Investing in mutual funds through SIPs can help you build the required corpus for life goals and help you stay invested across market cycles. Happy Investing!
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