The SIP mode of investing allows you to opt for an automatic deduction process by which a fixed amount is deducted from your savings account on a daily/monthly/quarterly/semi-annually basis and is directed towards the chosen mutual fund scheme.
How Does SIP Work?
SIP works on the basic concept of regularity of investments. It works like a recurring investment of a specified amount, which gets debited directly from an investor’s bank account at select intervals.
Once the investor pays the SIP amount, the mutual fund house allocates you with a certain number of units of the scheme you have chosen to invest in, depending upon the scheme’s Net Asset Value (NAV) for the day. With every SIP installment, the investor gains additional units of the scheme.
Since, every time the scheme units are bought at different rates, therefore, with the same SIP amount invested at regular intervals, the investor’s money buys him/her fewer units of the mutual fund scheme during rising markets and more units during declining markets.
Thus, a SIP enables you to lower the average cost of your investment and reduce the risk of your investment by spreading your purchase price over time. This is known as rupee cost averaging.
Moreover, a SIP enables you to regularly increase your investment amount by a fixed amount and get the benefit of compounding as you earn returns on the returns generated by your investment. This is called power of compounding.
Benefits of SIP
Small Investment Requirement: A SIP allows investors to start investing in mutual funds with an amount as low as Rs. 500. Thus, the SIP mode of investment is light on the pocket of investors. Moreover, the low investment requirement reduces the financial risk associated with lump sum investments.
Power of Compounding: With a SIP, an investor increases his/her investment by a certain sum at fixed intervals. By keeping the returns invested along with the principal amount, an investor earns returns on the earned returns also under the SIP mode of investment. This is known as power of compounding.
Less Risk: Mutual funds invest in equity and debt instruments which are volatile to stock market and economic changes. Thus, with the same amount of money an investor buys fewer units of a mutual fund during bullish markets and more when the markets are bearish. Thus, a SIP enables an investor to reduce the average cost of his/her investment and the associated investment risk by spreading the purchase price over time. This concept is known as rupee cost averaging.
Automated Process: An investor can opt for an automatic SIP deduction. For this, you need to give a one-time mandate to your bank for making your SIP contributions and your money will get invested in the scheme automatically at the periodic interval selected by you. This saves you from the trouble of filling forms and cheques or logging on digital platforms every time you make your SIP contribution.
How To Start SIP Investment?
Starting a SIP is a quick and hassle-free process. It is advisable to start investing as early as possible. If you have not started doing a SIP yet, start doing it now. Here are the 5 simple steps following which you can quickly and easily start doing a SIP:
Step 1: Visit your nearest branch of an Asset Management Company (fund house)/bank/Karvy/CAMS office/mutual fund agent or distributor. Or you can initiate the process online by visiting the website of an AMC or a registered investment adviser (RIA) like Paisabazaar or a mutual fund distributor.
Please note that RIAs can only provide direct plans of mutual fund schemes and mutual fund distributors can only provide regular plans of mutual fund schemes. It is always wiser to invest in the direct plan of a mutual fund scheme that its regular plan as the former comes with a lower expense ratio which ultimately helps you earn relatively higher returns.
Step 2: Submit a Know Your Customer (KYC) form to the concerned authority. You can also choose to opt for the e-KYC form which allows you to provide all the details digitally. You need to submit the following documents with your KYC/e-KYC form:
- An identity proof (Aadhaar card, Passport, Voter ID, or Driving Licence)
- PAN (Permanent Account Number) card
- An address proof
- A passport-sized photograph
Step 3: Complete In-Person Verification (IPV) as mandated by market-regulator SEBI (Securities and Exchange Board of India) from January 1, 2012. You can complete the IPV in two ways. You can either visit any of the following institutions and submitting the original copy of the above-mentioned documents:
- KYC registration agency (KRA)
- Mutual fund agent/distributor
- Mutual fund registrar
- Karvy/CAMS office
Or, you can complete the IPV via video conferencing using a webcam at a pre-agreed time with the concerned intermediary.
Step 4: Select a mutual fund scheme on the basis of the following factors:
- Financial goal – purchasing a house/car, children’s education, retirement, etc.
- Investment time horizon – short (up to 1 year) or long
- Risk tolerance level – low, moderate or high
- Fund’s performance – against benchmark and against fund category
- Fund’s performance consistency
- Fund manager’s experience
- AMC track record
- Fund’s expense ratio
You can read more about how to select a mutual fund scheme here.
Step 5: Submit the mutual fund application form. This can be done after the completion of the IPV which usually takes 5-7 days. Along the application form, submit the investment cheque amount and a SIP form to begin your SIP investment.
Also Read: Best SIP Investments