How SIP investing works
When it comes to creating long term wealth from equities, our biggest enemies are our own greed and fear. Most of us either fear volatility and sit on the side lines indefinitely, or end up investing after markets have gone up. But how does an SIP help with this?
Here’s how - an SIP investment puts your savings on auto-pilot and takes away the need to time the market (an impossible feat). It’s a well-known fact that predicting short term market movements is impossible, and trying to do so can make us miss out on market rallies or incur losses, eventually losing faith in equity as an asset class. Basically, SIP investments ensure that we do not waste time trying to time the market!
An SIP also helps us inculcate savings discipline and maintain a healthy savings to surplus ratio. With an SIP, you can invest a predetermined sum of money every month or quarter. In this manner, a SIP investment puts you firmly in the driver’s seat on your journey to wealth creation from equities!
What Are the Benefits of an SIP Investment?
Your decision to make an SIP investment may be one of the smartest investing moves you’ll make! Here are some of the main benefits of starting an SIP.
Convenience
Did you know that an SIP investment can be started with as little as Rs. 500 per month? It’s extremely convenient to start a SIP, as the entire process is paperless and can be completed in under 10 minutes with FinEdge’s world class onboarding platform.
Risk Reduction
By allowing your SIP investment to continue irrespective of market cycles, you’ll benefit from the “rupee cost averaging effect” which will ensure that you buy more units when markets fall and less units when they go up – leading to better risk adjusted returns from your SIP Mutual Fund in the long run.
Power of Compounding
By starting an SIP investment in an equity-oriented fund, you’ll benefit from the power of compounding, as you’ll earn returns on returns year on year. In the long run, this can result in exponential returns on your capital.
Types of SIP Mutual Funds ?
Now that we’ve covered quite a bit of ground when it comes to what a SIP is, how a SIP investment works, and what the benefits of a SIP investment are – let’s dig deeper into the two predominant types of SIP that you need to choose from.
Static SIP Investment
The default kind of SIP investment is a “static” one, in which a fixed amount is invested every month into a SIP Mutual Fund of your choice. You can specify an end date for the SIP investment or opt for a “perpetual” SIP – which basically means that it will continue to run until terminated. Since a SIP is highly flexible and can be stopped at any time, it’s advisable to start a perpetual SIP, which you can then stop once you achieve your goal! While a static SIP is simple and easy to understand, the wiser choice when it comes to achieving your long-term goals.
Step-up SIP Investment
Think of a step-up SIP investment as a turbocharged SIP! In a step-up SIP mutual fund, you basically issue a standing instruction to top up your SIP every year by a fixed amount. For example, you may only be comfortable investing Rs. 10,000 per month today, but are quite confident that you’ll be able to increase this SIP investment by Rs. 2,000 per month on an annual basis. Instead of waiting for a year to lapse and increasing this SIP investment manually, you can issue an upfront instruction to adjust the SIP mutual fund by Rs. 2,000 annually. This is a fantastic choice for long term goals, and it therefore recommended by top investment advisors and financial consultants. It may surprise you to know that even a small annual step up can make a 3x-4x different in your final SIP mutual fund corpus! …you can calculate your step-up sip investment by using FinEdge SIP Calculator
How To Invest in SIP Mutual Funds?
In today’s era of digital investing, starting an SIP investment is truly as easy as 1-2-3!
Financial Plan & Goal Setting
Starting a SIP investment without setting proper goals is one of the main reasons why investors fail! The first question to ask isn’t which SIP mutual fund to invest into, but “why” you are investing. A professional Financial Advisor can help you define your goals through a detailed and eye opening financial planning process.
KYC & Online Account Opening
Having set your goals, you are now ready to move to the next step in your SIP investment journey by opening a SIP investment account! Fortunately, top financial advisors like FinEdge offer seamless, fully digital KYC (Know Your Customer) and account opening solutions. All you need are soft copies of basic documents such as your PAN Card, Aadhar Card and a copy of your cheque with your name on it.
SIP Mutual Fund Selection
Fantastic! Now, with your financial goals clearly defined with the help of an investment advisor, your KYC formalities done, and your account opened; you can select the best SIP Mutual Fund for your goals. For long term goals like your retirement, you can go for an aggressive SIP investment that has the potential for delivering high returns in the long run. For shorter term goals, you can go for SIP Mutual Fund investments into debt funds, liquid funds or arbitrage funds.
