Investing is important for us to create wealth and achieve our financial goals. Each of us can have our own financial goals like retirement, buying a house, children’s education, buying a dream car.
There are multiple investment options to reach those goals. Although risky but if investments made systematically and adequate research, they could yield rich dividends.
Mutual fund investments can help us achieve those goals by taking calculated risk. Mutual funds are risky investment option. However, using systematic method of investing in mutual funds can minimize the risk to large extent what is known as a systematic investment plan or a SIP.
One of the biggest risks when investing is not knowing how much money you will need for these goals. If you do not have enough money saved up, you might end up having to work longer than you planned.
Table of Contents
- What is Systematic Investment Plan (SIP)
- Why Should You Invest Regularly Using Systematic Investment Plan?
- When Should You Start Investing?
- The Systematic Investment Plan Benefits
- How To Start Systematic investment Plan
- What is Systematic Withdrawal Plan in Mutual Funds
What is Systematic Investment Plan (SIP)
Mutual fund systematic investment plan (SIP) is a way to invest in mutual funds over the time period. It allows you to buy units of a mutual fund scheme by investing a fixed amount at regular intervals of time over the long run.
A mutual fund scheme is based on a portfolio of stocks, bonds, money market instruments etc. depending upon the objective of the mutual fund scheme. The value of these securities keeps changing according to the market prices.
Some mutual fund schemes have the objective of generating high returns while taking high risk while others are there to keep investment risk low while still trying to generate returns higher than savings bank accounts and fixed deposits (FDs).
Investment in mutual funds and systematic investment plans is executed according to the net asset value (NAV) of a mutual fund scheme. The NAV of the schemes keeps changing according to the value of the portfolio securities depending on their market price.
The goal of a systematic investment plan in mutual funds is to achieve consistent returns over time. You should consider using a SIP when you want to build wealth over time. If you do not have enough money or expertise to buy individual stocks, then you might want to use a systematic investment plan instead.
You can use SIPs to save for retirement, buy a house, children’s education or marriages, pay off debt, or just make regular contributions to your savings account.
You choose what type of mutual fund you’d like to invest in, and then you decide how much you want to put into it every month. This means you’ll never have to buy any stock shares yourself. Instead, you’ll just make regular contributions to your mutual fund.
You can choose a mutual fund scheme if you have the experience or knowledge of investing in mutual funds. Otherwise, you should take the help of financial adviser or a mutual fund distributor to make an informed decision.
Why Should You Invest Regularly Using Systematic Investment Plan?
There are several reasons why you should use systematic investment plans to invest in mutual funds!
First, you can invest as little or as much as you want. If you’re new to investing, you might not feel comfortable putting more than $100 per month into your investments. However, if you’re ready to invest more, you can do so without having to worry about buying individual stocks.
Systematic investment plan in mutual funds in India can be started with as low as ₹500. There is no upper limit to the investment amount.
Secondly, you can choose an investment interval as per your convenience. There is an option of monthly, quarterly investment and some fund houses allowing even intervals based on days.
Third, investing regularly in systematic route helps in averaging of purchasing cost. When stock markets are doing well, NAV of mutual funds go up resulting in purchase of lower number of units. When markets are falling, you end up buying higher number of units as the NAV comes down.
If you invest regularly, you’ll build up a portfolio of investments that will help you reach financial goals. By investing regularly, you can also reduce the risk of losing your entire investment.
When Should You Start Investing?
If you’re looking to build wealth, then starting early is key. However, there are some people who prefer to start later in life.
Starting early offers the advantage of compounding of returns. Compounding means, in layman language, earning interest on interest of the invested amount.
Regardless of when you start, it’s recommended that you begin with small amounts of money. This will allow you to learn how to manage your investments and avoid making costly mistakes.
The Systematic Investment Plan Benefits
- No need to time the market. By SIP, you continue to invest irrespective of the market levels and benefit from cost averaging over the longer period.
- Makes you disciplined towards your investment and goal achievement.
- You need not to invest in lump sums. Small regular investments do the trick.
- Helps in accumulation of wealth over the longer time horizons by compounding factor.
- A big advantage to taxpayers is the income tax benefit SIP investment offers. This is availed by investing in tax saver mutual fund scheme, the Equity Linked Savings Scheme or ELSS. An Indian taxpayer can avail tax benefit up to the limit of ₹1,50,000 under section 80C of the Income Tax Act. ELSS has a lock-in period of three years for each instalment invested. Thus, investing in ELSS funds offers the dual advantage of tax saving as well as high returns on SIP investment.
How To Start Systematic investment Plan
Once you have defined your goals and objectives for investing, it’s time to execute the plan. This step involves the research to find the right product for you and the tools needed to go with the investment.
Let’s take on these steps!
Choose The Right Type of Investment.
There are different types of investments available. Each has its own advantages and disadvantages.
If your goal is to generate wealth over the long run, then you can choose to invest in well diversified equity mutual funds. They are high risk funds with potential to generate inflation beating higher returns.
If you plan to invest for retirement, you would some safety along with capital appreciation. Retirement mutual funds make a better option for achieving corpus for post-retirement period.
If you want to put your money for short period of time, then liquid funds and short-term funds make a better investment option.
If you want to tax benefits along with capital appreciation, you may choose equity linked savings scheme or ELSS.
Set Up Your Account
Once you’ve decided what type of investment you’d like to make, you’ll need to set up an account with a broker. You can do this online through a brokerage firm’s website or the website of asset management company (AMC) managing the mutual fund you want to invest in.
Systematic Investment Plans (SIP) are an easy way to invest in mutual funds. They can go a long way in achieving your goal of financial freedom and wealth creation.
What is Systematic Withdrawal Plan in Mutual Funds
Once you have created a corpus through systematic investment or a lumpsum investment, you may want to liquidate your investment and get your money back.
You can sell your investment in one go. However, if you want a regular income and still want to stay invested to benefit from rising market, you can opt to exit through systematic withdrawal plan or SWP.
Systematic withdrawal plan allows investors to redeem their investment systematically in fixed installments at regular intervals over a time period from their accumulated corpus in a mutual fund scheme.
Systematic withdrawal plan is just opposite to a systematic investment plan where you withdraw investment instead of investing.
For SWP, you submit your request to the AMC managing mutual fund scheme of your investment for redemption. You can choose to redeem any fixed number of units or amount on a fixed date. The requested amount/units shall be redeemed at the prevailing market price of the net asset value of the units and credited to your bank account.
Thus, systematic withdrawal plan in mutual funds offers dual benefits of providing regular income and still offering the opportunity to stay invested for long period of time till your holdings last.