You heard about SIP or Systematic Investment Plan in Mutual funds. Thinking to invest your hard earned money through the SIP route.
What to do, how to move ahead and park your funds in the best possible manner through SIP?
What should be your plan of action once you decide to invest in SIP How to go about it? What are the steps for investing in SIP and how to proceed further?
These are the various queries that might worry you again and again.
With the help of this blog, I will try to answer your queries and clear your doubts so as to help you invest your money in an efficient way.
What is SIP or Systematic Investment Plan?
SIP i.e. Systematic Investment Plan is a common method followed for wealth creation in the long run. People generally get confused as to SIP is some investment or product.But,you should be clear that this is just a method or way of investing. Instead of putting a lumpsum amount altogether, you just have to set your own budget and put small small amounts every month through SIP.
When you invest money through SIP, your money is invested in Mutual funds.Mutual funds further invest your money in:
- Debt Instruments – Debt Mutual Funds.
- Equity – Equity Mutual Funds.
The returns are based on the performance of these funds over a period of time. Mutual Funds are subject to market risks, so you need to be extra careful while investing in it. But, based on historical data and past performance MFs perform well over a longer period.
Investing your money in Mutual funds, that too by opting the SIP route is considered the best long term investment option, for growing your money.
The Companies that deal in Mutual Funds are known as Asset Management Companies where the underlying asset is Debt or Equity. Almost all major banks like SBI, Axis Bank, ICICI, HDFC, BOI etc.have entered the Asset management business and provide mutual fund services. Other than banks there are various Companies that give you the opportunity to grow your money by investing in Mutual Fund Schemes like Reliance, Aditya Birla etc.
Also, there are various robo financial advisors that help you invest in Mutual Funds in a systematic way and further guide you to build a Balanced Financial Portfolio.
By Starting SIP, you can build a good corpus based on:
- Power of Compounding: This means you earn interest on Principal of previous year + Interest of Previous year i.e. you earn interest on your earnings also.
- High rate of returns: You tend to earn high returns by investing in Mutual funds as compared to traditional investment tools like PPF, NSC, Bank Fixed Deposits etc.
- Benefit from Cost Averaging: In simple words, buy more units when Net Asset Value is low and less units when the market rises. This leads to reduction in average cost of purchasing.
Through this blog, we will be discussing 10 Simple Steps that you need to follow to start your investment in SIP or Systematic Investment Plan.
SIP or Systematic Investment Plan: 10 Simple Steps to follow
1. Decide Your Finance Goals:
Before planning any kind of Investments, you need to be clear and specific about your short term as well as long term goals. SIP is considered best long term tool, so you need to focus on your long term objectives preferably. You can plan investing money based on multiple goals like:
- Retirement planning.
- Children education and their marriage.
- Family vacation.
- Buying a House etc.
Your Finance goals will be the deciding factor as to how much Debt and Equity Investments you can afford to make.
2. Measure your Risk Appetite:
Know your Risk appetite, as to how much risk you are willing to take – Low risk, moderate risk or high risk. Before Investing,try to understand your needs and risk horizon. This factor is somehow correlated to your age i.e. at a young age you can take high risks. But, as you grow up in years, you normally tend to shrink your risk area and start looking for safer investment options.
Its better and advisable to start investing at an early age, to get maximum returns and build an efficient Investment portfolio.
3. Plan Your Investment Horizon:
Generally, SIP is considered best for Long term Investments but you need to be more specific as to for how much duration you want to invest your money. Your duration based on your finance goals can vary anything from a short duration of may be 3 years to a very long duration of say 20 years. This is a matter of personal choice and depends on individual preferences.
4. Invest Online/ Offline:
You have two alternatives as to Invest Offline or Online. To avoid the hassles of going and submitting the forms and documents manually to Mutual Fund Company/Banks, you should prefer Online method of Investing. There are various Online Mutual fund Platforms where you can easily fill the application forms, upload your documents and requisite proofs and go ahead with the process of investing.
So,having an Online account will have long term benefits wherein you can operate your account and invest your funds with much ease.
5. Invest Directly or Through Financial Advisor/Third party:
You can opt to invest directly if you have the knowledge and experience in the field of investing. Direct plans usually carry less charges.
But, if you are new to investing and don’t have any knowledge as to how to start, it is better to take take the help of offline financial Advisors or robo financial advisors. After the registration process is complete,the Mutual fund companies also allocate a Fund Advisor to you, who will guide your way and make your investment journey easier.
To grab details on Robo financial Advsiors, do have a look at our blog post Robo Advisors in India: Investing made easy !
6. Know Your Customer or KYC Form:
Completing your KYC details is the basic requirement while starting an SIP. Being a prospective investor, you need to fill a KYC form and submit it to the Fund house along with necessary proofs. It is a one time procedure,so once you fulfill KYC requirements, you can freely carry your investments.
The 3 main proofs that need to be provided are:
- PAN Card Copy as ID Proof
- Address proof like Aadhar, Passport or Voter card.
- A Cancelled Cheque
It is mandatory to comply with KYC requirements before investing in Mutual Funds.
Do checkout exclusive details on cKYC or Central KYC that has replaced the earlier KYC.
7. Choose the Fund Type:
Figure out the different kinds of funds available and choose the one that best suits you. Do some detailed research, based on the past performance, the market trends and returns generated over the previous years. Although,you cannot rely completely on past performance since they are just an indicative factor and not any kind of assurance to yield high returns.
You can select any of the following Mutual Funds based on your finance goals, risk factor and Investment duration:
- Debt Funds – Invest in Debt Instruments.Debt funds are considered a safer investment options as compared to equity funds because the underlying asset is Debt.
- Equity Funds – Equity funds invest in Equity so are best suited for the ones who can afford high risk profile. A SIP in Equity funds is normally considered as a good option for the investors who prefer to invest their money for a longer duration. These usually perform well if invested for a longer duration.
- Hybrid Funds – Hybrid Funds invest in a combination of both equity and debt i.e. you get exposure to both equity and debt. These are also known as Hybrid Funds.
Before investing anywhere,you should make yourself clear about the various asset classes.
For details you can refer: What are different asset classes?
8. Choose the Amount and Date of SIP:
Each Mutual Fund Company/Bank has its own dates for investing. You can choose a date for monthly investment as per your convenience. Generally,the dates are 1, 5, 10, 15, 20, 25 but these can vary based on different companies. You can select multiple dates for investing through SIP in different funds.
Calculate the SIP amount you want to invest every month. Based on your Income and Savings, fix an amount you want to invest in Mutual Funds through SIP. A minimum investment of Rs.500 is normally required. But, this might be different for different companies/banks.
9. Decide Mode of Payment – Manual Transfer/Auto Debit Facility:
You can opt for Auto Debit facility i.e. money shall be automatically debited from your account each month as per your standing instructions. Hence, you can avoid the trouble of manually transferring SIP amount every month. You just have to fill an Auto debit form in this regard authorising the bank/fund house to deduct the payment.
You can manually transfer the SIP amount or give post dated cheques also in order to make regular SIP payments.
10. Submit Application Form:
You have to provide your particulars in the Common Application Form.Fill the details as asked and paste or upload your scanned passport size photograph. After giving the KYC details,selecting the fund type, the date and amount of SIP and submitting the Application form you are almost done with the compliance and SIP procedure.
So,now you are ready to start your monthly SIP journey, invest safely and enjoy the returns!
Also,make yourself aware about Taxes on mutual funds to help you in your tax planning.
Don’t hesitate to take the help of an experienced Fund Advisor/Financial Advisor if you have any doubt. Its your money and you have every right to know where and how you are putting it.
Further, Diversification of Funds is the key to getting maximum returns in the long run. Split your investments in a variety of Mutual funds i.e. you can focus on different asset class like Debt and Equity as per your risk horizon.
If you want to add anything, any information or opinions, feel free to share your valuable feedback. Don’t hesitate to share the blog with your family and friends so as to make them aware on this topic.
Enjoy your SIP journey! Happy Investing !