What is Systematic Investment Plan (SIP) in Mutual Fund?

  • Posted By : reliancesmartmoney.com
  • Thursday May 24, 2018

Key Takeaways

Mutual fund SIPs are a great mid-point between the solidity (and slow returns) of fixed deposits and government investment products, versus the other end of the spectrum, i.e. the volatility and untamed sentiment of investing in stocks and commodities.

Benefits of Investing in SIPs

  • RUPEE-COST AVERAGING: Systematic investment plans (SIPs) put an end to the worries of investors who have concerns about the market conditions and try to time the market. Investing in mutual funds via SIP enables investors to average out the cost of units purchased of a mutual fund by buying more units when the price is low and fewer units when the price is high.
    As a result, you will be able to average out your investments and continue investing the constant amount over regular intervals (weekly, monthly or quarterly) to accumulate more wealth over time.
  • POWER OF COMPOUNDING: When your interest starts giving interest, the money you invested start accelerating at a higher rate. That is the power of compounding that you can benefit from investing in mutual funds via SIP route. The earlier you start investing, for the long-term, the higher will be the power of compounding. During the falling market, investments made via SIPs tend to give relatively higher returns than lumpsum investments.
  • CONVENIENCE IN INVESTMENT: The best thing about investing in SIP is the hassle-free process that allows investors to invest a constant amount on regular intervals which can be auto-debit from your bank account. More importantly, you can start your SIP investments with as low as Rs. 500. To do that you don’t require to have immense knowledge of the stock market instead you will have a fund manager who will take the informed decisions in buying & selling on your behalf.

How to select the best SIP plan ?

Any investment done is with the purpose to attain a certain purpose or objective. Systematic Investment Plan (SIP) is also a goal-based investment option that allows you to invest a fixed amount on regular intervals to accumulate wealth over the years. When people invest in SIP they tend to fulfil their certain objectives like buying a car, planning for higher education, or corpus for retirement. However, it can only possible if you select the best SIP plan to go on with. It has often seen that many investors give preference to the star-ratings of mutual funds. These star-ratings is a composite measure of risk and reward and tells the historical performance of that particular mutual fund against other funds of the same category over a period of time. Fixation on the historical performance can be disastrous as these ratings are dynamic and should not be trusted every time.

Investors need better parameters to select the best SIP plan for themselves. Therefore, we’ve mentioned some points below that can help you in selecting the best SIP plan for yourself:

  • The size of the mutual fund matters in a lot of ways. In this context, the size is the total asset base. For a time, you can ignore NAV but not the AUM. While selecting for SIP plan, one can go with a plan that has an asset size of Rs. 500 crores or around this. Rs. 500 crores can be a reasonable benchmark for beginner investors. Of course, there are other outstanding mutual funds that are below this benchmark, but it would recommendable to select SIP with asset size around Rs. 500 crores.

  • Along with AUM, the AMC also plays an integral role of any mutual fund scheme. While looking for SIPs, investors must look for the fund house’s age and its reputation in the market. A well-reputed fund house will be able to manage the market’s highs and lows without affecting its investors. While you’re at it, it is important to make sure of the fund house’s age and the number of schemes offered under it.

    Apart from this, investors must also check for the duration of the SIP scheme in the context of risk, reward, and tax. SIP schemes with existence for at least 5 years should be considered for investing.

  • Along with all the above, investors should also look for expense ration and exit load of the SIP scheme. Expense ratio is related to the fees associated with the administration and management of the fund. A lower expense ratio will result in higher returns while higher expense ratio will affect the returns of the investors.

  • Similar to expense ratio, investors should also check out for exit load as it is the charges that an investor pay to fund house while exiting from the scheme. If the exit load is high, it will eat away most of the profits so a SIP scheme with lower exit load will ensure investor to save more on profits while exiting the scheme.

Let’s examine the case for investing in Equity Mutual Funds via SIPs, shall we?

  • A well-diversified mutual fund investment portfolio spread across sectors, lets you reap surges when and where they happen, and buffer you from lows and bumps in other sectors.
  • SIPs let you stagger your entry (and exposure) gradually.
  • Since entry takes place periodically, the size of the holding averages out over the long-term, across bull and bear phases
  • SIPs let your money reap from compounding and rupee-cost averaging over the long term (i.e. for your fixed SIP instalment, you’ll buy more units for lesser price when market is low, and vice versa)
  • They’re especially useful when you have a set portion of monthly income to invest, and you want to spread it across several instruments/sectors
  • They transfer the onus of tracking markets over to the fund manager
  • Since SIPs compound, so the earlier you begin, the better

That’s all good. But is now a good time though? With demonetization and US elections having shaken market sentiments, you may want to consider an even Equity is to Debt ratio via a balanced SIP instrument for now. The longer you stay invested, the greater the return.
If long-term financial stability is what you seek, then an SIP based equity fund would be a common choice. And if you’re already invested in several SIPs, stay put.

Let the Robot Assist tool help you in your process of choosing the fund that you may be looking out for.

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