The popularity of SIP or systematic investment plans have sky-rocketed in the last few years. Several investors are turning to mutual fund investments and SIPs, owing to demonetisation. AMFI’s (Association of Mutual Funds in India) ‘Mutual Fund Sahi Hai’ campaign has further pushed the popularity of SIPs and mutual funds. This article will explain how SIP works and how you can set up your SIP goals.
What is SIP?
An SIP is a flexible and easy way to invest in mutual funds. Under SIP investments, a fixed amount of money is deducted from your savings or current bank account and is invested in your desired mutual fund schemesperiodically. The periodicity of the investments can be daily, weekly, monthly, quarterly, semi-annually, annually, etc. whatever suits your portfolio. The investment amount and the tenure of the investment is predetermined and can be changed in the future to make investments easier for the investor. SIP essentially works in three stages. These are:
Stage 1 – SIP mandate
In this step, the investors need to give the authorisation to invest in mutual fund schemes. This can be done through both the online and offline method. For the former,you need to select the “Systematic Investment Plan” option while you are investing. And for the latter, you need to fill a mandate form and submit it along with the application form.
Stage 2 – Auto Debit/ ECS
When you give an SIP mandate to the AMC or the fund house, the indicated SIP amount is auto-debited from your bank account via standing instruction. The funds are further transferred through ECS (electronic clearing system) for investing in your desired mutual fund schemes.Likewise, the subsequent investment amounts would also be auto-debited at your indicated and predetermined SIP interval. This way, an investor need not worry about missing their payments.
Stage 3 -Allotment of mutual fund units
The SIP amount debited from your bank account is used tobuy mutual fund units.The goal of SIP investments is to make sure that your portfolio gets a good diversification across asset classes. Diversification of assets becomes easier with SIP as it is both a simple and flexible investment plan. This diversification is of great importance if you want to earn the maximum return from your investments.
How to set up SIP goals?
Setting up SIP goals in quite simple. The goal of any SIP investment is to ensure that your investment portfolio is exposed to the desired risk profile of an investor while ensuring good diversification across asset classes. Diversification is important if you wish to earn significantly higher returns on your investments. Diversification across asset classes become easier with SIP plans as SIP investments are quite flexible. Ensure that the mutual fund you choose meets certain criteria, such as they have a large asset size, they belong to a reputed fund house, they have been active for at least 5 years, etc.
To help investors understand the true value of their investments, almost all fund houses provide investors with an SIP calculator. Mutual funds SIP calculator helps to understand the amount needed to reach a specific corpus. Happy investing!