Systematic Investment Plan or mutual fund SIP is an investment plan where an investor can invest a fixed amount in a mutual fund scheme of his / her choice at a regular frequency (say daily, weekly, fortnightly or monthly etc.). Mutual Fund SIP was introduced for the first time in India in the late nineties. Over the past twenty years or so, mutual fund SIPs has become one of the favourite investment choices for retail mutual fund investors in India.
To start a mutual fund SIP, you have to submit a bank ECS mandate along with the application form for the scheme. Different fund houses (AMCs) offer a variety of choices of debit date and frequencies for SIPs in a month. Through the ECS mandate, the SIP amount (as specified by you) will automatically get debited from your bank account on a particular day of the month (or any other frequency) specified by you and get invested in the mutual fund scheme of your choice, till the time you stop the SIP. Minimum SIP amounts are usually Rs 500 or Rs 1,000 (depending on the fund house and the scheme type). For example Rs 500 is the minimum SIP amount for ELSS schemes.
Before we process further, let us know 6 important things before starting a Mutual Fund SIP
Usually the investments made through SIPS would otherwise be spent on some non-necessary items or remain idle in bank account of the investor. By investing your savings on a regular basis, you are putting your money to work to make more money as you benefit from regular investments and compounding. What is power of compounding and how it works
The other big advantage of SIP is that, it makes market timing irrelevant. While it is nearly impossible to predict how equity markets will behave in future, but by investing regularly e.g. monthly, weekly, fortnightly or even daily one is invested at different high and the low levels of the market. Mutual Fund SIPs work well during volatile markets as it can average the cost of investment.
By investing a portion of your monthly savings in a convenient yet disciplined way through SIP, you can meet a variety of long term financial goals through the power of compounding. In order for financial planning to be effective, investors should clearly define different financial goals in quantifiable terms. If your goal is clearly defined, our SIP goal planner can help you estimate how much you need to save every month (or any other frequency) in order to meet your goal. SIPplanners work based on the following methodology:-
- What is your goal amount: Goals should always be quantifiable; even if the quantification is not very accurate, it gives you something to work on. You should always factor in inflation because goals are always in the future.You can now plan a goal on our website
- What is the goal timeline: The tenure of the investment is one of the simplest factors; it is determined by how much time you have for fulfilling the goal. If you are determining the tenure of investment in years, in some SIP calculators, you may have to convert the tenure into months, to know how you have to save and invest monthly.
- What is your return expectation: The return expectation is determined by your risk appetite and investment strategy. If your investment strategy is biased to small and midcap funds, then your returns expectations should be higher than what it would be, if it was large cap biased; if you have balanced funds then your returns should be more moderate, so on so forth.
Suggested reading: mutual funds in India has the right solutions for all your money needs
Please use the above tools and ensure that all the assumptions are entered corrected in the SIP planner or goal planner, the software program calculates the monthly SIP amount which will be the result of future value of cash-flows at a certain rate of return to be equal to the inflation adjusted goal.
You may check the SIP return of various mutual in India here
In this article, we discussed the benefits of the mutual fund SIPs and how SIP calculators will help you determine the correct SIP amount. Knowing the right SIP amount is the most important factor, in ensuring success towards your financial goals. If you do not invest in the right SIP amount, you may fall short of your financial goals no matter how well the investment does in terms of percentage returns.