Systematic Investment Plan

Investors always seek and prefer to make an investment that gives highest return while they are in their comfort zone. A Mutual fund has evolved as a platform that provides good growth and the potential to ensure one’s financial security.

In this article, we attempted to cover the basic details of systematic investment plan (SIP), a method of investing.

Define a systematic investment plan

SIP or systematic investment plan is a simple investment strategy in a disciplined manner aiming for wealth accumulation over a period to meet financial goals. It is a method of investing a specific amount towards one mutual fund scheme at regular intervals, say weekly, monthly, or quarterly, for a long-term period.

Being flexible in nature, the investors can increase or decrease the periodical installment or else can stop SIP whenever required. It proves to be the easiest way of investment compared to lump sum investment. In lump sum investment, you need to engage a bulk amount in one shot.

Why should you prefer investing in SIP?

Investing through SIP in a mutual fund is a key solution to enjoy incessantly the high returns on investment. It also makes a great sense of investing irrespective of market jittery. Timing the market is not required.

Assistance from fund managers is a key advantage to invest in a mutual fund. They regularly carry out extensive researches before investing in various stocks or instruments, which can be a tough task on the investor’s part individually. Investors occupied in regular jobs and running businesses are too busy to devote sufficient time and put efforts to keep tracking the market regularly. It requires a good focus to select equity funds that fall in line with the investment objective.

A diversified portfolio reduces risk levels. Investing across multiple funds is always a better suggestion compared to investing in a single fund. For instance, if you invest your total corpus in a single scheme only, and when the market tanks, you may suffer huge losses in case that specific scheme fails to sustain. However, when you diversify your total corpus in different segments, during the market meltdown, the loss from one scheme can be covered from other scheme’s profit.

Assistance from fund managers is a key advantage to invest in a mutual fund. They regularly carry out extensive researches before investing in various stocks or instruments, which can be a tough task on the investor’s part individually. Investors occupied in regular jobs and running businesses are too busy to devote sufficient time and put efforts to keep tracking the market regularly. It requires a good focus to select equity funds that fall in line with the investment objective.

Both, Securities and Exchange Board of India (SEBI) and Association of Mutual Funds in India (AMFI) regulate a mutual fund industry. They provide periodic guidelines following which ensures smooth and transparent functioning of mutual fund industry.

You can start SIP with a small amount of Rs. 500 or even less. Thus, it never appears as a burden and you can invest systematically for a long period with ease.

Keeping aside a lump sum amount in one shot is a bit tough than deducting small amounts on a regular basis from your incomes. Often, the lump sum amount kept aside with an investment purpose ends up abruptly by using the amount for other reasons. An SIP works on a regularly investing pattern. Thus, helping investors to stay focused to achieve their financial goals in the long run.

You cannot time the market. Hence, it is difficult to fix a particular time for making an investment. Rupee-cost averaging helps the investors to keep accumulating wealth even when the market tanks. For instance, if the market is high, you get fewer units but when the market is low, you benefit accumulating more units for the same amount. Suppose you started investing Rs. 500 monthly from March 2019 to February 2020.

*AVERAGE COST = Total amount/Total units (12000/693.32)

*AVERAGE PRICE = Sum of all NAVs/Investment period (310/12)

You earn returns on the investment made in SIP. All these returns accumulate over a period. The longer the period, the higher will be the interest. This means you again earn returns on the accumulated returns. Thus, investing at an early stage and for a longer period is beneficial to accumulate wealth with the power of compounding.

No manual efforts are required to pay an amount on decided dates. You can provide ECS instruction or post dated cheque and the units will auto credit to your account on time.

There is no such extra charge needed to be paid while investing in SIP through monthly mode.

You can withdraw SIP anytime in case of any emergency. However, it is advisable to invest in debt or liquid fund for a short-term and in equity funds for a long-term.

Essential elements while selecting SIP

A few aspects one needs to keep in mind while choosing SIP.

• Tenure of SIP is essential and matters a lot from a perspective of risk, returns, and tax. Investing in SIP for a longer period is good for earning maximum returns.

• It is vital to select a fund house that is capable to handle the market fluctuations and earn good returns for its investors. It is better to select a fund house surviving in the market for at least five years.

• Select plans, which are less risky in terms of volatility and liquidity

• Focus on the funds that have a good credit rating

• ELSS plans are best suited from the perspective of saving a hefty tax payment

The below chart can help you decide the right category for your SIP.

MUTUAL FUND CATEGORY SELECTION

Types of SIP

Under this plan, you can increase your investment amount at regular intervals whenever desired. It gives the advantage to invest in mutual fund schemes performing well in the market with an increased SIP amount. Increasing investment amounts at regular intervals also increase accumulated corpus to meet the financial goals.

In perpetual SIP, mentioning the end date is not mandatory. This SIP type allows the investor to redeem the funds whenever it is required or when he has reached his financial goal before the end of tenure.

In flexible SIP, depending on your cash flow, you can increase or decrease the amount of investment. There is a possibility to skip a few dates if you are facing a cash crunch due to any reason. Similarly, you can make an increased contribution to your SIP account when you get a bonus or any additional income.

This is the ideal SIP type for investors who have a proper understanding and knowledge of the financial market. You can initially set your NAV, mark index level, SIP start date, etc and it will start. It is not most desirable since it involves speculation.

How to modify mutual fund SIPs?

Sometimes, various reasons contribute to modify a mutual fund SIPs to align with goals while rebalancing of the portfolio. Here are some instructions related to it.

Investors can opt to hold the ongoing SIPs. Many AMCs offer this facility to their valued investors. The investors can produce a written request to pause the ongoing SIPs for a maximum period of 3 months. They need to provide the folio number and dates between which SIP is required to hold.

During annual portfolio reviewing, the investors might figure out the need for increasing or decreasing the SIP installment amount and frequency of the instruction or schemes alteration. In this condition, we offer a room for SIP modification providing online facility to stop, increase, decrease, or change SIPs. It is imperative to clarify both the old SIP instruction and new modified instruction.

We provide online facility to stop, or end SIPs. Additionally, you can stop funding bank accounts registered for auto-debit.

Investing in too many SIPs

The SIPs usually mean savings making regular fixed investments to achieve small and big life goals like education, vacation, car, home, marriage, retirement, etc. SIP route is considered one of the best and safe ways to achieve these life goals. Ideally, each life goal should have its own SIP. However, this does not mean starting too many SIPs at the same time. You need to figure out the amount and time to start SIPs to meet each financial goal in its right time. For example, in the first stage of a job, you can plan SIPs for car, marriage, and retirement. Married people can plan for home, vacation, child’s education, etc. Invest the right amount in SIPs at the right time.

You can take advantage of multiple SIPs through diversification. For instance, you can opt to invest in equity for a long-term plan like retirement or buying a home and in a liquid mutual fund to meet a short-term plan like a vacation, buying a car, etc.

Often, overlapped investments cause problem. Maintaining balance in SIPs is of utmost importance. It is imperative to evaluate your requirements, give time to attain it and then invest accordingly in SIPs.

What is the best frequency for SIP?

Frequency means the time interval between the first start date of SIP payment to the next due date of SIP payment. You can choose to pay SIPs as per your convenience like weekly, fortnightly, monthly or quarterly.

SIP is designed to take advantage of market volatility by averaging rupee-cost. Sometimes, investors mislead themselves with the wrong conception that increased frequency benefits more.

Suppose, you increase your SIP frequency daily, it might affect the returns positively but in a long run, the difference compared to monthly will be negligible. You could consider the monthly option if you are comfortable investing every month.

How to deal with SIPs when the market tanks?

Various reasons contribute to the financial crisis affecting the market with a sharp correction. The investors, especially beginners with insufficient knowledge and experience, start panicking.

   • What can we do if SIP returns are continuously negative for the last one year?

A sudden dip in the market, which continues over a short tenure say a year or two, cannot frame a base to quit SIPs. During a long-term investment, the market encounters a number of ups and downs, and portfolios may get marked in red. In this situation, investors can grab an opportunity to add more units. Hence, investors should continue their SIPs closing eyes on negative returns for a year or two. In case, consistently negative results for more years, review your portfolio and consider rebalancing.

   • When the market falls consistently for three years or more?

In such a condition, when schemes happen to under performits benchmark for long tenure over three years, the investors can seriously give a close look. The investors can opt to move to another scheme showing better performance.

   • How long to continue SIPs?

The investors can select any tenure as they wish or they can opt for a perpetual option. In the Perpetual option, the SIPs continue until the investors give instruction for closing to the fund house. If you have started SIP for a short-term, say 2-3 years and the market tanks before the completion of tenure, you can extend the duration of SIP accumulating more units at lower price and get benefit of rupee-average cost.

   • Should we add money to SIPs even if returns are negative?

In a long-term investment, adding money to SIPs benefits to buy more units. The financial advisors also suggest their valuable investors to stay focused on investment objectives and not to sway by market volatility

General mistakes to avoid while investing in SIP

Risk levels, returns in the past years, fund managers, and investment tenure are important factors that investors should consider while picking funds. However, several other factors need to be considered to avoid capital loss in a market crash.

   1. Choosing the wrong fund

According to your investment goals, expected returns, and risk appetite, appropriate mutual funds are selected to make an investment. Before starting an investment, your financial advisor must conduct thorough research as the wrong fund may ruin your financial goals in the long-term.

   2. High investment amount

SIP gives you an option to invest small amounts systematically every month. Compute an amount possible to invest every month to reap the aimed returns. Avoid starting with a high amount, which later seems tough to continue until the end.

   3. Setting unrealistic goals

Investors often make the mistake of setting unrealistic goals. A real expectation on mutual fund is between 10-14%. It is prudent to continue your normal investment process with average return goals.

   4. Not boosting your SIP

Often, we go through times where we see a surge in our income. In these times, we can afford to contribute a lump sum amount to our SIP fund. There are many SIPs where you can add a lump sum amount, it is beneficial as the combination of a lump sum, and regular SIP is bound to give you higher returns than your regular SIP.

   5. Short-term investment

This is a common mistake made by many investors. The return on investment depends on the time horizon and not only on the amount invested in it. That is, the longer the investment term, the higher will be the return.

   6. Abruptly stopping SIP investments

During the financial crisis, the market tanks and the investors tend to lose their patience. Due to market fluctuations, the investor’s portfolios mark red. This drives many investors to decide from continuing regular investment. Thus, unknowingly they make a mistake to discontinue SIPs.

   7. Timing the market

Many investors keep waiting for the right time to make the investment. It is more important to measure your investment tenure than timing the market. The sooner you start a SIP, the more you gain. Thus, investing through SIP for a long tenure gives high returns.

   8. Starting SIP in multiple schemes of similar category

With a diversification perspective, the total corpus invested in different schemes of one mutual fund or various mutual funds. Often observed, especially in the case of beginners or individuals bearing insufficient market knowledge, they end up selecting almost similar kind of funds. For instance, ITC, HDFC bank, Axis bank, all such stocks being the star performer in the long run commonly seen in various schemes of mutual funds. This means various mutual funds invest in similar types of stocks. You need to focus if your fund has significant exposure in similar stocks.

   9. No periodical watch

The fund managers are assigned a specific job to track the market regularly and allocate the investments in various assets capable enough to meet your investment objectives. The fund managers are experienced and, thus reliable but you need to be cautious about your investments. The beginners, individuals, and often long-run investors rely on fund managers only and never track market performance personally. At regular intervals, you should eye on your invested schemes. For instance, the benchmark against your invested schemes has given a 10% return, but your SIP return is terribly showing less, this may be an indication for you to change the fund.

Conclusion

The above details show how the investment in Mutual Fund through SIP increases the percentage of income. SIP is a feature designed for investors aiming to invest small amounts on a regular basis to accumulate a huge corpus over the long term.

Investing in a Mutual Fund for a long tenure through SIPs certainly helps the investors reach financial milestones. It inculcates the habit of disciplined saving without affecting much on your financial life.

Additionally, unlike other investments, during the market crisis, the investors in SIP can accumulate wealth gain by adding more units.