A tree does not bear fruit in a day. Likewise, any investment plan requires sufficient amount of time to get good returns. For a responsible and disciplined saving, Systematic Investment Plan (popularly known as SIP) is a wise approach to begin your long-term investment plans.
“Do not save what is left after spending, but spend what is left after saving” – Warrant Buffet
Whatever you may earn, big or small, a regular thoughtful saving each month, could multiply your wealth in the long run. SIP is a tool that can help you achieve your financial dream without putting up a mammoth effort.
What is a Systematic Investment Plan (SIP)?
Systematic Investment Plans, as the name suggests, is a method of regularly investing in mutual funds. The amount can be as small as INR 500 and up to any amount you wish. It can be invested weekly, fortnightly, monthly and quarterly as per your convenient. Regularly paying a small amount over a long-term such as 20 to 25 years will deliver a lump sum which would be hugely helpful for your requirement. Hence starting at the early stage of your career helps you earn a better return when you head towards retirement.
How to Invest in a Systematic Investment Plan (SIP)?
Investing in mutual funds through SIP is similar to a recurring deposit except that the returns could vary in the former depending on the market conditions. However, the compounding and average rupee costing help you get the benefits much more than you can get on a recurring deposit.
You can invest in an SIP either by applying through a bank, online or with a Demat account. You may have to submit your KYC documents and the mandate to open an SIP account. Before choosing and SIP, it is important to do a background research on what plan is best for you and the benefits you get from the plan.
Equity mutual funds are tax free while debt mutual fund will attract tax at the rate of 20% with indexation benefit. The equity mutual funds generally have high risks when compared to other type of mutual funds. Hence you need to choose the mutual fund plan based on your income, risk profile and goal attached to it. Longer the tenure, better the compounding works.
If you are investing in open-ended mutual funds, you won’t have lock-in period. You can stop the plan and obtain the returns based on the market position. ELSS mutual funds generally have 3 years of lock-in period wherein you cannot withdraw the returns before the date of maturity.
SIP and Mutual Fund
Many have the notion that SIP and mutual funds are two different things. Here one must understand clearly that SIP is a tool to invest in a mutual fund. You can invest a lump sum or a small amount regularly in a mutual fund. Investing small amount regularly is known as Systematic Investment Plan (SIP).
Choosing to invest through an SIP helps you inculcate the habit of disciplined saving at an early stage of your life. Earmarking a small amount from your income for an SIP will not have much impact on your financial life.