What is SIP
SIP is a mode of Investment offered by various mutual fund houses, wherein a pre-set amount of money is debited at a regular interval of time, be it daily, weekly, monthly, or quarterly from a person’s bank account and is automatically invested into the financial markets. This amount could be as low as INR 500 a month and is like a recurring deposit or RD.
How SIP Works
First Step: Create a one-time mandate or OTM by instructing your bank in favor of a mutual fund house
Second Step: Set the desired amount that you want to invest and the time duration you want the mandate to be active for.
Third Step: Give a mandate to the Bank to schedule a pre-specified date and the amount will automatically be deducted from your bank account.
Benefits of SIP
1. Cost Averaging – SIP gives investors the benefit of “Rupee Cost Averaging” wherein you buy, irrespective of the price whether it is high or low. So, in the long run, it averages out the price of units of a mutual fund better known as NAV.
2. Convenience - SIPs offer ease of investing as the process is automated and requires minimal manual intervention.
3. Flexibility – You can start with a relatively small amount and then gradually increase the investment amount as and when your financial situation improves.
4. Goal Oriented Investing – Various mutual fund houses offer something known as “Goal Oriented SIPs” wherein, one can have multiple SIPs running and tag each of them with a separate goal that they may have. Doing so makes tracking investments much easy.
Example: Ram is a 20-year-old boy who is a student. He has started investing in 4 SIPs every month in multiple of INR 1,000. Ram has assigned an individual goal to each of his 4 SIPs with short-term, medium-term, and long-term financial goals.
Short-Term Financial Goal: Ram has allocated INR 1,000 to his financial goal of owning a car after 4 years.
Medium Term Financial Goal: Funds to study abroad, Have a good sum of money to marry
Long Term Financial Goal: Have enough money to buy a house and pay EMI, Retirement Planning
5. Disciplined Investing - SIPs encourage regular investing habits, which can be beneficial in the long run, especially during market fluctuations.
How to Start SIP Investment
1. Choosing a Fund House – One can select a mutual fund or funds based on their financial goals and risk appetite.
2. Complete KYC – Complete the Know Your Customer (KYC) process with the fund house or through various intermediaries like banks or financial brokers as per convenience.
3. Fill out the application form – Fill out the application form by online or offline method.
4. Specify Details – Specify details regarding the investment like the frequency (Monthly, Quarterly, half-yearly), amount, and bank details for automated deductions.
There is a plethora of funds available nowadays with various combinations of asset classes. It is recommended to go with an equity mutual fund if starting early.
Story of Mohit: A Smart and an Intelligent Investor
Mohit is a 20-year-old who has just started earning through his internship and wants to start investing via SIPs, Mohit approaches his financial advisor, and he proposes 2 equity mutual funds of the same category to start with but the only difference that they have is that both funds have different financial ratios.
To understand the importance of these ratios, let us now observe the past performance of 2 Funds
Fund A: - 100% equity composition with the following ratios: - P/E of 20.35 & Beta of 0.84.
Fund B: - 100% equity composition with the following ratios: - P/E of 24.75 & Beta of 0.86.
Fund A: - Annualized return 45.5 % (One Year) and 41.9% (Two Years)
Fund B: - Annualized return 39.5 % (One Year) and 32.9% (Two Years)
Fund A has a low beta with a high alpha value and has outperformed Fund B with a higher beta and a lower alpha value. This means, while choosing your Mutual fund it is important to look for these ratios, as returns are significantly impacted because of them
Before starting a SIP, thoroughly study the fund that you will be choosing, as there are various financial ratios involved that will help you to depict the performance of a fund in the future.
SIPs are popular among investors due to their simplicity, disciplined approach, and potential for creating long-term wealth. It's essential to choose the funds wisely, keeping in mind your financial objectives and risk tolerance. Regular monitoring and review of investments are also very important to ensure they align with your goals.
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