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Tuesday, May 21, 2024

How do SIP investments work and how can you invest in different bank’s SIPs?

SIPs, or Systematic Investment Plans, are easy and simple to invest in. For those who want to grow their wealth without having to channel large amounts of capital in one go, SIPs are the ideal option. Slow and steady does win the race when it comes to SIPs, that slowly build up your corpus through a series of pre-decided investments in a mutual fund scheme at regular intervals.

Regular investments that are spread over a long period of time yield higher returns. SIPs also work towards generating a disciplined habit of saving and financial responsibility. They score over lump-sum investments in many areas, such as being much easier to start with due to a low capital requirement.

SIPs Explained in 200 words

You invest a fixed amount in a mutual fund scheme.
The installments are fixed and so are the intervals of payment – usually monthly
The fund lets you buy units for a particular amount of money on a particular date each month. Knowledge of market timing is therefore not required.
The amount is debited automatically so you can treat it like a monthly EMI or a monthly bill
It enables wealth creation in the long run. A mutual fund SIP calculator is a handy tool to find your projected future returns from the investment.
Flexibility advantage – monthly investments can be increased, decreased, skipped or stopped.
SIPs help get you more mutual fund units during periods of market volatility.
A SIP can also be top-up at any time.
You can withdraw from the investment plan whenever you wish. The only exception to this is an ELSS fund which have lock-in periods of 3 years.
Rupee cost averaging allows for higher potential returns.
A SIP is perfect for salaried individuals who want to save and invest a certain amount of money every month helping in long term wealth creation.

How does a SIP work?

A Systematic Investment Plan takes into account two principles:

Rupee cost averaging

Since SIPs involve regular instalments over a period of time, they shield investors from the guessing game of market performance. Market volatility is tempered by SIPs via rupee cost averaging, where the purchase cost is averaged out over the long run. When the market exhibits bullish trends, investors would receive fewer units, while in bearish times, they’d stand to buy more units. The overall risk is therefore balanced out over a long period of time. In other words, the average cost is lowered.

Compounding

The concept of compounding delivers exponential returns. When small sums of money are invested at regular intervals, the interest begins to act as the principal, allowing the corpus to grow at much faster levels.

For example, Mr Y invests a sum of rupees 1,000 each month earning an interest of 7% on his investment. At the end of 20 years his investment will be ₹5,28,000. Whereas, Mr X who is twenty years younger, starts investing early. His total corpus at the end of 40 years would be ₹26,56,436 using the power of compound interest. The returns earned by Mr X are almost five times more than that of Mr Y. These kind of numbers can be easily generated using a Mutual Fund SIP Calculator

Bank SIPs: The What & The How

Nearly all major banking corporations in India offer their own mutual fund schemes. Again, nearly all of these schemes offer a SIP option to investors. Brands such as HDFC, Axis, SBI and more offer a variety of schemes – Balanced, Debt, ELSS-Tax Saving, Equity, index and even liquid funds. The SBI BlueChip fund, for example, is a growth fund that has delivered over 10% returns in the last 3 years and over 14% in the last five. Another solid performer – the HDFC Mid-Cap Opportunities fund, has given its investors over 13% over the last 3 years and 18% for the last 5).

How to invest in Bank SIPs

Investing via SIPs into a bank mutual fund is no different from investing in most other funds. Post the research and selection phase, all you need to do is either sign up for the SIP on the fund houses’ website. Or, in what is arguably a superior way to invest – get hold of a platform that offers all of these mutual funds in one place.

Before you start investing in SIPs, you need to make sure you have a clear view of your current financial situation and your goals for the long run. :

Setting up your financial goals will assist you be specific in finding a mutual fund that fits your needs
Deciding upon the tenure of your investment is equally critical
You can use a SIP calculator to ascertain the amount you need to invest under the plan to reach your goal

Before you begin, remember to keep the following in mind:

#1 Eligibility:  First and foremost, you need to fulfil the eligibility criteria. You’ll need to be a resident of India, and at least 18 years of age with a bank account and have a Mutual Fund KYC.

#2 Documents required: You’ll also require some proof of identity and proof of address

#3 Registration: Log on to the mutual fund investment portal of your choice and create your free account. Then, complete the KYC process

#4 Investment: Then, set up your SIP investment. Choose the amount and frequency of your instalments. Remember to periodically keep a rack of your investments as well.

SIPs carry their own pocketful of benefits that expand your wealth and contract your risks. Not only do they arguably offer higher returns, but also growth in the quantum of returns.