How can you make optimal use of a SIP?

Investing money in the markets is a smart move for the future, but sometimes it can feel overwhelming, especially if you're new to it. Enter Systematic Investment Plans (SIPs) – a convenient approach that helps you invest money regularly and in a disciplined manner without needing a huge lumpsum amount.

Table of contents

• What is a SIP?
• How can you make optimal use of a SIP?
• How to start a SIP?

What is a SIP?

Imagine you have a piggy bank. Each week, you put a fixed amount into it. This is similar to how a SIP works, but instead of a piggy bank, you invest in mutual funds. Let's say you decide to invest Rs. 2,000 every month in a SIP. So, on a fixed date every month, Rs. 2,000 is automatically debited from your linked bank account and invested in the mutual fund scheme you choose. SIPs help in building a habit of investing regularly, regardless of the market's ups and downs.

How can you make optimal use of a SIP?

Start early and stay consistent: Initiate your SIP investment as early as possible. The longer your money stays invested, the more it grows due to the power of compounding. Maintain consistency in your SIP investments. Even small, regular investments can accumulate into a substantial corpus over time.

Set clear financial goals: Define your financial objectives—whether it's retirement planning, education funds, or buying a house. Align your SIP investments with specific goals to ensure you are investing with a purpose.

Choose suitable funds: Selecting an appropriate mutual fund scheme plays a pivotal role in optimising the return potential of your investment. It's essential to choose a mutual fund that suits your investment objectives, risk tolerance, and time horizon. Notably, Bajaj Finserv AMC offers a diverse range of mutual fund schemes. You can select the ideal mutual fund scheme that matches your unique investment needs and preferences.

Increase SIP amounts over time: As your income grows or when you have additional funds, consider increasing your SIP amount. You can also opt for a step up SIP, wherein your instalment amount increases by a fixed percentage at regular intervals, potentially boosting your overall returns. A Step Up SIP Calculator can help you determine a step-up rate that aligns with your goals. This can boost your investments.

Take advantage of market fluctuations: During market downturns or corrections, consider increasing your SIP amount or investing a lumpsum. This strategy, known as 'topping up' or 'SIP top-up,' allows you to purchase more units at lower prices, increasing your potential returns when the market rebounds.

Stay invested for the long term: SIPs work well when allowed to grow over the long term. Avoid reacting impulsively to short-term market volatility. Resist the temptation to withdraw funds prematurely, as it disrupts the power of compounding.

Regularly review and rebalance: Periodically review your SIP portfolio to ensure it aligns with your evolving financial goals and risk tolerance. Rebalance your portfolio, if necessary, by adjusting SIP amounts based on changing circumstances.

Avoid early withdrawals: Don't let market fluctuations or short-term noise influence your investment decisions. Financial challenges can surface unexpectedly. However, in the case of SIP investments, early withdrawal or redeeming returns prematurely can adversely affect substantial corpus growth. Exiting a SIP plan during a market downturn may lead to reduced portfolio value, resulting in low returns.

Seek professional advice: If you're unsure about fund selection or investment strategies, consult a financial advisor for guidance.

How to start a SIP?

Here's a step-by-step guide on how to start a SIP:

Step 1: Select a mutual fund – You can choose equity funds, debt funds, or hybrid funds depending on your financial goals.

Step 2: Choose the investment amount – It can be as low as Rs. 500 or Rs. 1,000 per month, depending on the mutual fund scheme.

Step 3: Set the SIP duration – It can be short-term, medium-term, or long-term based on your investment goals.

Step 4: Fill the SIP registration form – Fill in your personal details, investment amount, frequency (monthly, quarterly), and duration in the SIP form.

Step 5: Provide necessary documents – Attach KYC documents, such as PAN card, Aadhaar card, address proof, and bank details, along with the SIP form.

Step 6: Set up auto-debit mandate – If opting for monthly SIPs, set up an auto-debit mandate on a fixed date with your bank.

Conclusion

In a nutshell, SIPs are a suitable tool for those looking to invest but have limited resources or knowledge about the market. SIPs make investing simple, disciplined, and accessible for everyone. By starting early, being consistent, and making informed choices, and using tools like a SIP investment calculator, SIPs can help you reach your financial goals over time. Remember, when it comes to SIPs, it's not about timing the market; it's about time in the market. So, start small, stay committed, and watch your investments grow steadily.

FAQs

Why is starting a SIP early beneficial?

Starting an SIP early provides advantages like higher potential for compounding growth, rupee cost averaging, and disciplined saving. Early investments can build substantial wealth, smooth market volatility, and help work towards long-term goals such as retirement or education. Consistent contributions reduce financial stress.

How can I align my SIP with specific financial goals?

Aligning SIP investments with financial goals involves clear planning and regular reviews. Define specific goals with timeframes and cost estimates, select suitable funds based on risk tolerance and horizon, and calculate required SIP amounts using a calculator. Periodically review your portfolio and make adjustments as needed. Consider increasing your contributions as goals evolve and incomes rise.

What should I consider when choosing a mutual fund for SIP?

Selecting a mutual fund for an SIP requires careful consideration of your goals, risk tolerance, and fund characteristics. Evaluate fund types based on objectives, analyze historical performance* and expense ratios, and assess the fund manager's track record. Diversify investments across asset classes and opt for reputable fund houses to optimize return potential and mitigate risks. *Past performance may or may not be sustained in the future.

How can increasing my SIP amount over time enhance returns?

Increasing your SIP amount over time can boost return potential by increasing your invesred capital and therefore, amplifying opportunities for compounding. Ensure increases are affordable and regularly reviewed, keeping market risks in mind.

Should I continue SIP investments during market downturns?

Continuing SIP investments during market downturns can be beneficial due to rupee cost averaging. During downturns, your SIP buys more units for the same instalment size. This positions you to potentially benefit if the market recovers. Over time, investing in different market conditions can also reduce your per-unit investment cost.

How often should I review and rebalance my SIP portfolio?

There is no fixed frequency, but reviewing and rebalancing your SIP portfolio annually can help it stay aligned with your asset allocation, address underperformance, and adapt it to life or market changes. More frequent rebalancing may be needed during significant market swings or as financial goals near.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.