The SIP facts you should know before starting your SIP

Investing in mutual funds through Systematic Investment Plan (SIP) offers several benefits that can help you achieve your financial goals more effectively. Through this post, let’s understand it in more practical way so as to get maximum benefits out of it.

1.      The best time to start SIP is now:

Yes, every time is good to start an investment and for SIP where we invest a definite amount every month, we don’t need to find a right time it will  never be : the markets are in constant flux; something or the other keeps happening. If you keep procrastinating, nothing good will come out of it. On the other hand, SIPs, by design, are meant to help you navigate the ups and downs of the market, thanks to rupee cost averaging.

Rupee cost averaging means your SIPs buy more stocks when they are available at a lower price and buy less when stock prices become expensive. That's what all of us want, right?

 

2.      Do not pause or stop your SIPs when market is a peak: 

We are all tempted to get out and book profit when we see that the market is at its highest level. But this is only one of the highest of its past, in the future, it will keep on achieving new highs as the economy/country grows and again getting in the market when it touches a new high becomes more difficult. In a recent study, for 20 years return on NIFTY, if a person stayed invested was 15.6% and if he has missed just 20 best days (i.e. one day in a year) the returns would have fallen to 13.3% only. We can not correctly guess the market's future movement so better to remain invested.

  

3.      Increasing/Decreasing the amount in Market movement, doesn't makes much of difference:

Say we have SIP of  20,000 it will actually not make any big difference whether you increase your SIP to Rs 30,000 when the market crashes or decrease it to Rs 10,000 when the market rallies.

Let's understand it in a simple way, say if you have planned this SIP for say 10 years which means 120 months SIP then one SIP is just 1/120^th or 0.83%% of the total investment amount. So increasing it by 50% (20K to 30K) is just another 0.4% means nothing great you can achieve by this. However, increasing your SIP every year definitely makes a difference.

 

4.      SIPs are for long term, be patient, give enough time

SIPs are typically designed for long-term wealth accumulation. If your investment horizon is many years away, the short-term fluctuations in the market may not matter as much. Over the long run, markets tend to grow, and investing consistently can help you benefit from this growth.

Let’s understand this by example: If you are investing Rs. 10,000 every month, expecting a return of 12% P.a. the change in wealth accumulation over the years will be phenomenal and if we increase our SIP amount every year the amount can be mind-blowing, see the table given below:  

Time	5 Years	10 Years	20 Years	30 Years
Investment Amount	6 Lakhs	12 Lakhs	24 Lakhs	36 Lakhs
Investment Value	8.11 Lakhs	22.40 Lakhs	91.98 Lakhs	3.08 Cr
Investment Value with 10% SIP hike every year	9.69 Lakhs	32.68 Lakhs	1.86 Cr	7.99 Cr

 

5.      Plan your redemptions

Like investment planning, redemption also needs to be planned so that we don’t get a shock at the last moment. We all know that the market is unpredictable if it crashes exactly at the same time when we need money, it can be disastrous. So, what could be the solution for it, well if we know that when we need money, we can actually plan to redeem partially well in advance say 25% each over four instalments spread over a few months, and transfer the money into liquid/debt funds so that we don’t get a last-minute shock. SWP can be another way to redeem the mutual funds.

 

SIPs are a good way to create wealth by contributing a small amount regularly, if we use it wisely then it can also become a Smart Investment Plan.