Written by : Rajiv Singh

A Chartered Accountant in UK with 15+ years of experience in FinTech Consulting, Accounting & International Taxation. I enjoy being a Social, Foodie and Father of two young children, reachable at linktr.ee/RajivSingh.

What is SIP? Few Tips for SIP

Rajiv Singh
Rajiv Singh, CA, FAIA

Nov 13, 2021 05:06

SIP is one of the most popular ways to invest in mutual funds. Its disciplinary nature and pre-defined investment intervals make it an ideal plan, especially for first-time investors. If you are seeking a plan to invest in a time-bound manner to reap benefits without getting bothered about the market dynamics, then you are in the right place. SIP is preferred over many other financial security mechanisms because it brings you an enjoyable retirement life. Before getting to know the tips for SIP, let us take a look at what SIP actually means.

What is SIP?

SIP is a retirement investment plan that utilizes your monthly savings to invest in mutual funds. If you are a prudent investor and like to invest money in a structured manner, SIP is a great avenue to divert a fixed amount of money to a selected mutual fund scheme. The catch is that by unlocking this benefit you can invest monthly, daily, quarterly or semi-annually. The money will be deducted from your account and will be directly invested in the mutual fund. However, activating it will force you to submit a lump sum periodically. Thus, in a way, you can say that it is not the best investment plan, but with the following tip for SIP you can effortlessly optimize the benefits.

TIPs for SIP

1. Start investing early

If you are planning to adopt a scheme, then the foremost tip for SIP is to commence the process early. As your goal is to save more money from your income, it will take some time to allocate enough money to get an adequate outcome on your investment. This is where the power of compounding pitches in. It helps you magnify the amount that you have invested in. If you are aiming to earn not just the credited amount, then compounding is a way to ensure that goal. Compounding simply is a way of investing what you have generated so far. In this method, your procured returns will be added to the principal investment and then SIP will facilitate additional returns on this amount. The benefit is that it can double or triple your initial investment money.

For example, let’s take the story of Samuel and Zara. Samuel decided to invest Rs10,000 when he was 25 years of age and will be able to get a return of 15% in a year. Whereas, Zara started her investment journey when she was 35 and will be getting the same return annually. Both opted for the SIP scheme until they turned 60. As a result, Samuel will get a return of 14.86 crores while Zara will only get 3.28 crores. Thus, starting 10 years earlier helped Samuel to earn 3 to 4 times more than Zara.

2. Choose direct mutual funds

Once you decide to start early, what matters next is optimizing your outcome. This is why experts demand investors to choose their schemes wisely. There are various versions of mutual funds. Most often the funds that investors select might not be the best mutual fund scheme available. If you are selecting your scheme based on the reviews and star rating, then sorry to say; you got it wrong. Here are few tips for SPI to select the best mechanism;

  • Before entering your funds into various accounts, it is important to divide them into proper baskets. Always choose a large-cap mutual fund if you are looking for long-term benefits.
  • Compare and contrast funds across various timelines and choose the one that lands at your preferable outcome.
  • It is also necessary to consider the risk that you might expose , if you haven’t calculated the returns.
  • You also need to take into account the reputation and reliability of the company that you have decided to invest in.

Nevertheless, opting for direct mutual funds will give you a financial raise of 0.8%-1% annually to your earnings. Take, for instance, you like to take a SIP for Rs 10,000 for 20 years; and you have selected the “regular” equity mutual fund scheme. Consequently, after 20 years, you will get an annualized return of 12%. However, if you have opted for a direct mutual fund, you can annualize a return of 13%.

3. Set a long-term goal and avoid fast withdrawal

Similar to early investment, setting a long-term goal is one of the vital tips for SIP. As SIP is more beneficial in the long run, it is preferable to accumulate the money until maturity date. This will give the desirable financial security that you seek to achieve in the long run. Apart from this, it is also crucial to set aside your immediate tendencies to withdraw SIP investment. In times of financial crunches or unplanned expenses, you might stop investing or withdraw unexpectedly. It can be a huge loss especially when the market is low and your profile value is less. It is always good to make withdrawals when you are nearing your goals. However, systematic withdrawals can work at your advantage to boost your income. Even if you are opting for systematic withdrawals, confirm that you are only touching your return corpus, not the principal portion of your investment. In this way, you can continue growing your return rate. Apart from this, you can even apply intelligence to make your SPI plan more effective. Intelligence will help you understand the pattern to optimize your funds.

That being said, it takes time to optimize your portfolio. Besides, you also need to get expert advice before opting you’re a scheme that fits your interest. If you are looking for an ideal financial mechanism, then keep these tips for SIP in mind to enhance your returns.

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Rajiv Singh
Rajiv Singh, CA, FAIA

Nov 13, 2021 05:06

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