Are you looking to take charge of your money? Enjoy the future you've worked so hard for? You can achieve these and much more with a Systematic Investment Plan [SIP]. This is a gradual and disciplined way of achieving specific investment goals.
Most mutual funds have SIP schemes, that let you access markets by making affordable and staggered investments over a period of time.
In the second story as part of our personal finance explainer series, BOOM tells you five things you need to know about SIPs.
1. What is an SIP?
As the term suggests, it is a simple yet powerful automated strategy of putting a specific amount of money towards a mutual fund of your choice periodically to meet a goal.
So whether you're looking to celebrate a milestone, go on a holiday or perhaps fund your child's future university costs, a Systematic Investment Plan can come to your aid and give you the cash sum you need to make it. It helps you build up a substantial nest egg for any future goals over a continuous period of time.
Also Read: What Is A Mutual Fund: 7 Things To Know How It Works
2. How do SIPs work?
Several schemes allow you to invest a fixed amount of your choice in a mutual fund scheme periodically for a specified time frame.
The amount gets deducted from your bank account without you having to make an effort. That ensures you are regularly saving for your future through direct debit.
You may also make an SIP payment through a broker or manually to the asset management company (AMC) every month.
3. What are the benefits of SIPs?
- Offers a well-disciplined and passive approach to investing, keeping you on track for your long term goals
- It helps create wealth in the long term through the power of compounding.
- No need to gamble or focus on timing the market
- Allows you to invest periodically with little to no impact of market fluctuation and benefit from rupee cost averaging
- Provides a good deal of versatility — you can pause, update or cancel at any time.
4. SIP vs. lumpsum
A lump-sum method of investment is contrary to that of a SIP. It's where you invest a large chunk of money at one go into a mutual fund of your choice. So if you have a significant amount of cash and you're looking to park your funds or make a one-time investment, you can choose the lump sum route. While this does not give you the benefit of averaging, your entire investment can reap the benefits of a potential gain together, but will also dent your investment in case of a fall.
To the contrary, an SIP is a process that makes it effortless for you to set up an investment plan across market conditions and the flexibility of selecting an amount and frequency to invest in the market. Through an SIP, you benefit from rupee cost averaging and the power of compounding. It also ensures you stay disciplined by allowing you to invest in instalments while synchronising your monthly income, budget and expenses.
5. Pausing vs. stopping SIPs.
Several mutual fund houses give you the option of temporarily pausing your SIP. That's very different from stopping it.
This is a nifty option to have in case you need to meet necessary expenses or large-ticket expenditure.
To pause your SIP, you need to provide the fund house with sufficient notice — ideally a month — to allow the fund to make provisions, such as sending the pause mandate to the bank. You will need to:
- Click on the pause application form found on the fund website
- File a pause application mentioning the time duration to pause the SIP
Once the period ends, your SIP will be resumed automatically like before. However, not all mutual funds provide the pause feature. Therefore, you need to cross-check with your mutual fund whether the facility is available.
Stopping your SIPs means discontinuing the plan altogether. All you need to do is:
- Go to the mutual fund website
- Choose the ongoing SIP you seek to cancel
- Click on cancel/stop SIP
Typically, it takes about 15 to 20 business days for the cancel request to be processed.
These services can also be availed through an agent or a broker.
Also Read: Explained: What To Look For When Investing In An IPO
This story is part of the BOOM Money explainer series on personal finance
