Systematic Investment Plans (SIPs) is a financial planning tool through which you can invest in a fixed amount at regular frequency (weekly, fortnightly, monthly etc.) to achieve your long term financial goals and wealth creation. Systematic Investment Plans are ideal long term investment options for salaried as well other investors because they can invest from their regular monthly savings. There are a number of benefits of investing through Mutual funds Systematic Investment Plans.
One of the main advantages of investing through Systematic Investment Plan is that it makes disciplined saving and investing hassle free. By submitting an ECS mandate for SIP to the mutual fund company (AMC), the SIP amount will automatically get debited from your bank on a particular day or days of the month (as specified by you) and get invested in the mutual fund scheme(s) of your choice.
One of the major reasons why many investors fail to achieve their long term financial target is the ad-hoc nature of their investments. Money saved but not invested is not productive and often gets spent on discretionary items. SIP puts your financial planning on auto-pilot and has tremendous benefits in the long term.
Another big advantage of SIP is that it makes market timing irrelevant. All investors want to buy at a low price and sell at a high price but it’s not possible to predict accurately how markets will behave. By investing at a regular frequency, e.g. monthly, one is invested both at the high and the low points of the market. SIPs work well in the long term by averaging the purchase price of the units. SIPs are also very flexible investments. There is no penalty if the auto debit fails from your bank account due to insufficient funds. You can stop your SIPs at any point of time, by submitting a SIP closure request to the Asset Management Company (AMC).
The two most important factors in achieving investment success through SIP are discipline and patience. If there are insufficient funds in your bank account there is no penalty; however, if you miss three consecutive SIP instalments due to insufficient funds in your bank account then generally the AMC will cancel your SIP, thereby putting your financial plan at risk. Many a times, insufficient funds on SIP auto-debit dates are a result of negligence on part of the investor. You can set up recurring calendar alarm on your smart phone or your email calendar on SIP auto debit dates to help you ensure that you have sufficient funds on the SIP dates.
You can also ask your financial advisor to send you a SIP SMS (text message) alert one or two days before the SIP auto debit date. You also need to give some thought to the SIP dates selected by you. If you think that there is a risk of you running out of funds in your savings bank towards the end of the month, you should set your SIP date just a few days after your usual monthly salary credit date.
Patience is another important virtue in SIP investments. Equity markets are volatile and during periods of high volatility our patience is tested. In the past many investors stopped their SIPs in bear markets fearing further capital erosion. You should understand that, SIP investments made in bear markets are the best investments that you will possibly make because you keep buying at lower and lower costs. Over a long investment horizon, SIP investments made during bear market periods can give you bumper returns. Therefore, you should always be patient with your SIPs and will be richly rewarded in the future.
Optimal asset allocation is an extremely important component of your financial planning. You should always keep asset allocation in mind when doing SIP and select schemes based on risk capacity. If your risk capacity is aggressive, you can select midcap equity funds (See SIP returns of top performing mid and small cap funds); if your risk capacity is only moderate then you can select balanced funds (See SIP returns of top performing balanced funds) and if your risk capacity is conservative, you can select monthly income plans or income funds (See SIP returns of top performing MIPs).
For SIPs, you should try to select mutual fund schemes which are consistent performers because SIPs are usually long term investments. Funds which are consistently in the top two quartiles for several years, across different market conditions, are ideal for SIPs. Many investors choose fancy funds which have given the highest returns in the last 1 or 2 years but research has shown that consistent performers give superior capital appreciation in the long term. Consistent performers also give more stability to your portfolio in volatile markets.
See the most consistent mutual fund performers on our website
The key to investment success is starting early because the power of compounding with long term tenure can do magic to your investments as you continuously earn return on returns for you. You do not wait till you have accumulated a substantial amount of savings to start investing.
You can start your SIP with a small amount (as low as Rs 500 or Rs 1,000). As your income goes up over time your savings also increase. You should try to invest more every year in order to fight inflation better. Mutual funds offer investors the option of increasing their SIP instalments every year through features like Step-Up SIP, Top-Up SIP etc. Increasing your SIP instalments over time will go a long way in ensuring that you are on track for meeting your inflation adjusted financial goals.
Please check how much more corpus you can have if you increase your SIPs annually
Conclusion
Warren Buffet has said emotional intelligence is far more important than IQ for investing success. With SIPs you can invest in an emotionally intelligent way to create wealth. In this article, we have discussed how you can get more out of your SIP investments through discipline, patience and prudence.
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.