Systematic Investment Plan (SIP) is often an intriguing plan be it for a first-timer or for a seasoned investor. Sometimes, even the regular investors are often confused about it. If what is SIP often confuses you, read on to more about this system of investment and how it can be used to create wealth over a long time.
What is SIP?
Systematic Investment Planning (SIP) is like a regular equity mutual fund scheme where an investor invests a fixed amount of money regularly in the scheme. It is especially beneficial for beginners. If you choose to invest in a SIP fund, you can make arrangements for a fixed amount to be debited automatically from your savings account to a mutual fund scheme.
SIP mutual funds are available with an investment amount that starts as less as Rs 500. A fixed amount is invested in the mutual fund scheme monthly. However, the payment methodology can be customized and changed to quarterly, half-yearly or annual payments. The SIP amount can also be increased periodically. A clear understanding of what is SIP is essential before you begin to invest in it.
How Does SIP Work?
When an investor invests in a particular scheme of a mutual fund, he/she is allotted a certain number of units. The number of units allotted depends on the Net Asset Value or the current market rate on that particular day.
As an investor adds more money to the scheme, more units are added to his/her portfolio. When units are bought at varying prices in the market, the investor benefits by the average of rupee cost and by Compounding.
A regular investor can buy more units when the prices are low and sell them when there is an improvement in the prices. It is safer to buy less when the prices are high. When the markets are volatile, an investor can achieve a lower average cost for a unit.
The Pros of Investing in a SIP Plan
Once you get an idea of what is SIP, you should know the benefits of investing in them some as to make an informed decision. The following are a few of the benefits of investing in a SIP plan:
- Regular Saving: SIP involves paying towards your mutual fund scheme regularly and hence it encourages a kind of discipline where you allocate a certain amount towards savings. Discipline is the key to meet your financial objectives, be it short-term or long-term.
- Hassle-free: SIP is a very convenient method of saving. All you have to do is enable auto transfer of money from your bank account.
- Suitable for long-term: As mentioned earlier, the averaging of rupee costs and compounding make SIPs very suitable as a long-term investment tool where investors see a high percentage of returns in long-term.
- Flexibility: It is true that long-term investments in SIP give good returns. But, it is not a compulsion to hold onto the policy for a long-term. An investor can choose to discontinue the plan as per his/her convenience. The amount invested can also be adjusted by the investor.
Learning the intricacies of SIP investments in simple and that is what is SIP is all about.
The Preferred Equity Mutual Funds for SIP Investment
The various assets under mutual funds management are growing at a rapid pace and it is an indicator of the growing number of investors. Once you understand what is SIP, it is crucial to assemble a few schemes that suit your portfolio the best and help you in meeting your financial goals.
Here are a few tips on how to create your mutual fund portfolio once you have understood what is SIP:
- Shortlist the schemes with a good performance track in the long-term
- Consider your investment objectives while choosing the scheme
- Your risk-profile should not be ignored
- Consider risks and objectives while fixing the portfolio composition
- Watch the performance of your portfolio closely
- Take remedial action when necessary and turn to experts when needed.
Top Performing SIPs
An understanding of what is SIP will have every investor looking for the best performers. Calculating the data from the last five-year period and ten-year period, the plans that have generated the most returns are listed below. The schemes are chosen from four categories namely large-cap, mid-cap, multi-cap and Equity Linked Savings Scheme (ELSS).
The Best performing large-cap funds as on data available till December 2017 are:
- Reliance Growth Fund (G)
- Tata Equity P/E Fund
- Aditya Birla India GenNext Fund
- ICICI Pru Dynamic Plan
The Best performing mid-cap funds as on data available till December 2017 are:
- Franklin India Smaller Fund
- Sundaram Select Fund
- L&T Midcap Fund
- Aditya Birla Small & Midcap Fund
Some of the multi-cap schemes that have performed well include:
- SBI Emerging Business Fund
- IDFC Premier Equity Fund
- HDFC Capital Builder Scheme
- L&T India Special Situations Fund
- Aditya Birla Equity Fund
The Best performing ELSS funds as on data available till December 2017 are:
- Tata India Tax Savings Fund
- L&T Tax Advt Fund
- Reliance ELSS Fund
The above-listed schemes have a proven track record, however, it is not a guarantee that it would perform well in the future. Therefore, it makes sense to use a SIP calculator to understand the amount of returns one may expect when investing in SIP.