Systematic Investment Plans or SIPs have become one of the most popular ways for long term investors in India to build their wealth over time. By making small, regular investments every month, SIPs allow you to benefit from the power of compounding and rupee cost averaging. If you are looking to start investing through SIPs but are unsure about the basics, this article will help you understand everything you need to know about sip investment.
What is a SIP?
A SIP or Systematic Investment Plan is a facility offered by mutual funds which allows you to invest a fixed amount in a mutual fund scheme periodically at fixed intervals – usually monthly or quarterly. Rather than making a lumpsum investment, you can start an SIP with as small as Rs. 500 per month. The amount will be automatically debited from your bank account on the opted date every month and invested in the scheme of your choice. This takes out the emotion of timing the markets.
Benefits of SIP
- Rupee Cost Averaging: By investing small amounts regularly through SIPs, you end up buying more units when markets are low and fewer units when they are high. This brings down your average cost of investment.
- Power of Compounding: By staying invested for long periods through SIPs, you benefit from the power of compounding as your returns are earned on previous returns as well as the principal amount. This can help grow your wealth exponentially over time.
- Disciplined Saving: SIPs enforce financial discipline as the amount gets debited automatically each month from your bank account. This ensures you don’t procrastinate on your investments.
- Lower Minimum Investment: SIPs have a low minimum investment amount starting from just Rs. 500 per month making mutual fund investing accessible to all.
- Tax Efficient: Long term capital gains from equity mutual funds held for more than 1 year are taxed at just 10% with indexation benefit.
How to start a SIP?
Starting an SIP is very simple. You need to approach the AMC (Asset Management Company) or the Registrar & Transfer Agent (RTA) of the mutual fund scheme you wish to invest in. You can also open an account online on the website of the fund house. You will need to fill a one-time SIP registration form providing your details like PAN number, KYC documents and debit mandate. Choose the scheme, date, frequency and amount of SIP installments. Your SIP will then start getting debited from your linked bank account as per the opted details.
Best sectors to invest through SIP
Depending on your risk appetite and investment horizon, here are some of the top sectors to consider for long term wealth creation through SIPs:
- Large Cap Equity Funds: Large, established companies tend to be less volatile. Opt for diversified, large cap funds for stable, long term growth.
- Mid Cap Funds: Mid cap companies have higher growth potential than large caps. Invest for 7-10 years through SIPs to benefit from the higher returns over the long run.
- Multi Cap Funds: These dynamically manage their portfolio across large, mid and small cap stocks. Suitable for investors looking for one-stop diversification.
- Index Funds: Passively track the underlying index like Nifty 50, Sensex etc. at a very low cost. Ideal for hands-off investors.
- Tax Saving Funds: Equity Linked Saving Schemes (ELSS) offer tax rebate u/s 80C along with equity exposure. 3 year lock-in period.
- Debt Funds: For capital protection and regular income needs, consider short or medium term debt funds.
SIPs are a simple and convenient way to achieve your long term financial goals through the power of compounding. By starting to invest in mutual funds and small SIPs in growth sectors through 5paisa, you can create wealth over the years without much effort. Do your research to identify the right funds based on your risk profile and start investing through SIPs for a secure financial future.