A Step-by-Step Guide to Invest in SIP for Beginners

In the unpredictable realm of financial planning, SIP investments have proven to be a hidden advantage. As it eliminates the need for “timing the market” for investment purposes. It provides a structured method for investing and aligns investments with consistent income streams. If you’re new to the concept of SIPs, this Blog on SIP for beginners will walk you through the process of getting started and making informed investment decisions.

In the following Blog, we will elaborately explain the meaning of SIP, how to invest in SIP works, the advantages it offers, and provide guidance on initiating a SIP investment in mutual funds.

What is SIP?

SIP or Systematic Investment Plan is a methodical and organized strategy in order to engage in mutual fund investments. Under the SIP framework, the investors need to deposit a consistent sum regularly, usually on a monthly basis, to a specific mutual fund scheme.

Characteristics of SIP – Systematic Investment Plan

1. Regular Investment – The investor needs to invest a consistent sum at regular intervals, fostering a steady and disciplined investment strategy.
2. Convenience – SIPs provide convenience through the automation of the investment process. The designated amount is automatically deducted from the investor’s bank account at scheduled intervals.
3. Affordable – SIPs simplify the initiation of investments for individuals with a small sum of money, thereby broadening the accessibility of mutual fund investments to a more extensive group of investors.
4. Wealth Building – SIPs prove exceptionally well-suited for achieving long-term financial objectives by leveraging the compounding effect and offering the advantage of smoothing out market volatility over an extended period.

How does SIP work explained with an Example?

SIP operates based on the principles of rupee cost averaging and compounding.

• Rupee cost averaging entails acquiring more units when the NAV (Net Asset Value) is low and fewer units when the NAV is high, thereby averaging the cost per unit over time.
• Compounding involves reinvesting returns along with the principal amount, potentially leading to the growth of wealth over an extended period.

Example – If you commit Rs. 5,000 per month over a span of 10 years with an annual return of 12%, your total investment of Rs. 6 lakh will experience compounding, resulting in a growth to Rs. 11.61 lakh by the end of the decade.

In the initial year, your investment amounts to Rs. 60,000 (Rs. 5,000 x 12 months), and it generates interest of Rs. 7,200 (calculated as Rs. 60,000 x 12% = Rs. 7,200). This earned interest is then added to your principal investment, elevating the total value of your investment to Rs. 67,200 after the first year.

In the second year, your investment will persistently expand as you contribute an additional Rs. 5,000 each month. The interest accrued in the second year will be computed based on the updated principal amount of Rs. 127,200 (derived from Rs. 67,200 + Rs. 60,000), resulting in interest earnings of Rs. 15,264 (calculated as Rs. 127,200 x 12% = Rs. 15,264). This earned interest is then added to the principal investment, elevating the total value of your investment to Rs. 142,464 by the conclusion of the second year.

This cyclic progression continues annually, where the interest earned augments the principal investment, and the subsequent principal amount is utilized for calculating interest in the subsequent year. Over time, this compounding mechanism has the potential to foster the growth of your investment.

Which type of SIP Funds are available for Investment?

1. Regular SIP – This represents the most common form of SIP, wherein you regularly invest a fixed sum in a mutual fund scheme.

2. Perpetual SIP – This kind of SIP doesn’t have a set finish date. You can keep investing through SIP for as long as you want until you decide to stop.

3. Step–Up SIP – This SIP, gives the flexibility to the investor to raise their investment regularly, like yearly or quarterly. This enables an increase in your savings and potential returns as time progresses.

4. Trigger SIP – This kind of SIP lets you decide when to invest based on certain things like a date, value, or event.

Which are the Best SIP Funds to Invest in 2024?

Fund Name	1-Year Return (%)	3-Year Return (%)	5-Year Return (%)
Quant Active Fund Direct-Growth	50.15%	31.08%	30.88%
Quant Large and Mid Cap Fund Direct-Growth	61.87%	32.97%	27.61%
Quant Focused Fund Direct-Growth	53.99%	27.27%	25.10%
Parag Parikh Flexi Cap Fund Direct-Growth	41.72%	23.97%	24.39%
Mirae Asset Large & Midcap Fund Direct-Growth	39.42%	19.22%	22.11%

Check more investment options – https://www.etmoney.com/mutual-funds/featured/best-sip-funds/18

Advantages and Disadvantages of SIP Investment  

Advantages of SIP

1. Accessibility –
SIPs broaden the reach of investing, enabling a more extensive group of individuals to begin with modest sums of money.

2.Flexibility – Investors have the flexibility to select the SIP amount, frequency, and the fund that matches their financial objectives and risk tolerance.

3.Compounding benefits – The compounding impact, involving the reinvestment of returns, has the potential to foster the gradual growth of wealth as time progresses.

4.Disciplined Savings – SIP cultivates a disciplined savings routine by necessitating regular contributions, encouraging a steadfast approach to investment.

Disadvantages of SIP

1.Market Fluctuation – SIPs face exposure to market variations, and in times of market downturns, there is a possibility of a decline in the investment’s value.

2. Unassured Returns – SIPs do not assure returns, and the investment’s performance is contingent upon prevailing market conditions.

3.Fees and Charge – Some mutual funds may have extra costs related to SIPs, which can affect the total returns you get.

4.Fund’s Performance dependency – The success of SIPs hinges on how well the selected mutual fund performs. If the fund’s performance is below par, it could result in diminished returns for your investment.

How to invest in SIP for Beginners?

Investment in SIP is a convenient and straightforward process just follow these steps:

1.Set Financial Objective -Define your financial objectives, whether it involves saving for specific milestones like purchasing a home or funding education, or building long-term wealth.

2.Evaluate Risk Tolerance – Assess your comfort level with market fluctuations to determine your risk tolerance. This evaluation will assist you in selecting an appropriate mutual fund category.

3. Opt for a Mutual Fund – Conduct research and choose a mutual fund aligned with your financial goals and risk tolerance.

4.Select SIP’s Tenure and Amount – Choose the frequency (monthly, quarterly) and the amount you’re comfortable investing regularly through SIP. Ensure that it fits seamlessly into your budget.

5.Open Mutual Fund Account – Establish a mutual fund account with a reputable fund house or through a registered online investment platform. Link your bank account to your mutual fund account, facilitating automatic debits of SIP contributions from your bank.

6.Initiate SIP – Once your account is established, commence the SIP by specifying the fund, SIP amount, and frequency. The mutual fund company will automatically deduct the SIP amount based on your chosen frequency.

7. Monitor your SIP – Regularly monitor your mutual fund’s performance. Although SIPs are designed for a long-term strategy, periodic reviews are essential for making adjustments when necessary.

8. Seek Expert Advice – If uncertain about fund selection or investment strategies, consider consulting a financial advisor. They can offer personalized guidance tailored to your financial situation and goals.

Conclusion

Keep in mind that every investment involves a degree of risk, emphasizing the importance of patience and dedication to your long-term objectives. It’s perfectly acceptable to begin with a modest SIP amount, with the option to increase it as your financial circumstances improve.