Investing in today’s world can be a bit overwhelming with so many options. If you are looking for a disciplined and low-risk way to grow your wealth, a Systematic Investment Plan (SIP) is a great start. In this blog, we will explore how SIPs work, where to invest, the importance of Demat accounts, and how to calculate your returns. Let’s explore why SIPs can be your ideal investment strategy.
What is a SIP (Systematic Investment Plan)?
A Systematic Investment Plan (SIP) is a way of investing in mutual funds where you invest a fixed amount regularly (monthly or quarterly). SIPs help you automate your investments, encourage financial discipline, and leverage the power of compounding.
How to invest in SIP
Investing in SIP is simple and can be done in a few steps:
- Open a demat account: This is the first step in any stock or mutual fund investment.
- Choose a mutual fund: Choose from equity funds, debt funds or hybrid funds depending on your risk tolerance and financial goals.
- Choose the SIP amount and duration: You can start with as little as Rs 500 per month.
- Set up auto-debit: Link your bank account for automatic monthly debits, ensuring regular investments without any manual intervention.
Where to invest in SIP
There are several mutual funds you can invest in through SIP. Here’s how to choose:
- Equity mutual funds: Best for long-term growth. Suitable for investors with high risk tolerance.
- Debt Mutual Funds: Safe, but with low returns, ideal for conservative investors.
- Hybrid Funds: A mix of equity and debt, offering moderate returns with low risk.
- Sectoral Funds: Focus on specific sectors like IT or pharmaceuticals, ideal for investors with sector-specific knowledge.
You can invest in SIPs through online platforms like:
- Zerodha
- Groww
- ET Money
- Paytm Money
- Direct Mutual Fund Website
What is a Demat Account?
Demat (Dematerialised) Account is an account that holds your securities like shares, mutual funds and bonds in electronic format. It simplifies the process of trading, eliminating the need for physical certificates.
Types of Demat Accounts in India
- Regular Demat Account: For Indian residents to hold securities.
- Repatriable Demat Account: For NRIs (Non-Resident Indians), allows funds to be transferred abroad.
- Non-Repatriable Demat Account: For NRIs, but funds cannot be transferred abroad.
How to calculate SIP returns
SIP returns can be calculated using the XIRR (Extended Internal Rate of Return) formula. XIRR gives a more accurate representation of SIP returns as it takes into account multiple investments made at different times.
Here is a quick formula:
Use an online SIP calculator or a spreadsheet tool like Excel to calculate XIRR by inputting the SIP amount, frequency and expected return rate.
What is the average return through SIP?
Historically, SIPs in equity mutual funds have given an average return of 10-12% per annum over the long term (5-10 years). However, returns may vary depending on market conditions, fund performance and the investment period.
Why is SIP better than other investments
- Rupee Cost Averaging: SIPs enable you to buy more units when prices are low and fewer units when prices are high, thereby averaging out the cost over time.
- Power of Compounding: The longer you invest, the greater is the effect of compounding, which helps your investment grow substantially over time.
- Low Risk: SIPs reduce the risk of market volatility as the investment is spread over time rather than being lump sum.
- Disciplined Investing: SIPs implement a disciplined approach to investing, making them ideal for individuals who want to save for long-term goals.
- Flexibility: You can start with a small amount, pause or stop your SIP anytime without any penalty.
- Tax Benefits: Equity-linked savings schemes (ELSS) through SIPs offer tax benefits under Section 80C of the Income Tax Act.
SIP vs Other Investment Options
- Fixed Deposits (FDs): While FDs offer guaranteed returns, they usually offer lower returns (5-7%) than SIPs.
- Direct Stock Market Investment: Stock investments may offer high returns, but they come with higher risk. On the other hand, SIPs spread out the investment, thereby reducing the risk.
- Real Estate: Real estate requires a significant lump sum investment, making it less flexible than SIPs.
- Gold: Gold is a good hedge against inflation, but it does not offer the compounded growth potential that SIPs offer.