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How to Start a SIP Investment?

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Nowadays, a number of financial investment instruments are available to investors who want to generate extra income and expand their wealth. For a beginner, Mutual Fund is one of the best investment options available in the market as they are managed by professionals and popular for yielding good returns.

How to Start Investing in Mutual Funds?

Before investing in Mutual Funds, an investor should set his financial goals. This would include a thorough contemplation on how much one wants to spend, how much to save for emergencies and, how much to invest for generating returns. 

The time horizon for investment should also be decided before-hand. After this, one should look for a mutual fund scheme which perfectly aligns with the goal. The opportunity cost of the investment should be taken into consideration while choosing the mutual fund scheme.

Once the investor is done with setting his/her financial goals and mutual fund scheme, they can start investing.

There are two ways to invest in mutual funds:

  • Lump Sum Investment
  • Systematic Investment Plan (SIP)

Lump Sum Investment

It refers to a one-time investment that an investor does annually. If you have a large sum of disposable income in hand, coupled with a good risk appetite, you should go for a lump sum investment. 

Systematic Investment Plan (SIP)

It refers to the regular investment of small amounts of money at predefined intervals. It is a  disciplined manner of investment where one can get a hold on their spending and save judiciously. People who do not have a large sum of money in hand can opt for Systematic Investment Plan (SIP).

Under SIP, a pre-decided amount is invested at regular intervals which can be weekly/monthly/quarterly/semi-annually or annually. Various schemes allow the investor to start a SIP with as low an amount as ₹500.

Why opt for Systematic Investment Plan(SIP)?

For those who have just started their career, and plan to enter the world of investment, SIP is one of the best avenues to opt for. Here is a list of multiple benefits SIP has to offer:

  • Low Risk: New investors often face problems such as lack of knowledge of financial markets or finding the ideal time to monitor the market. An investor may lose a huge amount if it is invested through lump sum and the market crashes.

SIPs prevent investors from such losses and ensure decent returns as your investment is managed by a team of market experts. Through regular, disciplined investment, one can mitigate the risk of a potential market crash and need not worry about when and how to invest.

  • Convenience: SIP allows investors to put in smaller amounts every month without any hassle. In fact, one can also give Standing Instructions (SI) to the fund house for auto debit from your bank account. This is a great way to pay every installment without any default or delay or efforts!

Also, SIP enables investors to increase their investment amount as per their wishes. There are several fund houses that allow investors to increase the SIP amount.

  • Rupee Cost Averaging (RCA): Rupee Cost Averaging refers to an investment strategy which eliminates the need to time the market. Through SIP one invests a pre-decided amount in the fund. This ensures that one buys fewer units of shares when the markets are expensive, and more units of shares when the markets are cheap. This practice reduces the cost per unit and is called ‘Rupee Cost Averaging’.

Ultimately, investors end up with better returns at a lower risk. RCA is one of the major reasons people invest in Equity Mutual Funds through the SIP route.

  • Benefits of Compounding: When investing in mutual funds through SIP, returns are magnified through compounding effect. Because of compounding, you not only earn interest on your principal amount but also on the interest accrued on that amount.

Suppose you invest Rs.500 in a mutual fund at a 10% rate of return. After a year, interest earned would be Rs.50. From the next year, you’ll earn interest on Rs. 550. Thus, in the long run, one can greatly benefit from the compounding effect.

How to Start a SIP Investment?

When an investor gets to know how much and how often the money needs to be invested, starting a SIP investment becomes a cakewalk.

Here are the steps involved in the process:

Step 1: Complete all Know-Your-Customer (KYC) Formalities

To start investing in mutual fund schemes, whether, through SIP or lump sum, an investor needs to first become KYC compliant.

Paperwork requirements for the KYC process:

  • PAN Card
  • Proof of address (e.g. Aadhaar, passport, voter ID, utility bill, driving licence, etc.)
  • Passport-size photographs
  • Cheque book (for providing bank details)

The KYC process begins thereafter. There are two ways to become a KYC compliant. Either you can visit the office of the asset management company that manages the mutual fund, or you can get it done online (e-KYC). 

For e-KYC, you will have to provide your name, contact details and date of birth along with other basic information. Then you need to upload the soft copies of the aforementioned documents.

The next step is in-person verification through a video call that allows the fund house to confirm the identity of the investor. The customer will have to show their PAN card and address proof at this verification stage.

If you provide Aadhaar details for e-KYC, the form gets automatically filled up. The details are taken from the UIDAI database. In-person Verification is also not required for Aadhaar based e-KYC.

Important Note: Aadhaar-card based e-KYC caps the yearly investment limit at Rs. 50,000. To increase this limit, the customer will have to provide their PAN card details to the fund house.

Once you are done with KYC formalities, you can start investing in the mutual fund scheme. While selecting a fund you should emphasize on the past performance of the fund and assess your risk appetite, return expectations and investment horizon in perfect alignment of your financial goals.

Step 2: Register yourself for a SIP

After KYC and deciding which mutual fund to invest in, the next step is to register for a SIP. Here are the standard steps followed by most of the fund houses:

  • First, visit the official website of the preferred fund house.
  • Find the link for new registration. This option may be a ‘Register Now’ or a ‘New Investor’ link.
  • Click on the link and an application form will appear on the screen. Fill out all the basic information and contact details. 
  • Create a new User ID and password for online transactions.
  • For availing the auto debit facility, enter the details of your bank account from which you want your SIP payments to be debited.
  • The fund house will send you a confirmation mail on your mail ID. After getting the confirmation mail, you are all set to start investing through SIPs.

Note: These are generic steps and will vary for different fund houses  For any questions, you can call up the customer service of the fund house and they will be able to guide you in a better way.

Step 3: Choose the right SIP

What is the right amount to start a SIP investment? This decision will depend on the income and expenditure level of the investor, their financial goals and the amount of money they are willing to invest.

It is often recommended linking the investment amount with a long-term or even short-term goal such as building a retirement corpus, planning a vacation, buying a house, etc. You can use an online SIP calculator tool to calculate the amount you need to save on a regular basis to reach your goals.

You can start a SIP with an amount as low as Rs. 500. So the idea is to start early and increase your investments as per your income levels and financial goal.

Also Read: 10 Best SIP Investments for 2019

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