All You Need to Know About SIP

SIPs have the potential to yield high returns in the long term, and are now a popular investment option

All You Need to Know About SIP
All You Need to Know About SIP
Palka Chopra - 08 July 2021

Since conventional investment options such as recurring deposits, fixed deposits, bank saving account, etc., offer a lower rate of interest, investment in mutual funds and stocks is becoming popular nowadays. Commonly, mutual funds are preferred by investors as they hold many different securities which make them very attractive investment options for those who do not wish to put in efforts and time to study the market or evaluate individual stock performances by themselves. Among the reasons why an investor may opt to buy mutual funds instead of individual stocks are diversification, convenience, lower costs, and very less supervision.

Mutual funds remain popular among investors irrespective of the market conditions. They are managed by certified and experienced fund managers who possess a good track record of managing investment portfolios and know when to make the right calls of buying, selling, or holding on to suitable stocks.

Moving ahead, let’s gain some knowledge about SIPs.

When can you start a SIP?

The investors invest in mutual funds to get good returns as per their risk appetite. A large number of investors prefer investing in mutual funds either through SIPs or lumpsum. The major reason for investing in SIP is that investors get the benefit of rupee cost averaging which gets them to earn higher returns in the long term.

The most common query by investors is – what is the right time to start a SIP? Well, there is no particular time to start a SIP. Any time is good because fundamentally, existing market levels should not interfere with one's decision to start a SIP. To summarise, whatever the value of Sensex is - high or low, it does not matter if one is planning to invest in equity mutual funds through SIP.

There may be times when the market is trading at higher levels and also, times when the market gets still and is undervalued with expectation that it may fall further. SIP investments should be independent of such short-term market movements. However, one thing an investor needs to be certain of is that they should continue to invest in SIP for at least 3-5 years. The longer one invests and stays invested, the greater the returns would be.

Hence, if long-term capital appreciation is your financial goal, then investing in a SIP is the best decision you can come up with.

What happens when you miss a SIP installment?

There might be a situation when an investor does not have the minimum required amount in their bank account due to a financial crunch or some other reason. Investors need to know that missing a SIP installment does not lead to the cancellation of future SIPs or penalty. It is completely fine as mutual funds are a long-term investment tool.

If an investor misses a SIP, they will not be penalised by mutual fund companies but the SIP will automatically be cancelled if one fails to make the payments for three consecutive months. The bank may charge a fee if the account holder defaults on a SIP.

An investor can skip these charges and the chances of SIP cancellation by pausing the SIP and resuming it later. For this, the investor needs to send SIP Stop Request to the concerned mutual fund house at least 30 days in advance. The request can be submitted online or offline.

For how long can you run a SIP?

Investing in mutual funds is a great way to build wealth. However, the best returns come only when an investor keeps the investment going for a minimum of five years and thereafter, for the longest duration one can afford. Over shorter periods, mutual fund investments may not give you the desired returns. Hence, long term investment is the key to growing returns on your SIPs.

Summing Up

As SIPs have the potential to yield high returns in the long term, they are becoming a popular investment option among investors. So, if you are an investor and looking for an investment option that can give you good returns over a period of time, regardless of the market conditions, mutual funds are the best option for you.

The author is Senior Vice President, Master Capital Services

DISCLAIMER: Views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.

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