A Systematic Investment Plan (SIP) is a disciplined and regular way to invest money in mutual funds. It’s arguably one of the best ways to generate wealth over the long term. A SIP helps you start small and grow big, enables investment control, reduces the average cost of investment and extends the benefits of compounding in the long run. Here’s how you can start a mutual fund SIP.
Get the Know-Your-Customer (KYC) papers mandated by market regulator SEBI. Individual investors must submit their identity and address proof and complete the verification process before beginning a mutual fund SIP. Usually, your PAN card and Aadhaar card will be enough for this purpose, along with a recent color photograph. KYC compliance is a one-time matter. You also have to sign the Foreign Account Tax Compliance (FATCA) form—a tax and information exchange law—to which India is a signatory.
Understand Your Risk Profile
Before taking the plunge, first assess your risk profile. Generally, higher the age, lower would be the risk taking ability. You should also determine your investment goals. These may usually include retirement plans, children’s higher education and marriage, buying a new home or car etc. It’s imperative to have clear objectives to help you get the proper mix of equity and debt.
While investing for the first time in a mutual fund SIP, you have to fill up the application form and the SIP enrolment form. Existing investors, of course, will only have to fill up the latter.
However, now, physical forms are a thing of the past. You can contact your financial advisor to help you transact online and the payment can be made through your Internet Banking.
Multiple Modes Of Investment
If you have the requisite expertise in financial matters you may invest directly with the mutual fund house. However, if you are not a financial expert or you can’t devote the time to monitor and review your portfolio periodically, it is better to invest through a financial adviser. A genuine financial adviser would not only help you put through the transaction but also give you expert advice regarding proper asset allocation and diversification of risk.
Also you have the added advantage that mutual funds don’t require a demat account for investments.
Most SIPs offer flexibility regarding the choice of investment. You can choose a quarterly or monthly mode. Starting with as low as 1000, you can choose your time of investment from 5-6 dates in a month. You can increase the amount whenever you feel like. Most mutual funds do not have a minimum lock-in period although they charge an exit load if you redeem within a period of one year. But to enjoy the real benefit of a mutual fund SIP, you should stay invested for at least 7-10 years. It will help you exploit the advantages of rupee-cost averaging and the real benefits of compounding will start kicking in. You will then be able to see your wealth grow exponentially.
Once the SIP starts, the mutual fund company will send an account statement every month or quarter, to inform about the units you hold and their NAV (Net Asset Value or simply, price). If you are investing through SIP, you get lesser units when the fund’s NAV rises, and when it falls, you get more units. This helps you in averaging out your costs and technically it is known as rupee-cost averaging. In a rising market, this will benefit you in the longer term.