How to Invest in SIP: A Comprehensive Guide

Investing in a SIP is like building a house; by placing one brick after another, it becomes a fully constructed house. Whether you're a young professional or a seasoned expert, mutual fund SIPs have become a popular investment choice across all age groups.

A mutual fund is an investment vehicle where you can invest a fixed sum of money at regular intervals, providing exposure to various asset classes such as equity, debt, and gold. But you might be wondering how to Invest in SIP. Don't worry! We have got you covered.

In this blog, we'll take a deep dive into how a mutual fund SIP works, how to start sip investment and the key factors to consider before you begin. Keep reading to learn more!

How Does a SIP Work?

There are two ways in which you can invest in a mutual fund: SIP and lump sum. SIP (Systematic Investment Plan) is a systematic way of investing in a fund of your choice with a chosen sum at a fixed interval. It can be weekly, monthly, quarterly or annually; you can choose it as per your preference.

Moreover, a Systematic Investment Plan allows you to gain exposure to multiple asset classes, such as equity and debt. It also leverages the power of compounding to accumulate a sizable corpus over time.

Now, let us understand how an SIP works with the help of an example:

Suppose Ms Rinika is investing ₹5000 per month in a mutual fund scheme through a SIP for 30 years. If we assume an average return of 12%, you can expect an accumulated corpus of ₹1.54 crore approximately after 30 years. While your total amount of investment is only ₹18 lakhs, the power of compounding in SIP greatly amplifies your returns.

Note: Please note that the 12% CAGR is the assumed expected ROI; it can vary from time to time and from one scheme to another. The above is only for illustration purposes. It should not be construed as a promise on minimum returns and safeguard of capital.

How to Invest in SIP in India?

Here are the steps to invest in mutual funds in India:

Step 1: Set Your Investment Goals

The first step involves setting up your goals, objectives, time horizon and risk appetite, based on which you should select the right type of mutual fund scheme.

Step 2: Keep All the Documents Ready

After finalising the scheme, the next step is to keep all your documents handy. You will require several documents to start your mutual fund SIP, including a bank account statement reflecting your bank details.                

Step 3: Register for SIP

You can register for an SIP online by directly visiting the AMC's app or website. Moreover, you can register your SIP by physically visiting the AMC's local branch office.

Step 4: Select a Suitable Mutual Fund

When registering for SIP, you have to mention the mutual fund scheme in which you want to invest. You can choose a scheme based on your risk tolerance, financial goals, time horizon, past performance, expense ratio, top holdings, etc.

Step 5: Select the SIP Amount

Once you have finalised your purchase, you will need to enter the amount you wish to invest at regular intervals. Determine the SIP amount based on multiple factors such as your financial goals, income, existing obligations, etc.

Step 6: Select the Date & Frequency of Investment

Next, you will need to choose the frequency of your SIP, such as weekly, monthly, or quarterly. Depending on the frequency, you can then choose the specific date or day for your SIP.

For instance, if you opt for a monthly or quarterly SIP, you can select any date of the month that suits you. Similarly, if you choose a weekly SIP, you will need to select a specific day, such as every Monday.

Step 7: Setup Auto Debit

Once you have selected your SIP amount, frequency, and date, now you set up an auto-debit function. However, this is an optional step you can either set up an auto-debit facility or make instalment payments manually. The auto debit facility automatically pays the SIP instalment, eliminating the need for manual payments.

To enable this facility, you will need to fill out the e-mandate form, which provides standing instructions to the bank on how to debit the selected amount at regular intervals.

Step 8: Complete Your Application

Once you are done with setting up the auto debit option, simply upload the scanned KYC documents, fill in the required fields and submit.

Things to Consider Before Investing in a SIP

Now that you have clarity on how to invest in SIP plans, let us now look into various factors to ensure that the scheme aligns well with your financial goals. Here are certain things to keep in mind before investing in mutual funds via SIP:

1. Decide Your Investment Goals

When investing in mutual fund SIPs, the first and foremost step is to define your investment objectives. Based on these objectives, you can determine your investment horizon, whether it be long-term, mid-term, or short-term. Your goal could be anything from purchasing a car or house to building a retirement corpus.

2. Consider Your Investment Horizon

Having a well-defined financial goal can help you determine your investment horizon. For instance, buying a house or accumulating a retirement corpus are examples of long-term goals. Meanwhile, purchasing a car or planning a family vacation are good examples of medium-term goals. Examples of short-term goals includes purchasing a gadget or undertaking home renovations.

3. Know Your Risk Appetite

Understanding your risk appetite is crucial, as it helps you choose the right kind of fund. If your risk tolerance is high, you might consider investing in equity mutual funds to reach your expected goals. For those with a moderate risk appetite, hybrid funds could be a suitable option. Meanwhile, a debt fund may be appropriate for conservative investors.

4. Evaluate Fund Performance

It is also crucial to check how the fund has performed over time. The return on investment (ROI) is denoted by CAGR (Compound Annual Growth Rate). You can check the last 1 year, 3 years, 5 years or since inception returns to get an idea of the fund's performance. In addition, check the fund’s returns against its benchmark index and competitor funds.

5. Assess the Fund Managers’ Track Records

All AMCs disclose their fund managers' qualifications and track records. Reviewing the experience and track record of the fund manager helps determine their investment style and the overall success of the fund. It is also recommended to ensure that the fund manager of your chosen scheme has sufficient qualifications and a proven track record.

6. Check All Applicable Charges

Primarily, there are two types of charges associated with a mutual fund: the expense ratio and the exit load, both of which can affect your overall returns. The expense ratio is a small fee levied by the AMC to cover its fund management expenses, such as the salaries of fund managers, marketing expenses, etc.

The exit load in mutual funds, on the other hand, is a fee imposed by fund houses if the investor redeems their investment within a specific period. For example, an exit load of 1% could be levied on the NAV of a scheme if the investor redeems their investment before 12 months.

Therefore, when understanding how to invest in SIP, it is recommended to check both the expense ratio and exit load and compare them across different categories. However, while a lower expense ratio is preferred, don’t choose a fund solely based on its expense ratio.

7. Calculate Your SIP Returns

It is also important to get an estimate of your return on your investment that you can expect after a specific period to accomplish your goals using an SIP calculator. It is an online financial tool which helps in computing the return on investment and the total maturity value.

Simply enter the monthly SIP amount and investment horizon, and you can select the "Assumed Rate of Return" from the drop-down below and know the expected maturity value instantly.

8. Seek Financial Advice

You may consider consulting an investment advisor before investing to receive better assistance in selecting an appropriate mutual fund scheme. Discuss your investment goals, objectives, risk tolerance, and overall financial status with your advisor to determine the fund that best suits your needs.

Conclusion

To wrap up, mutual fund SIP is one of the most popular and innovative way of investment available in the market. Knowing how to invest in SIP can help you inculcate a disciplined investment habit, allowing you to accumulate a significant corpus over time.

Remember, the journey of wealth creation through SIP may be slow, but with patience and perseverance, it can lead to a future full of opportunities. Each contribution, no matter how small, takes you closer to your objectives and aspirations. So, take your first step today, and watch your investments grow.

 

Frequently Asked Questions

1. How to start SIP?

To learn how to invest in SIP online, simply start with defining your financial goals, keeping your documents handy, completing your KYC and selecting a suitable mutual fund. Then, fill out the SIP registration form by entering the amount, frequency and other required details and submit.

2. What is the 8 4 3 rule in SIP?

The 8 4 3 rule in SIP is used to determine how soon you can double your investment amount. According to this rule, the amount grows steadily in the first 8 years, the growth accelerates in the next 4 years and in the next 3 years, the snowball effect becomes effective.

3. How do I choose which SIP to invest in?

There are several factors to keep in mind while selecting the most suitable mutual fund scheme for yourself. You must assess your investment goals, your risk tolerance, the risk associated with the scheme, the fund's performance, expense ratio, top holdings, the fund manager's track record, etc.

 

Disclaimer

These materials are not intended for distribution to or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation.  The distribution of this document in certain jurisdictions may be restricted or totally prohibited and accordingly, persons who come into possession of this document are required to inform themselves about, and to observe, any such restrictions.

SIP calculator alone is not sufficient and shouldn't be used to develop or implement an investment strategy. Kotak Mahindra Asset Management Company Limited (“KMAMC”) is not guaranteeing or promising, or forecasting any returns. SIP does not assure a profit or guarantee protection against loss in a declining/upward market. SIP Calculator is designed to assist you in determining the appropriate amount. Visit https://www.kotakmf.com/mutual-fund-calculators/retirement-calculator to get for detailed information/disclaimers.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.