Benefits of investing in mutual funds through SIP

Watch this video to learn how to easily reattempt your rejected SIP transaction on ICICI Direct with the new payment reattempt feature. Follow simple steps and get your SIP back on track.

Watch this short video to learn how to place stock SIP order on the ICICI Direct app

Those who are courageous often find success, and it's important to learn from our errors. Don't pass up this unique opportunity to hear from a genuine industry leader and gain valuable insights in this video

Many people often feel confused when it comes to choosing the best mutual fund. To gain clarity on this topic, watch this exclusive conversation with industry experts

Systematic Investment Plan or SIP, if judicially used by investors can actually be that tool that can help people retire early by saving early. But one has to be cautious with type of mutual fund schemes he/she chooses. To exploit the full potential of SIP one point is clear, that one has to start investing in SIP at a young age. As more the time, more the gains from the compounding effect.

Let us understand with an example:

As one SIP calculator shows that if one starts investing Rs 1,000 per month, then assuming a return of 10%, the amount at the end of 20 years, this investor would get is Rs 7,18,259 due to the compounding effect.

Now, we will try show the power of investing an SIP at an early age. According to another SIP calculator, if a 25-year-old starts an SIP of Rs 5,000 per month, then assuming 12% return, the investor would have Rs 2.76 cr when he retires at 60. While another person who starts investing at the age of 30 years would get Rs 1.54 cr at 60. Clearly, a gain of Rs 1.22 cr for starting early. Clearly, it’s a big-big advantage for early birds. From this example it clear, the delay in SIP could cost you the few crores.

Smart financial planning is one of the basic principles for realising your dreams. For example, if you want to buy a house or luxury car, you need to plan for it early. So, you have to save and then invest the savings intelligently. Always remember that reducing tax liability is a saving too. Now, if you can save tax and create wealth simultaneously, wouldn’t it be icing on the cake it.

Systematic Investment Plan or SIPs are the simplest tool to save tax and create wealth in one go. All that you have to do, is to invest in Equity Linked Saving Schemes or ELSS, which are tax saving schemes of the mutual funds. You can invest in ELSS via SIPs. For ELSS investments using SIPs, the government allows you the deduction of up to Rs. 1.5 lakh from your taxable income. You save more than Rs 45,000 if you are in the 30% tax bracket.

You can start an ELSS SIP with the minimal amount of Rs 500. However, you can increase the amount whenever you want to. To start SIP you have to fill a form, offline or online. In the form you have to give your bank account details for auto-debit. You have the flexibility of choosing the frequency, i.e. weekly, monthly, quarterly, or yearly. And yes, SIP gives you the option of choosing a date too. ELSS SIPs not only save tax but offer you other advantages too. On an average you get returns of nearly 15% over 5 years. Almost more than double that you get on PPF, FD, or NSC investments. These returns help you create wealth.

With a lock-in period of just 3-years, it gives you more liquidity than PPF for example, where the lock-in is 15-years. Advantages don’t end here. Unlike insurance policies or PPF, there are no penalties for missing your installment. You can deposit after the due date and your SIP continues. However, if you miss three consecutive installments, then your SIP gets cancelled and you then have to fill a form again for restarting your SIP. So, you should maintain adequate bank balance on your SIP date.

Now, let us look at your precautions. Since you ELSS SIP investments go into equities, you must assess your risk appetite before investing in this instrument. Once into it, ensure adequate balance in your account on SIP date.

What is the best and safest way to invest in stock markets. Well, undoubtedly systematic investment plan is the best instrument. Systematic investment plan is commonly known as SIP, it gives you an opportunity to invest in shares indirectly and thus minimizing the risks of direct investment in shares. SIPs are offered by all mutual funds and once you subscribe sips, experts of mutual funds invest your money in various debt and equity instruments in a manner that with minimum possible risk you get reasonable returns on your investment. Simply put, in SIPs you gain when market zooms, but don't lose much in case of a crash.

How to subscribe SIPs?

You have the option of subscribing it yourself online or you can ask a broker to do it for you. You can even download a form fill it and then deposit it at the nearest office of your chosen mutual fund. For many mutual funds a company called CAMs handles all the paperwork, so you can even visit a CAMs office near you.

Applying SIP: Yourself vs Broker

Now, a look at the advantage of not going the broker way. If you do all the paperwork yourself and go for direct plans then you will not have to pay commission. The commission in case of brokers is small but over a long period it leads to substantial outgo from your returns.

Documents needed for SIP

You may like to know the documents needed for SIP. When you apply for an SIP, you would need copy of Aadhar card for address and id proof plus copy of PAN is mandatory. That is, you must have a pan if you want to subscribe SIP. Since amount fixed by you will be directly debited from your account so you are required to submit a check for the first instalment in case you are applying offline. This gives your bank details to the mutual fund for future auto debit facility.

Number of subscribers in SIP

How many family members can apply a single SIP you may be thinking. you can hold it solely or jointly with others. All holders are required to sign the form and submit PAN and Aadhar details. In case of minors, guardian details are required. In case you want to withdraw money then it will go to the account from which investments were being debited.

Key facts to remember

Here's something very important that you need to know while subscribing a SIP. While applying for the SIP always mention a nominee, this will ensure hassle-free withdrawal or transfer of SIP in name of nominee in case the primary holder suffers untimely death.

Lumpsum Investment Systematic Investment Plan You invest a large sum in one go. You invest small amounts periodically, like every month. Ideal when prices are not volatile and are likely to steadily rise. Best in most conditions, but particularly when markets are volatile. You must time the market to get the best returns. You don’t need to time the market; just keep investing regularly. Good for seasoned investors, who have a higher risk appetite. Good for most investors, who prefer lower risk. Good for investments in liquid funds, which provide stable returns. Great for investments in equity mutual funds, where returns are volatile.