For retail investors, a systematic investment plan (SIP) is an ideal way to invest in equity, debt or even gold to create a long-term corpus. One can invest small sums of money every month or quarter over a period of time and earn compounding returns.
In SIPs, an investor will have to continue to invest till the period mentioned at the time of opening the account. However, in order to give flexibility to investors to tide over any cash flow issues, asset management companies (AMCs) offer the option to pause the SIP for a limited period of time. This ensures that the investor does not have to prematurely close the account and lose on the returns.
When to pause
Most fund houses allow investors to pause an SIP only once during the entire tenure of the investment. If there is a cash crunch due to an emergency or if you are anticipating a major expense coming up that would strain your budget, you can instruct your fund house to pause the SIP for a period of time ranging from one to three months. However, the duration of the pause will be finally decided by the fund house.
The investor will have to submit the pause form to the AMC and mention the period. The fund house will then pause your monthly or quarterly contribution and resume from the date agreed upon. If the investor has put a bank mandate to the fund house to debit the amount from the account through the electronic clearing system, then ensure that the mandate to pause is also given to the bank by the fund house.
Ideally, one should submit the pause form to the fund house a month before the SIP date. This will help the fund house make the necessary changes and activate the instruction. Investors must note that the SIP pause facility is not offered by AMCs to those who have invested through the stock exchange or through an online distributor portal, as these SIPs are registered directly with the the latter.
Advantage of SIPs
For retail investors, an SIP can help accumulate funds over a long term and one does not have to time the stock market. Typically, in equities, most investors time the market. In such a case, they miss out on the rally or enter the market either when the valuations have peaked or the markets are on the verge of declining. So investing every month in an SIP will ensure that one is invested during the highs and the lows.
In fact, SIPs make the volatility in the market work in favour of an investor and help average out the cost. For instance, with R1,000, one can buy 50 units at R20 per unit or 100 units at R10 per unit, depending on whether the market is up or down. More units are purchased when a scheme’s net asset value (NAV) is low and fewer units are bought when the NAV is high.
One of the most important advantages of SIPs is the advantage of compounding. One must start investing at an early age as the longer the investment horizon, the bigger the benefits. If you start out young, equity funds should constitute around 80% of your portfolio, as this asset class has been found to be the best bet for growing money over the long term.