SIP is a planned way of investing, which helps cultivate the habit of savings and accomplish the goal of wealth creation.
An SIP (Systematic Investment Plan) is an ideal way of investing in mutual funds. It allows an investor to invest at regular intervals. It is a planned way of investing, which helps cultivate the habit of savings and accomplish the goal of wealth creation. Here it is important to understand that by investing regularly, the possibility of incurring a substantial loss is diminished. This is because over a period of time, the cost of your investments gets averaged. You end up buying some units at a high price and some at a lower price.
Now, most of us get a raise in our salaries every year. This means we can afford to increase our investments. But how do you do that in an SIP that is already going on? Enter the top-up or step-up facility. It is important that as your income grows, the quantum of investment should grow too.
SIP in good as well as bad times
By definition, an SIP is the practice of investing a consistent amount in the same scheme at regular intervals (say, each month) over the course of a set period of time. But before investing in an MF scheme through an SIP, it’s important to see the performance of the scheme and asset management company through different market cycles, rather than looking just at near-term performance. The rule of the game is one should keep investing and enhancing one’s SIP amount year-on-year, irrespective of the market movements to achieve long-term financial goals.
Suppose, you started an SIP in the Nifty index on any date during the last year. The market was highly volatile and there was a probability of losing money during this period. But, if you increased the tenure of your SIP to three years, your probability of making a negative return would decline.
Over a 10-year period, irrespective of the day you invested on, you would make a profit. But for this to happen, it is important to stay consistent on your SIP amounts.
Then how do you go about it?
There are two ways to step up your SIPs every year:
The traditional option is to simply decide how much more money per month you’d like to invest and then start a fresh SIP. You can do that either in the same scheme (but the SIPs won’t get clubbed) or in another scheme in the same folio.
The second option is that you have an existing SIP and you want to increase your monthly contribution. Very few fund houses allow you to do that midway. However, most fund houses allow you to decide the top-up amount right at the time when you start your SIP, before you pay your first installment.
What to keep in mind
While enhancing the SIP amount certainly seems alluring, but you should understand that it isn’t recommended to change your long-term goals on a regular basis. It might diminish your overall returns on a long-term basis. Therefore, before enhancing your SIP, always consult your financial advisor.
(By Rahul Jain, Head-Personal Wealth Advisory, Edelweiss)