Part 5 of the Classroom series on mutual funds explains about systematic investment plans, how to start SIP and its benefits.
Q. Mutual funds often talk about the virtues of SIPs. What is an SIP? Is it a new product? A new facility?
A. SIP is short for systematic investment plan. It is nothing but a way of investing and not a product. Just as in a recurring deposit, you invest a sum every month, an SIP is a way to invest in the units of a mutual fund periodically. Only that there are no assured returns in the case of MFs!
SIPs have existed for many decades now and all fund houses provide and indeed encourage the mode of investing. According to data from industry body AMFI, over Rs 8,000 crore is invested in mutual funds through the SIP route every month by nearly 2.8 crore investors.
So, once you choose one or more schemes to invest in, you can fill the application form(s) of the fund houses and set up a mandate to set aside specific sums. You can set up SIPs to be executed on specific dates in a month by using the ECS (electronic clearance service), direct debit and biller payment modes of your banking facility or give post-dated cheques.
On the specified date, the amount you wish to invest would be debited from your account to buy units of the fund of your choice.
Q. What is the advantage of investing through SIP?
A. By opting for the SIP mode, you get the habit of investing regularly. You get to buy units at different price points in the market cycle and average your purchase price. You can also invest in the direct plans of mutual funds through the SIP route.
In short, SIP is not a product. It is a way of disciplined and convenient investing.
Q. What is an ideal SIP tenure?
A. There are no defined ideal tenures. You must ideally save for various goals through the SIP mode. Financial planners and advisors emphasise that all investments must be made for specific goals. So, you can invest in buying your dream home, a car, foreign vacation, retirement and children’s education. Depending on how far these goals are and after assessing your appetite for risks (stomach market gyrations), among other factors, experts would suggest suitable funds for you.
You can run SIPs for just six months or for decades together (even perpetual SIPs are allowed).
Q. Can I stop or pause my SIPs?
A. Of course, you can. There are some conditions set by most fund houses though. You must run a minimum number of SIPs (usually for six months) or invest till the minimum amount specified by the fund for the scheme is reached (usually Rs 5,000). If you face a fund crunch or if the markets move up too quickly, your financial adviser may ask you to pause or even stop SIPs.
You can write to the fund house to terminate or pause your SIP or do so online through MF distribution portals or the websites of asset management companies. You must inform your bank too about any termination or pausing of SIPs, as otherwise, the amount would be debited on the due date. Most fund houses allow you to pause your SIP for a minimum of one month and a maximum of three months. Your investments would resume after the period specified for the pause is over.
On the other hand, stopping a SIP means permanently terminating investments in a specific scheme.
Q. Can I do SIPs only in equity funds? Do debt funds also allow me to do SIPs?
A. You can invest in all kinds of funds – equity, debt, hybrid – through the SIP mode. Because SIP investments in equity funds are very popular, there may be a perception that other categories do not allow systematic investments. As mentioned earlier, even debt and hybrid funds allow SIP investments. You are allowed to do systematic investments even in liquid funds, as a part of building your emergency corpus.
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