SIP Interest Rate

SIP - Systematic Investment Policies is a kind of investment placed before us by different mutual funds where different investors get the opportunity to make investments in small amounts rather than make huge payments at a time. It can be made weekly, monthly, and quarterly, depending upon the investor’s convenience. SIP works on the basis of compound interest.

SIP essentially works on the principle of compounding, where investors earn dividends by making periodic investments. It is convenient and pragmatic, and the money is fixed so it cannot be changed according to your convenience. The time you make the payments are also flexible, and you can submit the money either weekly or monthly or even quarterly.

SIP is malleable, which allows investors to change the amount of investment and stop paying whenever there are issues. These are some of the reasons that people who are starting in the field of investment should look out for SIP and consider this an important starting step in the right direction that will enable them to understand the mechanics behind the complex investments later.

How does SIP function?

Investing in SIP today has become a convenient affair. As you apply for your preferred SIP and register, a pre-determined sum of money is going to get deducted from your account at a particular interval and get used upon the funds you invested in. Depending on the Net Asset Value of your funds, you will be allotted a fixed number of units at the end of the day. After every investment, additional units are credited to your account based on the current market value.

What is great about these policies is that investors need not be well-versed with the idea of mutual fund investments. Generally, the rule of the thumb is that when the units' market price is high, more units are bought, and when the units are priced low, they are generally not bought much. There are ideally two ways in SIP that affect the investor positively. One is called the rupee-cost averaging, and the other is called the Power of Compounding.

Rupee Cost Averaging

This method helps deal new investors with the volatility of stock markets and sort out confusion regarding the best time to invest. It allows the investor to earn fewer units when the price is escalating and more units when it is not.

Power of Compounding

Whenever anyone invests in SIP, interest is generated, and these interests get compounded over time. Needless to say, the longer the period in question is, the higher the compounding will be. Longer duration in the field of investment is going to get a better chance of generating wealth by higher compounding.

Categorizations of SIP

There are four different kinds of investments, and they are as follows:

  • Top-up SIP

    These policies give a chance to the investor to increase his investment with time. This means that one can redirect their financial resources to better-performing stocks when they see it is doing better than other stocks. With an increase in your wealth, you can increase your investment.

  • Flexible SIP

    This SIP allows you to increase or decrease your investment with time and depending on the cash resources at your disposal. This allows you to stop payments when you run short of cash and make additional payments when you have extra cash. Even in case of additional resources, you can make lump-sum payments to compensate.

  • Perpetual SIP

    Generally, when you talk about SIP, the terms of SIP investment can range from 1 year to 5 years. A SIP is usually termed a Perpetual SIP if the end date is not codified in the mandate. This allows flexibility about the withdrawal of your funds as and when you want, especially when your targets are met. However, it is always advisable for newer investors to set and end date so that you have a target in mind before starting.

  • Trigger SIP

    If you are an investor with confined knowledge about mutual fund investments, this is the safest option for you. The investor is allowed to set his NAV, SIP dates, and index level. The catch about this is that it encourages apprehension, which is not always a healthy thing.  

Advantages of Investing in SIP

Even though there are stigmas associated with SIP, a well thought out and safe investment policy can bring you huge returns over some time. The following are the advantages of SIP:

  • Extremely Convenient

    Once you get into the hang of such policies, things will become pretty smooth sailing for you. It is easy to understand, and you can decide how much you want to pay every month. You can start with as little as Rs 500 for every month, and you can give your bank the authority to make monthly payments so that there is no need for recurrent authorizations.

  • Rupee-Cost Averaging

    The best way to size up your investment expenses is to follow this method. It enables the investors to buy more units when the market is not performing well and fewer units in case they are doing well.

  • Compounding Mechanism

    Surefire and a sorted way of creation of wealth are to invest regularly with whatever limited resources you own. The more you invest, and the more time you are spending in the market, the compounding frequency will be higher and generate greater wealth when you withdraw on the end date.

  • Twice the Amount of Returns than FDs and RDs

    Statistically speaking, one gets better returns from SIPs than from traditional methods of mobilization, and besides that, SIPs are an efficacious way to beat the impact of inflationary forces. They provide returns irrespective of how the money market is performing.

SIP Mutual Fund

Reiterating what has been said a Simple Investment Policies is a beginner's step in mutual funds where the investor needs not have extensive knowledge about the market and the investments are generally earmarked at a specific date and in a specific amount at the desired mutual fund of the investor.

A commonplace definition of SIP mutual fund would be that it is a managed fund by expert personnel that funnels in resources from different investors to create one single source which is later invested in funds. The money taken in from different investors is used to buy stocks of companies or their shares and bonds. There are fund managers who are efficiently trained to coagulate funds and use them in such a manner that it would enable us to earn the highest returns on investment. SIPs work on the principle of compounding that enables us to earn more money with greater rates with maturity.

SIP Mutual Fund in a Nutshell

  • In mutual funds, the money is accessed from different resources and then made into one single source by professional managers.
  • All mutual funds in the country are controlled by the Securities and Exchange Board of India.
  • It enables smaller investors to gain entry into larger portfolios.
  • It is considered the best thing today because it rates return, which is higher than traditional investment sources because of compounding.
  • It allows investors to invest even with a paltry sum.

SIP today has become all the rage in the market of policies, but it is important to have a fund manager who knows what he is doing and whom you can trust.

Reasons to Invest through SIP

SIP works on the idea of "save first; spend next." Through SIP, investors can choose the amount they want to invest weekly, monthly, or even quarterly. The following are the reasons to invest in SIP mutual fund:

  • A Minimum Investment of Rs. 500 is advised

    You can start in this field with an initial monthly investment of Rs. 500, and since there is no upper limit, you could increase your investment every month by a certain percentage. This allows you to stay on top of things and not be shackled by the chains of finance.

  • Compounding Factor

    With the power of always compounding at work, one can expect higher returns on investment in the long run. Therefore you should stay locked in the process for long to reap its true benefits.

  • Cultivates Discipline

    SIP creates the culture of saving up a fixed amount for investment at certain intervals and prepares you better for an investor's life. Moreover, there is no chance of missing payments as the payment gets automatically deducted from your account periodically.  

  • Rupee-Cost Averaging Mechanism

    This allows investors to lower the unit's cost by buying more when the market is not doing well and buying less when it is doing well and therefore avoid pitfalls of a volatile stock market. The rupee-cost averaging system is helpful in this regard.

    Like an emergency fund, it takes just a withdrawal to use SIP money in times of financial emergencies. Moreover, if you are locked in the process for a long period, in all probability, this can act as a source of wealth and fulfil your financial goals.

Difference Between SIP and One-time Investment

Newbies in the field of investment often have issues in understanding the difference between SIP and one -time investment. The following are the differences between the two:

  1. One-time investment policies require payment of a huge amount during a particular point of time, while SIP requires you to make periodical payments.  
  2. The one-time investment yields better result when the market performs better, and SIP does better when the market is not doing well.
  3. One-time investment has a danger of being affected because of market issues, but with the help of rupee-cost averaging, SIP can cushion the blow better.

Things to Follow when Choosing a SIP

Before investing in a SIP, here is a bunch of information that you need to process:

  • Tenure of the SIP- It is important to assess the duration of how long these policies before you consider the risks of return and tax. The yardstick should be 5 years, and the potential investor should keep a close tab on the stocks' performance.
  • An objective analysis of the fund house is important to understand how efficient they are in handling market fluctuations so that they can lessen the impact on the investing people.
  • A benchmark of Rs. 500 Crore could be considered an ideal amount while selecting a fund. It is not a hard and fast rule because there are fund sizes lesser than that that have been performing well in the market.

How to begin Investing in SIP?

Investing in SIP is a simple and hassle-free procedure. So, investors need a few basic things to get started:

  • An Investment goal should ideally have a goal in mind before setting out on a path of investment, and he should choose a fund that he knows will fulfil his goal.
  • Selection of the right policies – Due to the availability of a wide array of SIPs in the market, one must analyse and select the right policy.
  • KYC- for all SIPs related investment, it is mandatory to have net-banking facilities and the KYC documentation done. Today, however, a lot of people are following e-KYC and uploading online documents.

Mistakes to avoid while Investing in SIP

Some of the most common mistakes that investors commit are as follows:

  • Choosing the Wrong Fund

    The beginners' guide to investing involves the selection of the right kind of funds and objective analysis. If you are in it for the long haul, then the fund's market performance, risk appetite, and chances of return are important. A wrong step in that direction might misdirect you.

  • High Investment

    Since SIP allows you to invest in small amounts over the year, choosing the right sum is important. A lot of people make the mistake of making one huge payment without being able to continue that payment throughout the year.

  • A Misconception

    There is a stigma associated with SIP where people think SIP is a small investor’s thing because you cannot invest lump-sum in SIP. This is not true because you can invest lump-sum instead of paying a periodical amount.

  • Short-term Use

    Another misconception about SIP is that people think that it is a short term thing. However, with the power of compounding, there can be enormous dividends if you are in it for a long haul.

  • Setting Impractical Goals

    When you are new to SIP, hoping that you would get huge returns from such policies instead of average and stable returns might be impractical. So you must spend progressively while getting average returns.

  • Avoiding Boosting of SIP

    When you're getting good returns, don't shy away from adding a lump sum to the increasing investment so that when you are not doing well financially, you get stable returns.

SIP Interest Rate - FAQs 

Written By: Paisawiki - Updated: 26 March 2021