Why SIP Is One Of The Best Tools For Building Wealth?

Are you planning to invest in SIP (Systematic Investment Plan) or a mutual fund scheme? In that case, before starting with the procedure you should have a fair idea about what is SIP, how to invest in SIP and how to choose the best one for you. Simply put, SIP is a systematic and regular mode of investing in mutual funds which is quite similar to the method of investing in recurring deposit with a bank.

However, the difference between a SIP and a RD is that, with SIP you deposit a fixed sum of money in a mutual fund scheme (equity/debt schemes) and not in a bank deposit, which means your investments with SIP are subject to market risk.

SIP helps you maintain a disciplined approach towards investing which eventually enables you accumulate wealth over the long-term with regular saving habits. In SIPs, a fixed amount chosen by you is invested in a scheme on a specific date (either on daily/monthly/quarterly basis) for a particular tenure.
You have two ways to start a SIP: Offline and Online.

Here are the steps you need to follow to start a SIP offline:

• You can start with reaching the office of a mutual fund house/ mutual fund distributor / agent / relationship manager / investment adviser.
• Select a mutual fund that best suits your requirements, financial goals and investment objectives.
• Fill in the details carefully in the SIP/Common Application Form; without missing the name of the scheme and other details.
• Make sure to submit your NACH (National Automated Clearing House) mandate form with all your SIP details.
• If your KYC is not done, fill in the KYC form.
• Submit the form to the office of mutual form agent / distributor / investment adviser / relationship manager / Certified Financial Guardian. Or, you can also directly submit the form to Registrar and Transfer Agents (RTAs) / AMC.

Nowadays, there are a lot of companies that provide the convenience and ease of applying for SIPs via online mode. They have set up their own online transaction platforms, so you have to face fewer hassles while investing in SIPs as well as tracking your investment dates.

Below enlisted are the steps to start a SIP online:

• You simply need to login to the respective mutual fund’s house website, or use other online transaction platforms such as MFU. You can also opt for robo-advisory platforms and follow the instructions given on the website.

• The next and the most important step is to ensure that you’re opting only for the direct plans to get the most out of the SIPs.

Once you’ve acquired the know-how of how to invest in SIP, your next destination should be to find the best mutual fund schemes to invest.

While choosing the best SIP to invest, you cannot blindly follow the star ratings given to different mutual funds, as these ratings are often based on quantitative parameters (such as risk, returns, average Assets Under Management, etc.) rather than qualitative parameters.

It’s important to realize the fact that although, ratings can serve as starting points for identifying a wider set of investment-worthy funds; they usually follow a ‘one size fits all’ approach and hence finalizing your decision to invest in a fund shouldn’t be based solely on the number of start ratings given to it. Although, ratings can serve as starting points for identifying a wider set of investment-worthy funds; investing and financial planning are personalised activities, which means that the same mutual fund could be best option for one investor and could be highly unsuitable for the another person.

There are several aspects within a mutual fund scheme that are fundamental for the investors to study vigilantly before investing. They are:

Past Performance:

Before we go forward, remember that past performance is not everything when it comes to comparing investments because it may or may not be sustained in the future depending on various other factors. Past performance simply indicates the mutual fund’s ability to regulate returns across market conditions. In case, a fund has a well-established track record, it means that the likelihood of it performing good in the future is far higher than other companies, whose past performance hasn’t been good.

Basics of Fund Management:
Performance of a mutual fund scheme is largely associated with the fund manager and his team. Therefore, the team managing the fund should have substantial experience in dealing with market ups and downs. Once again, investors should avoid investing with the mutual fund companies that owe their performance to their ‘star’ performers/fund managers. This is because, the day their ‘star’ manager will resign from his/her job, the company could stop delivering its star performance without its star performer’s aid. You don’t want your investments to suffer. Hence, the focus while deciding on how to invest in SIP should always be on process-driven mutual fund houses and not on the ‘star’ performers.

Cost Margin:
While comparing two mutual fund schemes, you should understand that it won’t be worth buying mutual fund scheme which has higher costs linked to it when it is simply giving marginally better performance than the other one. In simpler words, there shouldn’t be any reason for an AMC to incur higher costs other than its need to have higher margins.