A Systematic Investment Plan or a SIP is a form of financial savings where you regularly invest a fixed amount in financial assets.
It is a mode of investing in financial assets.
The underlying financial investment in which you are doing a Systematic Investment Plan can be shares, mutual funds, a recurring fixed deposit or even a pension plan under the Employees’ Pension Scheme.
The whole rationale of the Systematic Investment Plan is that the investments are being made at regular intervals with a fixed periodicity. You can invest in a SIP at your convenience – monthly, quarterly or half-yearly.
The whole purpose of doing a Systematic Investment Plan is to bring down your weighted average investment costs. This results in rupee cost averaging and increases your potential profit on your investment.
Income elasticity of demand measures the changes in the actual income and the corresponding changes in the consumption of various goods and services.
In the goods we consume, savings and consequent demand for financial products are also included.
Income elasticity of demand = Change in the consumption of goods and services / Changes in the consumer’s real income.
If this ratio is greater than 1, it signifies that you have a higher income elasticity of demand; if it is below one, you have a low-income elasticity of demand.
In this case, real income means the total income you receive from all sources deflated for the inflation rate in the economy.
The changes in the CPI Index measure the inflation rate.
So, if your income increases by 10%, but you increase your allocation to the savings bucket by 15%, you have a high-income elasticity of greater than 1 for your savings component and, consequently, your income elasticity for doing SIPs.
Your allocation to savings is discretionary, so you are income elastic when it comes to savings and SIP investment planning.
Income elasticity plays a critical role in determining the allocation of resources in your household budget. It also helps categorise your various buckets of expense in a profit maximising manner. All things being equal, the potential for the allocation to the savings bucket to increase with your income increase has a high probability.
A SIP investment Plan works on the following premises:
Most of us juggle between busy professional careers and personal lives. We also desire a secondary source of income from your financial savings. We also seek to achieve a work-life balance and spend quality time with our family.
A SIP investment Plan in mutual funds is the best option to attain all these three goals. You can safely plan a SIP investment in your selected mutual funds. This allows a hands-free approach, where you do not have to time the market, determine points of entry, or analyse market trends.
You can safely be a passive investor and allow your fund manager and the selected SIP investment plans in mutual funds to work for you.
Frequent monitoring is required, but you are not engaged all the time in monitoring the NAVs of your mutual funds and determining the appropriate point of entry. This will help you achieve your financial objective of wealth maximisation with a diversified portfolio of mutual fund assets while you focus on your primary career.
SIP investment plans in mutual funds also help you reduce your weighted average cost of investment which increases your potential long term profit.
As you invest for the medium to long term, compounding helps to maximise your wealth accumulation. You also cannot be driven by sentiment or emotion due to the market vagaries.
Anyone who is an adult from any walk of life and of any age can start a SIP plan of investment in mutual funds. Someone who is a minor can also invest in a SIP with the help of his parents or a guardian.
You don’t need a great deal of market knowledge and expertise to start a SIP Plan of investment in mutual funds. You also don’t need to devote your time and attention to purchasing and monitoring your SIP investment in mutual funds. Your only responsibility is to ensure sufficient funds in your bank account from the SIP amount to purchase mutual funds are deducted regularly.
Determine your financial goals
Analyse your risk-return profile
Select the different buckets you want to invest your money in, like equities, bonds, real estate, and liquidity.
Analyse the best fund from the fund’s past performance, manager ranking, and the fund’s risk profile.
Plan your savings available to invest and your plans to bifurcate it into the various buckets for SIP investment plans in different mutual funds; you can start the process.
The SIP plan must meet your portfolio diversification, maximise return, and minimise risk objectives. It would help if you first analysed the following parameters:
The only tax benefit you can avail of is investing in a SIP in ELSS tax Saver mutual Funds. Under the old income tax regime, you can avail of deductions of up to Rs. 150,000 under the old regime of taxation. Otherwise, you are taxed according to your tax slab.
Under equity mutual fund investment SIPS, both your dividend and capital gains are subject to tax. In bond funds, you can increase the cost of bond funds by indexing it to the growth in the CPI Index before calculating capital gains tax. Interest income is taxed according to your taxation rates.
The factors to be considered while doing a mutual fund SIP include:
SIPs bring down your weighted average cost of investments. You do not need a large corpus to invest in SIP investment plans. You don’t have to time the market and determine an appropriate entry point as you stagger your investments.
In lump sum investments, market timing is critical. It would help if you had a large fund corpus. As you cannot always determine the market trend, you may enter your investment when the Fund NAVs are relatively high. This reduces the profit potential and does not satisfy your wealth maximisation objective.
SIP investment plans are the best mode of investment when you are investing for the medium to long term. You can successfully juggle your primary professional career and work-life balance and create a secondary source of income by doing a SIP investment plan into mutual funds.
SIP Plans can be diversified to meet your portfolio diversification objectives, keeping your risk-return tolerance in perspective. It satisfies your long term profit and wealth maximisation objectives and meets your financial goals easily. SIP investment plans make you a disciplined investor who carefully plans your investments. Do not delay; start your SIP account and invest in your best SIPs today.
SIPs offer a cost-effective and straightforward solution to financial planning without much active involvement and monitoring by you.
There is no best time to start a SIP. You can start a SIP investment plan as soon as you have a regular savings plan set up.
Many mutual fund houses offer SIP starting at Rs. 500. You can always top-up or vary your SIP amount as and when required.
When you face financial difficulties or a cash crunch, you can miss a few SIP payments without your SIP Plan closed.
No, only Equity Linked Savings Schemes SIPs enjoy the benefit of a Rs 1,50,000 p.a deduction from your total taxable amount under Sec 80 Cc under the old Income Tax regime.
SIPs are only a method of investing. The underlying investments still are exposed to the risks of that particular asset class. Equity investments are subject to market risk. Debt or bond funds are subject to interest rate risk.