SIP or a Systematic Investment Plan is one of the best ways to increase your capital. A SIP allows you to invest a part of your monthly income in high-growth financial instruments like stocks, mutual funds, PPF, recurring term deposits, or fixed deposits.
This article discusses everything you need to know about SIP in 2021 and helps you find the best plans to augment your wealth.
What Is a Systematic Investment Plan (SIP)?
An effective SIP is one in which you park at least 30% of your monthly income in one or more high-growth financial instruments.
The amount you invest every month depends on your fixed liabilities and financial goals. Due to this flexibility, SIPs are ideal for people who are new to the investment world as they need not put in a large sum of their money at once.
Mutual fund SIPs are the most popular in India. According to AMFI, there were over 3.80 crore active mutual fund SIP accounts in India (as of May 2021). Although mutual fund SIPs are an almost sure way to earn higher-than-average returns, you can also invest in other financial instruments to grow your capital.
The 5 Best Ways to Invest in SIP in 2021
1. Mutual Funds
Mutual funds far exceed other investment products when it comes to designing an efficient SIP Investment Plan. Mutual funds invest in capital and money market products like stocks, bonds, debentures, etc.
Since the capital market is associated with huge volatility, investing a lump sum at the wrong time can lead to capital loss. In contrast, a SIP allows you to make volatility your friend since you do not invest a hefty sum at one go. A SIP lets you benefit from all market conditions.
Contrary to mutual funds, a SIP in stocks allows you to earn higher profits. Financial platforms will enable you to find a basket of stocks in high-performing sectors that you can safely invest in. SIPs are ideal for stocks as they naturally imbibe financial discipline in the investor and protect them from the market’s volatility.
If the returns are any indication, SIP in a best-performing stock basket might provide better returns than mutual fund investments.
PPF, which stands for Public Provident Fund, is a sovereign investment scheme that allows SIP investments. However, unlike stocks or mutual funds, the maximum amount you can invest in PPF is capped at INR 1.5 lakhs a financial year.
The interest rate is fixed by the Government of India every quarter. Although the interest rates are on a declining mode, you can keep this on your radar for investing a fixed amount every month.
4. Recurring Term Deposits
You can open a recurring term deposit account with any scheduled commercial bank or the post office. Recurring term deposit interest rates are usually lower than other investment options. That said, investors still select this option since the returns are guaranteed.
5. Fixed Deposits
Although fixed deposit interest rates have tumbled to multi-year lows, it is still a lucrative option for millions of investors.
Generally, fixed deposits do not allow SIP. However, you can still create a SIP Investment Plan with fixed deposits by investing in a new fixed deposit every month. Note that this method can be more complex than investing in a stock or mutual fund SIP.
Ways to Plan, Maintain, Manage, and Grow Your Capital With a SIP
You can grow your capital faster by investing in a SIP if you keep the following things in mind:
1. Start Investing Early in Life
The earlier you start investing, the more time you can get for compounding your investment. And, historically, stocks and mutual funds have delivered higher returns than other investment products.
Imagine that you are 25 and plan to invest INR 10,000 in SIP for the next 35 years until attaining 60. If you choose a basket of stocks or mutual funds that delivers a return of 15% every year, your capital will grow to over INR 14 crores.
In contrast, if you start ten years later, i.e., 35, the capital may grow to just over INR 3 crores. Therefore, investing early allows your capital to benefit from compounding.
2. Top-Up With a Lumpsum Amount Whenever You Can
It is prudent to top-up your investment when you get a bonus or make windfall gains. Adding some amount when the stock price or unit price is considerably lower. Alternatively, you may increase the amount by 10% every year.
3. Invest for the Long Run
SIPs are best suited for fulfilling long-term financial goals. When your investment horizon is long, the chances of capital growth increases as the returns get cumulated.
4. Refrain From Withdrawing Frequently
Investments like PPF, recurring term deposits, and fixed deposits have a fixed lock-in period. In contrast, stocks and mutual funds (except ELSS) have no lock-in period, meaning you can withdraw the money whenever you want.
However, if you are serious about capital appreciation, it is better to desist from withdrawing the money before the date you have set for yourself.
5. Evaluate Your Fund’s Performance
Although you must refrain from withdrawing the amount too often, it is wise to evaluate your investment’s status on a regular basis. If you are dissatisfied with one basket, you can switch to another one to increase the chances of higher returns.
How Much Should You Invest Every Month?
Ideally, you should invest at least 30% of your monthly income in a SIP every month. Except for fixed deposits, all other investment products accept deposits from INR 500. However, the higher your investment amount, the better are the chances of capital growth.
Intelligent investors start with a low amount and increase it systematically.
A SIP must figure prominently in your investment methodology. If you’re careful about where you place your money, it can help you generate higher returns and maximize your wealth. However, it is always recommended to check the historical returns before investing to make an informed decision.
Raj Kumar is a qualified business/finance writer expert in investment, debt, credit cards, Passive income, financial updates. He advises in his blog finance clap.