How to Choose Best SIP?

Nitin Agrawal
Nitin Agrawal

SIP (Systematic Investment Plan) has probably become one of the most talked about the term since the mutual fund industry garnered investors’ focus. As we are entering 2019, in this blog we seek to discuss how to select the best SIPs.
Read on!

What is a SIP?

A SIP (Systematic Investment Plan) is an investing way that has taken center stage ever since the mutual fund industry has seen rapid growth. SIP is one of the ideal forms of investing in mutual funds and allows an investor to invest regularly thereby building on financial discipline. SIP is a planned way of investing which helps to inculcate the savings nature in an individual.

In SIP, an individual is free to choose the frequency of investments (such as quarterly, monthly or weekly) and depending on the frequency selected; the stipulated amount gets auto-debited from the bank account. An investor receives some units based on the current NAV of the fund instead of the SIP amount.

Benefits of SIP

Rupee cost averaging

If you are looking to invest in equity or hybrid mutual funds, you should be aware that these funds invest fully and partly to equities respectively. Thus, these funds witness a high degree of volatility depending on the movement of the market and the underlying securities. Therefore, it makes sense to invest via SIP route. By investing via SIP route, an investor invests at different price points (sometimes high, sometimes low). This method enables an investor to be average down their cost of acquisition.

Power of compounding

If you invest in mutual funds, you are not only entitled for returns on your initial investment but also returns on the earned interest. This is nothing but the power of compounding. In the case of mutual funds (particularly with regular investments), the returns are similar to compound interest. Thus, you tend to make higher money at a much faster rate if you remain invested for a long-term period.

How to choose the best SIP plan?

You can check out Orowealth for assessment of mutual funds that suit your requirement and could help you achieve your financial goals. Following are things you need to keep in mind while selecting a SIP –

  • The mutual fund that you are evaluating has been in the market for at least five years
  • The mutual fund house or the AMC shortlisted is reputed and recognized.
  • The total assets under management in the fund are considerable. This prevents from severe volatility of the fund.
  • Check the instruments held by the fund and assess the liquidity of the instruments and the fund. The fund should be liquid so that you can invest and redeem anytime.
  • Get accreditation by checking Orowealth’s star rating of the fund and/or CRISIL Fund Ranking.

Things to keep in mind before investing in SIP

Generally, people have remained cautious when it comes to the sustainability of equity returns. Market volatility, bad experience, mis-selling, and other factors have kept the investors away from the segment of the market. But this fear results in investors losing out on the opportunity to enter during early phases of the market rallies. Careful investigation reveals that equity investments have the potential to yield substantial returns provided an investor remains invested, in a systematic manner, for a long-term horizon. The long-term approach negates the effect of medium and short-term volatility. Following are the things that an investor should keep in mind while investing in mutual funds –

i. Work out your investment frequency carefully:

People often start SIPs without giving any consideration to the amount they can invest comfortably. An over-commitment result in hardships, and often individuals have to discontinue their investments. Thus, it is advisable that you start conservatively with a small amount and as your monthly income grows, you can increase your SIP amount. When you raise your SIP amount every year, it is called step-up SIP and is an excellent tool for salaried class.

ii. Invest with an objective/goal

Be it buying a car or down payment for a home, or children’s education or marriage, you can save separately for each of these goals. Having a clear objective in mind and a financial goal helps you ensure you plan accordingly. Check out different goals and how you can prepare separately for each of them at Orowealth’s goal planning section.

iii. Don’t have a myopic view

When you are investing in equities, you are rewarded only if you remain invested. Remember Rome was not built in a day. Let us show you how long-term horizon can be rewarding in case of equities.

Example –

Eicher Motors

You must have heard of Royal Enfield bike. The bike is a brand of Eicher Motors. In June 1998, the stock of Eicher Motors was trading at around Rs 9. In 20 years, this stock has grown nearly 2,555 times to around Rs 23,000 as on December 31, 2018, which is almost 50% CAGR (compounded annual growth rate).

Kotak Mahindra Bank

Similarly, you would have heard of Kotak Mahindra Bank (KMB) started by ace banker Mr. Uday Kotak. Price of KMB was Rs 1.8 in September 2003 and Rs 1250 as on December 31, 2018 – an impressive growth of nearly 700 times.

Thus, never get disappointed with first-year or one-year assessments of your funds or portfolio. If you feel the investments are valuable, you should remain invested. Never indulge in panic selling due to short-term volatility, instead get back to drawing board to see if the investment thesis has changed fundamentally. If there is no change in the fundamentals, use every dip as an opportunity to buy.

iv. Don’t opt for dividend plan

SIPs work the best if you remain invested for long-term and let the power of compounding do the magic. Thus, remember to invest in the growth option where the capital appreciation or the dividend announced by the fund remains in the fund. If you take out a dividend at every interval or opt for dividend pay-out plan, you do not get exponential returns on the investment even if you remain invested for long-term.

Why Should You Invest in a SIP Plan?

a. Regularity in Savings

SIPs involve investment at every interval (such as monthly, weekly or annually). For salaried class, the approach is ideal as they don’t have to shed huge money for investing purpose.

b. Hassle Free

SIPs are also termed as Sleep in Peace account these days. This depicts the kind of flexibility a SIP offers. SIP is executed every month by authorizing an ECS mandate from your bank. This process enables auto-debit from the bank account, and you are not required to make payments every month.

c. Flexibility

SIPs are flexible as they allow an investor to increase or decrease the amount of money. Also, the investors get an option to exit their respective plans at any point in time.

d. Low-risk factor

An investor puts a small amount of money in the plan. Thus, there is a lower degree of risk in losing their investments and higher probabilities of making money.

Step-by-Step guide to investing in SIP

Now when you have understood in detail about the benefits of SIP, let us discuss simplified steps by which you can start your SIP.

Step 1- Get your KYC Done

KYC is Know Your Customer. KYC captures all the essential information of an investor such as Name, Email, Phone, Address, Permanent Account Number, Aadhar number, etc. It is necessary to get KYC done before investing in any mutual fund. For completing your KYC, you can reach your nearest KYC center or contact Orowealth team.

Step 2- Assess your risk appetite

This step helps you understand how much you can invest and how much risk you can accommodate in your investment. You can reach out to Orowealth team to get your risk profiling done.

Step 3- Select the funds

Once you have finalized on your risk appetite, you should ideally select the funds in which you wish to invest. The selection of funds is dependent on the type of financial goal you want to accomplish.

Step 4- Start investing

Once you finalized on the funds you wish to invest, you can start your SIP.

Always remember to ensure that your overall portfolio is well diversified such that reduces your risk and maximize your total returns. Also, remember to do a portfolio health check every quarter (preferably) to ensure that the asset allocation is in line with your risk appetite. You can check out Orowealth’s proprietary portfolio health check tool for assessing your portfolio’s health.

Nitin Agrawal
Nitin Agrawal

Nitin is the Co-founder and CEO at Orowealth and has worked at Deutsche Bank for 6 years in Equity Structuring across their London and Singapore offices. He is a MBA from IIM Bangalore and has a degree in Electrical Engineering from IIT Bombay.

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