How to Start SIP Investment: A Beginner’s Guide to Investing in SIP

A Systematic Investment Plan (SIP) is a good way to leverage the power of mutual funds. It allows you to build wealth over time without worrying about market fluctuations. If you have never invested in mutual funds, it is natural for you not be aware of how to start SIP investments. Fortunately, the process is simple and entirely digital. 

What is an SIP Investment?

Before we look at how to invest in SIP, let us briefly go through the concept.

A Systematic Investment Plan is a disciplined investment approach where you commit to investing a specific amount regularly over a certain period of time. With a mutual fund SIP, you can eliminate the need to time the market or wait for a large corpus to accumulate.

How SIP Works in Mutual Funds?

When you invest through a SIP, the fund house allots you units based on the Net Asset Value (NAV) on the date of purchase. So, if the NAV is high when you invest, you purchase fewer units. Conversely, if the NAV is low when you invest, you get more units. Over time, this averages down the cost of investment. 

Difference Between SIP and Regular Savings 

While regular savings or recurring deposits in a bank might provide safety, the returns are often low and barely beat inflation. A SIP investment, on the other hand, provides market-linked growth with the potential for higher returns. This makes it superior for long-term wealth creation compared to traditional savings.

Why SIP is Ideal for Beginners?

If you are new to the financial markets, SIPs offer distinct advantages that make them the ideal investment route for novices.

• Low Starting Amount 

You can start a mutual fund SIP with as little as Rs. 500 per month. This low entry barrier ensures that the investment is easily accessible for all kinds of investors.

• Disciplined Investing 

A Systematic Investment Plan automatically deducts the investment amount from your bank account. This ensures financial discipline by preventing you from skipping investments.

• Rupee Cost Averaging 

When you invest consistently over a long period, you buy mutual fund units at both high and low price points. This averages out the cost of purchase over time and reduces the impact of market volatility.

• Power of Compounding 

When you continue investing for a long period, your returns will generate further returns. This compounding effect accelerates your wealth creation significantly.

• Less Market Timing Stress 

Since you invest across market cycles, the need to predict the right time or monitor the stock market closely is eliminated. 

How to Start SIP Investment – Step-by-Step Process

Now that you know the SIP benefits, let us look at the practical steps you need to follow to start investing. 

• Step 1: Define Your Financial Goal 

Having a clear goal helps you determine how much money you need and how long you need to stay invested to achieve it.

• Step 2: Decide Monthly SIP Amount 

Analyse your income and expenses to find a comfortable surplus. It is better to start with a smaller amount, as it can help you sustain investing over a long period. 

• Step 3: Choose the Right Mutual Fund Category 

Select a fund based on your risk profile and investment horizon. Equity funds are suitable for long-term goals, whereas debt funds are safer for short-term needs.

• Step 4: Complete KYC Process 

Being Know Your Customer (KYC) compliant is essential to start a mutual fund SIP. Most stockbrokers allow you to complete the process online by submitting your PAN card and address proof. Once your KYC is verified, you can open a trading and demat account with the broker.

• Step 5: Select SIP Date and Tenure 

Once your accounts are opened, the next step is to pick the investment date, frequency and tenure. You can choose a tenure of a few years or select the 'until cancelled' option to keep the SIP investment running indefinitely until you decide to stop.

• Step 6: Start SIP and Monitor Periodically 

Review the performance of your Systematic Investment Plan every six months or annually to ensure the fund aligns with your original financial objectives.

How to Invest in SIP for Beginners? 

Navigating the mutual fund landscape can be confusing initially. Here is a practical guide on how to invest in SIP for beginners to ensure you make informed choices.

• How Beginners Should Select Funds?

Inexperienced investors should stick to large-cap or index funds initially. These funds invest in established companies and are generally less volatile than mid-cap or small-cap funds. They offer a stable introduction to the equity markets.

• Importance of Long-Term Horizon 

Equity mutual fund SIP investments often need a long time frame to perform. Ideally, beginners should have a horizon of at least five to seven years. This allows the market to recover from any short-term corrections or crashes.

• Choosing Equity vs. Debt SIPs 

In the case of long-term goals, equity SIPs are better since they have the potential for higher growth. For short-term goals, debt SIPs are better since they protect capital from market swings.

• Role of Risk Tolerance 

Beginners must assess how much loss they can tolerate and choose funds that align with their emotional ability to handle risk.

How Much Should You Invest in SIP?

When it comes to SIP investments, there is no fixed number that applies to everyone. Some investors arrive at the investment amount through the 50-30-20 rule. The rule requires you to allocate 50% of your income to needs, 30% to wants and 20% to savings and investments. 

For example, if you earn Rs. 50,000 per month, you should aim to invest at least Rs. 10,000 via a Systematic Investment Plan. Over time, you should look to increase your SIP investment amount every year as your income grows. A 'Step-up SIP' is a feature that allows you to increase your contribution by a fixed percentage annually. It ensures your investments keep pace with inflation and lifestyle changes.

Best Time to Start SIP Investment

Many investors wait for the right time to invest and lose out on valuable compounding years. With Systematic Investment Plans, the sooner you start investing, the better. This is because with SIPs, you do not need to wait for a market crash to start investing. Since you invest systematically, you buy units at high and low prices. The inherent averaging mechanism makes market timing irrelevant for SIP investors.

For example, in a rising market, your investment value grows. In a falling market, you accumulate more units with the same investment amount. Both scenarios benefit you in the long run.

It is important to remember that time in the market is more important than timing the market. The longer you remain in the market, the better your chances of wealth creation.

SIP vs. Lump Sum Investment

The table below highlights the key differences between SIP vs. lump sum investments to help you decide.

Common SIP Mistakes Beginners Should Avoid

As an investor, you should be aware of SIP investment pitfalls to ensure your journey remains smooth.

• Stopping SIP During Market Fall 

Do not panic when the market drops and stop your mutual fund SIP. A market fall is a buying opportunity and not a threat.

• Choosing Funds Based Only on Past Returns 

Past performance does not guarantee future results. Therefore, do not focus on selecting a fund solely because it gave good returns last year. Instead, look at the fund manager's consistency and the underlying portfolio quality.

• Investing Without Goals 

Investing aimlessly often leads to premature withdrawals. If you do not assign a goal to your investment, you might spend the money on unnecessary luxuries. 

• Not Reviewing SIP Performance 

While you need not check the performance daily, ignoring your portfolio for a long period of time is also dangerous. Ideally, you should review annually to ensure the fund performs better than its benchmark and peers.

Example of SIP Investment

Suppose you start a mutual fund SIP by investing Rs. 5,000 every month for a period of 15 years. Assuming a conservative annual return of 12% from equity mutual funds, your total investment over 15 years would be Rs. 9 lakhs. 

However, the estimated value of your corpus at the end of 15 years would be approximately Rs. 25 Lakhs. The profit of Rs. 16 lakhs comes purely from the power of compounding working on your regular contributions.

How SIP Helps in Long-Term Wealth Creation?

The magic of mutual fund SIP lies in its ability to transform small savings into significant wealth.

Compounding is essentially earning interest on interest. In the initial years, the growth might seem slow. However, after multiple years, the growth becomes exponential as your returns generate returns. 

That said, if you withdraw money frequently, you break the compounding chain. It is essential to stay invested until you reach your specific financial goal. Remember, investing a small amount every month for twenty years yields better results than investing a large amount for just two years.

Things to Review Periodically in Your SIP

A periodic review of your SIP investment is essential. Here are some things you need to review from time to time. 

• Performance Review 

Check if your fund is beating the benchmark index. If your fund underperforms consistently for more than two years, you might need to switch to a better-performing fund.

• Goal Alignment 

Check if you are on track to meet your goals. If inflation has increased your target goal, you might need to step up your investment amount.

• Fund Rebalancing 

Over time, your asset allocation might get skewed due to market movements. When that happens, you should rebalance your portfolio to keep the risk in check. 

• Increasing SIP Amount 

As your career progresses, your income rises. Instead of keeping your SIP investment amount stagnant, you must increase it to reflect your current financial capacity and lifestyle aspirations.

FAQs on SIP Investment

• Can beginners start SIP with small amounts? 

Yes. Beginners can start a SIP with as little as Rs. 100 or Rs. 500 per month.

• Is SIP safe for long-term investment? 

Yes. Mutual fund SIPs are safe for the long term as it averages out market volatility and benefit from the growth of the economy.

• Can SIP be stopped anytime? 

Yes. You can stop or pause your SIP at any time without any penalty. However, some funds might levy an exit load if you withdraw the money too soon.

• What happens if I miss a SIP instalment? 

If you miss an instalment, the SIP does not get cancelled automatically. However, the bank might charge a penalty for insufficient funds.

• How long should I continue SIP? 

You should ideally continue your SIP for as long as it takes to achieve your specific financial goal.

Conclusion

Understanding how to start SIP investment is the most empowering step you can take for your financial future. SIPs offer you the perfect blend of discipline, flexibility, and growth potential that is hard to find in other investment avenues.

Now, it is important to remember that while market ups and downs are normal, your discipline must remain constant. By starting early and staying patient, you allow the power of compounding to work its magic.