The Smart Girl's Guide: Why you should consider saving through a Systematic Investment Plan

With the financial discipline that SIPs bring, most people end up saving far more money than they would have otherwise

Your moodboard has everything that dreams are made of–a fabulous holiday with your girlfriends in Greece, that sparkly tennis bracelet, the Chanel bag you’ve been lusting after, a fat retirement fund to fuel all these desires and a fighting-fit body to make those holiday pictures count. But, as we know, nothing comes easy. It’s going to take both fiscal and physical discipline to bring that moodboard to life. Where should you start though?? You might want to pick a Systematic Investment Plan (SIP) to get cracking on those financial goals, and throw in a brisk walk, perhaps.

In simple terms, a Systematic Investment Plan–or SIP–is an investment strategy where you are saving money at a predetermined frequency. The money is deposited in a mutual fund scheme at periodic intervals. This could be daily, weekly, monthly, quarterly and therefore, allows you to set aside some amount of money regularly with a great deal of discipline, says Vishal Dhawan, CEO and founder of Mumbai-based Plan Ahead Wealth Advisors. Think of it as a compulsory form of saving, especially if you put it away as soon as your salary clocks into your bank account. Experts agree that with the financial discipline that SIPs bring, most people end up saving far more money than they would through ad-hoc investments.

Why SIP?

Investing in a SIP comes with a host of benefits:

Small installment amount:
This type of strategy can help you start small and work your way up the investment ladder. Investors can start investing in SIPs with regular contributions that are as low as ₹100 or ₹500. It means that you get the ball rolling sooner rather than later.

Rupee Cost Averaging:

In the rupee cost averaging approach, you invest a fixed amount of money at regular intervals, irrespective of whether the markets are going high or low. This ensures that you buy more units (in a mutual fund) when the markets are low and lesser units when they are high. Spreading your investment across a period of time through SIPs helps lower the average cost of your investment. It also buffers you from the risk associated with fluctuations in the market. “With SIPs, you do not have to think about whether the financial markets are good to invest in at this point. It allows you rupee cost averaging benefits which ensure your way of saving money can actually be without the worry that the markets are too high or too low. So the highs and lows compensate for each other, and over a long period of time it evens out,” says Dhawan.

Power of Compounding:

Compounding is essentially a long-term investment strategy. For compounding to work, two things are required–reinvestment of earnings and time, say experts. With a SIP, you regularly increase your investment by a fixed amount. The returns are calculated on the amount invested plus the previous returns, allowing you to reap the benefits of compounding.

Serving different financial goals:

“If you’re planning a holiday a year later, or want to set up an emergency corpus, you can still use SIPs to meet those financial goals,” says Dhawan, explaining that it is not necessary to only invest in an equity fund. “SIPs in debt mutual funds and hybrid mutual funds can be used for short-term loans. The crucial thing to remember is that because there are different mutual funds, the way you use the mutual fund instrument should be driven by your financial goals first. If you have long-term financial goals, you could use equity as the mutual fund. If you have shorter-term goals, you could use debt. Therefore, your financial goals will determine which mutual fund SIP you will pick, rather than presuming that equity funds are the way to go,” he shares.

Brings your finances into sharp focus:

When you are putting money away through SIPs, it automatically makes you think in detail about your expenses. What is the difference between my income, expenses and savings, say experts. Usually, most people don’t have a grasp on how much they are bringing in each month after tax is deducted, where the expenditure is, or how much is being set aside as savings. “This also makes them think about their income and expense components in detail before they commit a fixed outflow towards the SIP each month,” says Dhawan.

SIPs offer flexibility:

Unlike a loan or an insurance plan where it is very difficult to stop once you start, in this case, if circumstances change, it is possible to stop or even reduce the load of an SIP, offering you the flexibility in commitment if you are not sure.

Tax Benefits:

As in the case of Equity Linked Saving Schemes (ELSS) investments, investors can also avail of tax benefits. You can claim a deduction of up to ₹1.5 lakh from your taxable income for investing in ELSS through SIPs under Section 80(C) of The Income Tax Act, 1961.

Different types of SIPs

Regular SIP: This is the most commonly used SIP where you invest a fixed amount at regular intervals.

Step-Up SIP: Here, the contribution could increase at a predetermined frequency. It also helps you earn the intended corpus faster as your SIP amount increases with time.

Flexible SIP: This allows you to increase or decrease the SIP amount as per your disposable income.

Things to keep in mind while investing in SIPs

Don’t limit your savings: The biggest downside, experts say, is that even though people have the potential to save more money, they tend to limit it to their regular investments in SIPs, even when they have additional sums of money, like a bonus, come in.

Understand how SIP works:

“The way SIPs are structured, your first installment goes in at month one and your last installment goes in at month twelve. This means your first installment would have completed one year, while your last installment would have completed one month. So over a year, the average holding period would be approximately six months. You may be thinking that you’ve invested in an SIP for a year, so your expectation of what gets delivered as an outcome could be very different. The problem arises when your expectation is much higher because you might not understand how an SIP works and this could be a challenge,” warns Dhawan.

Be mindful of cost related to the exit load and taxes: Exit load and taxes are determined by the date of each installment. Quite simply, if a mutual fund has a one-year exit load, then that exit load will be at an installment level. So if you decide to pull out your money after one year, your first installment may have completed its one-year exit load period, but your second, third or fourth installments will not have. So you have to be mindful of that.

Avoid over-diversification while investing in SIPS:

Don’t get carried away by the short-term returns from the asset class, because it will average out over a longer period of time.

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