Ask the right questions before starting a monthly SIP

Systematic Investment Plan abbreviated as and commonly referred to as SIP is the easiest way to invest in mutual fund schemes. There isn’t a more organized investment option as for now and SIP ensures that you save and invest a fixed amount at regular intervals (typically every month) till your investment objective is achieved. Not everyone has a hefty corpus to start investing in mutual funds and SIP ensures that even if you have Rs. 500 to Rs. 1000 every month, you can still invest this amount and kickstart your investment journey without worrying too much. Thanks to the introduction of SIP, it has become possible for almost everyone to give themselves a chance of earning long term capital appreciation through systematic investing.

If you too are keen on starting your mutual fund investment journey via SIP, here are some of the questions you must be asking to ensure that you are taking an informed investment decision –

What is SIP?

Systematic Investment Plan is an investment tool where you choose an investment amount that you are comfortable with and invest this amount at regular intervals till your investment objective is achieved. There is no limit on number of SIPs and investors can start SIPs in end number of mutual fund schemes without any restrictions. SIP ensures that you save and invest a fixed amount before you start splurging in that particular month.

Are SIPs safe?

SIPs are not safe, but they ensure that you do not invest all your amount at once, thus saving your entire finances from getting exposed to market volatility. If you are investing in equity funds, these funds are constantly exposed to volatile markets. But when you start a monthly SIP, only the amount that you invest every month is exposed to equity market’s explosive nature. SIPs do not require investors to time the market and you can start investing in mutual funds via SIP right away.

Can I stop my SIP?

The performance of mutual fund schemes fluctuates from time to time. Sometimes if the sector or asset class in which a mutual fund scheme invests crashes, investors might be concerned about the scheme’s performance. In such a scenario, investors can immediately stop their SIP investments in that particular fund. In case you realize that you have invested in the wrong scheme or there is another mutual fund scheme in the same category that has a better track record, you can immediately stop your investments and switch to a better performing scheme. There are no fines applicable for abruptly stopping your monthly SIPs.

Can I modify the SIP sum?

Just like it is possible to stop your ongoing SIPs, investors can even modify the SIP sum depending on their income needs. Ideally year after year, it is recommended to increase your monthly SIP sum by 10 percent. Some individuals find themselves in a situation where their monthly income might fluctuate from time to time. Such individuals can increase or decrease their monthly SIP sum and they can invest this modified amount in the following again. Again, there are no charges for modifying the monthly SIP sum.

Does power of compounding work with SIP?

Power of compounding is an investment technique that seems to come into effect only when you continue investing in mutual funds via SIP for a minimum period of 7 to 10 years. Power of compounding is nothing, but the interest earned on the interest earned from the initial investment amount. To witness your small SIP sums snowball into a large corpus, investors are expected to continue investing in mutual funds via SIP keeping a long term investment horizon in mind.

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