Wondering what an SIP is? Here's all you should know

SIP route has significantly contributed to the record run Dalal Street has witnessed so far even as valuations look expensive.

At a time when the benchmark indices Sensex and Nifty50 are scaling fresh highs by every passing day, there is one route that the retail investors can still consider joining the rally: Systematic Investment Plan or SIP.  

SIP route has, in fact, significantly contributed to the record run Dalal Street has witnessed so far even as valuations look expensive.

What is an SIP, you wonder!   

It is a method to periodically invest some amount of money in a mutual fund of your choice to serve your long-term financial goals. You can start a SIP with as low as Rs 500 and the period could be daily, weekly, monthly, quarterly or yearly. Monthly is the preferred choice. Some mutual funds offer micro-SIPs too with a cap of as low as Rs 100.

Data from the Association of Mutual Fund Industry (AMFI) shows the MF industry has added, on an average, about 9.26 lakh SIP accounts each month during the financial year (FY) 2017-18, with an average SIP size of about Rs 3,300 per SIP account. Over 47,000 crore was collected through SIP in FY18 as compared to nearly 44,000 crore collected in FY17.  

Here's what you must know about SIPs:

SIPs must be goal-based

One must identify one's financial goals before starting an SIP, and accordingly zero down on a specific mutual fund. Specific goals help one not only choose mutual funds correctly, but also keep track of them in a better way. Various kinds of mutual funds, for example, diversified, large-cap, midcap, smallcap, sectoral funds and index funds etc are available in the market. These must be selected depending upon the term and the negotiability of the goal.

Commission charged on MFs

There are no free lunches! Mutual funds charge commission on the intellectual and logistical services they provide to investors. How much administration and fund management cost, expense ratio, exit load etc is going into your mutual fund scheme must be taken into account because what may look like a small commission could add up to a big chunk in many years, diminishing your returns.

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