SIP Investment Basics for Beginners: A Simple Guide to Start Investing
SIP Investment Basics for Beginners: A Simple Guide to Start Investing
Have you ever considered investing but been bewildered with concepts such as mutual funds, returns, and market movements? You’re not the only one!
Like many beginners, in the past, too, I had the misconception that to invest, I must have plenty of money along with good investment knowledge. But, after knowing the concept of SIPs, I came to know that even with a little money and no special investment skills, anyone can invest.
In this article, we’ll learn about SIP investment basics.
What Is SIP?
SIP means Systematic Investment Plan.
It refers to a process through which an individual invests a certain amount of money periodically into a mutual fund. Here, rather than investing lump sum, the person invests in smaller amounts each month.
Let’s take examples of three such investments:
- Rs.500 monthly
- Rs.1000 monthly
- Rs.2000 monthly
This amount of money is automatically invested into the mutual fund chosen by the person at a particular date each month.
Why Are SIPs So Popular?
SIPs have become popular due to their simplicity and affordability.
There is no need to spend lakhs of rupees on investments. Several mutual funds let you start with an investment of ₹500 per month.
Here are some of the advantages of SIPs:
Simple and Convenient to Start
SIPs are easy to start and most platforms provide facilities to initiate SIP in just minutes.
Creates Financial Discipline
As you invest automatically every month, it instills financial discipline.
Ideal for Beginners
There is no need to keep a constant check on the stock markets.
Wealth Creation Through Investments
It helps create long-term wealth through regular investments.
How does SIP Work?
It would be easier to explain by an example.
Assume that you make an investment of ₹1,000 per month in SIPs.
Every month:
- Units of the mutual funds are bought.
- Lower prices result in higher numbers of units.
- Higher prices lead to lower numbers of units.
In the long run, this will even out your cost of investing.
This method is known as "rupee cost averaging." You need not memorize this phrase. Just know that the act of investing regularly eliminates the pressure of predicting market trends.
The Advantage of Being Consistent
- Consistency is one of the important lessons I have learned about investing.
- Beginners often take months looking for the right opportunity to make their first investment. During this period, time passes away without being utilized.
- Often it is better to start early rather than late with high amounts.
- Small monthly investments, if made regularly over a sufficient period of time, may become significant.
Here is an example:
₹1,000 invested per month for a considerable period of time could become a lot of money.
Investing an increasing amount of money in SIP based on income growth would create wealth faster.
Advantages of SIP Investments
1. Affordable For Everyone
- No requirement for you to have a huge salary.
- This is possible for students, new graduates, and employed people.
2. Avoids Emotional Decisions
- There will be those who will feel depressed if the market goes down.
- The reverse will happen when the market goes up.
- The SIP will ensure that you keep on track because the investment process keeps happening regularly.
3. Adjustable
You can:
- Increase your SIP investment
- Reduce it
- Put a pause on it
- Even stop it if necessary
4. Future Scope of Growth
Common Misconceptions about SIP
- Absolutely baseless!
- Many SIPs can be initiated with an initial investment of only ₹500 per month.
- An SIP doesn’t give returns.
- As mutual funds operate in markets, there are possibilities for fluctuating returns.
- But long-term investments usually minimize market effects.
- Actually, the SIP concept is intended to facilitate investing for common investors.
- They can learn and invest simultaneously while they are newbies.
- Selection of a SIP as a Beginner
- What is my motive behind investing?
- To pursue education?
- To buy a house?
- For retirement?
- Making money?
- SIPs should be taken up when one can invest for a few years at least.
- Generally speaking, the greater the time horizon, the more growth chances for your investments.
- Every mutual fund comes with a certain amount of risk attached to it.
- Newcomers usually like diversified mutual funds because their investments would be spread out across many firms.
Mistakes Beginners Should Avoid
- Starting Too Late
- Most people delay their investments thinking that they should have more savings.
- It is always better to start small than waiting forever.
- Staying Away From Investments During Market Slumps.
- Rises and falls in the market are part of the business.
- Some beginners stop their investments during market slumps, which might impact their overall growth.
- Looking For Quick Success.
- SIPs are not supposed to provide quick solutions.
- Their main objective is to build long-term wealth.
- One must be patient for the best results.
- Lacking Goals While Investing.
Is SIP Safe?
- One of the frequent questions asked by beginners is the safety of SIPs.
- The first thing to note here is that SIPs are a mode of investing, and not investments themselves.
- This means mutual funds invest in market-related products where gains may vary.
- However, this is the reason why SIPs are popular as they ensure discipline and market stability.
- Always do thorough research before making any investments.
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