Having a savings plan for a rainy day will never hurt you or your finances. But most people today, especially young adults at the beginning of their careers, don’t have proper knowledge of such savings plans and the benefits. If you, too, are looking for a savings plan, you can create your own plan through a Systematic Investment Plan or SIP. And through tax saving SIPs, you can further increase your savings potential. Read on to know more about how to invest in SIP and everything about investing in it.
What Is An SIP?
SIP is a fixed plan that an individual follows to achieve a set amount in the future. They can set any goal in terms of expected returns from a plan based on the plan’s returns capacity. You can use any savings or investment plan for your SIP, and it will provide high returns as long as you regularly invest in it. Some common plans used in SIP are equity, EPF, bonds, mutual funds, securities, fixed deposits, recurring deposits, insurance with a money-back policy, and government savings schemes. Most of these plans come under Section 80C of income tax which provides INR 1,50,000 relaxation every year, so you can convert your regular SIP into a tax saving SIP.
Different Types of SIPs
There are several types of SIPs based on the investment potential, duration, and extra benefits. Here are some common SIPs capable of providing high returns and added benefits.
These SIPs have a fixed amount of investment for a fixed duration of time.
In these SIPs, you can gradually increase the investment amount with time, helping you obtain much higher returns.
These SIPs are usually seen in securities where the value of the investment can fall, causing losses. So, you can set a limit, and when the value of the invested product goes below it, the SIP will automatically exit without your constant supervision.
In these, you can increase or decrease the investment amount based on the availability of funds, and the benefits will reflect in the final returns.
There are no duration limits in these SIPs. These will go on till you invest money, and you can continue growing your investment without any term-end related obstacles. Most savings schemes SIPs come under this category.
SIP through Insurance
Another method of SIP is through investing in an insurance policy with a money-back policy. So, you get the double benefits of investments and insurance coverages through the same plan.
These SIPs allow investment in different plans through the same plan. You can diversify your portfolio and reduce the risks of capital and interest losses.
Structure Of the Perfect SIP
A common SIP investment popular amount young working professional is the ‘15 x 15 x 15’ rule. As per this rule, you must invest INR 15,000 every month in a plan with a 15% rate of annual interest for 15 years to accumulate more than INR 1 crore. Based on this, you can get a rough idea of the structure of a perfect SIP visible from the description given below.
Component – A: Regular and Disciplined Investment
The investment which you make should be regular and should not stop under any circumstances. For this, you can plan your budget to know the investment capacity after setting aside a savings fund for emergency situations. So even if you require money for some emergency, you can use this backup fund, and your SIP investment will not have to suffer.
Component – B: Investing in Instruments Capable of Providing High Returns
The next component of a perfect SIP is choosing a perfect investment instrument. This plan must have high and assured returns to ensure your SIP is not in vain, as low-interest rates don’t have the capability of providing good returns.
Component – C: Long-Term Investment
Investing for a long term is also a must as the benefits from SIP are not visible in shorter durations. A duration of or more than 10 years is necessary for the investment to grow and show viable returns from the selected plan.
How To Choose an Investment Plan for Your SIP?
If you understand how to invest in SIP through all the above-mentioned three components, you can ensure safe and high returns from any plan, even with lower contributions. But the major component among them all is Component – B, as it requires the knowledge of the right investment plans. You can make use of the below-given methods to choose a perfect investment plan for your SIP.
- Compare plans based on returns to investment ratio
- Verify plan performance over the years
- Ensure service provider reliability
- Consult legal advisers and financial planners
- Read the plan documents and TnCs before entering any investment schemes.
Future financial planning is important, as it will protect you from a lack of funds due to an emergency. And now that you know how to invest in SIP and the benefits of tax saving SIPs you can create your own financial planning even through small investments. This will ensure that you get high returns with as less investment as possible through correct market research methodologies.