How to simply start an SIP from pocket money?
You don't have to be rich to get started investing. Students and young earners can even use small amounts of pocket money to build the habit of investing regularly.
A Systematic Investment Plan (SIP) is an investment plan in a mutual fund scheme where you invest a fixed sum periodically.
But remember: invest only what you can afford. Your SIP isn't to be made at the expense of your needs. Also, remember that mutual fund returns are market-driven and not guaranteed.
What is an SIP and how does it work?
A systematic investment plan is an investment option in which a certain sum is invested in a mutual fund periodically, say monthly. You don't have to invest a large sum of money; you can invest in smaller increments and make regular investments.
While investing in an SIP, the investor gets units of the chosen mutual fund at the applicable NAV. The number of units can thus fluctuate from one installment to another depending on the NAV.
Sometimes the greatest reward for a novice might be self-discipline. It turns investing into a regular financial habit rather than something you do only when you have spare money. An SIP is not an investment product; it is a form of investment in a mutual fund.
How much of your pocket money should you invest?
There is no fixed amount that every student should invest. Your contribution should be based on your pocket money, expenses and financial responsibilities.
For instance, if you have a monthly pocket money of ₹5000, you may choose to save ₹500 or ₹1000, as long as it doesn't affect your necessary expenses. The focus is not on investing as much as you can but on investing an amount that you can comfortably afford.
It's fine to start small. As your income or allowance increases, you can gradually increase your SIP contribution. According to AMFI, SIPs can be initiated with comparatively smaller amounts, depending on the minimum investment value of the SIP.
How can a SIP calculator help you plan?
Use a SIP calculator to learn how varying investment amounts and lengths of time may have an impact on the value you may realise. Typically, you enter the monthly investment amount, the assumed rate of return, and the investment period.
For instance, the difference between investing ₹500 per month vs ₹1,000 per month, or continuing for 10 years vs 5 years. These calculations are merely examples since the returns from mutual funds are variable and cannot be anticipated or promised.
The exercise can, however, help you set realistic expectations and show why it may be better to start early and give your money more time to benefit from compounding.
How to start your first SIP
The first step is to identify how much you can invest without affecting your monthly budget. Next, determine your investment objective and time frame, and then select a kind of mutual fund.
Avoid choosing a fund based on its recent performance. Consider the fund's goal, risk level, fees, and how well it fits your time horizon. Another important step before investing in mutual funds is the KYC process.
For specific investments with market links, and for dematerialised mutual fund units, a demat account can prove to be beneficial. But not all mutual fund investment paths require it. Individuals interested in direct market investments can open free demat account with an appropriate broker and compare the applicable services and charges.
What should beginners check before starting?
Before starting, determine whether the mutual fund fits your objective and risk tolerance. Consider the investment strategy, expense ratio, and other relevant fees.
Read the documents relating to the scheme and understand what you are investing in. Don't invest in a product that's just turned in a high profit lately. Results are not guaranteed.
Select an SIP when you get pocket money or income. With an automatic payment, you can make regular investing more convenient.
Don't follow every short-term market move. If your initial investment objective and risk level remain unchanged, don't stop just because of temporary losses. Periodically review your investments and consider doing an increase in SIP if your financial capacity improves.
Conclusion
Making an SIP from pocket money isn't about investing a ton of money; it's about building a habit of saving. A little bit and a clear objective can make investing easier for young people over the long-term.
Effort should be made to stay consistent, understand risk, and stay invested based on financial objectives rather than seeking “quick” or “certain” returns.