At the end of the month, a lot of people wonder where their hard-earned money went as the savings scheme takes a backseat while the expenditures climb.
People have been taught that to invest, one has to have substantial amount of money, market knowledge, and time to watch the market trends and the right time to enter or exit.
However, investing does not require all of these, and a small amount of money periodically can grow significantly over time through a Systematic Investment Plan (SIP).
SIP has proven to be a great tool in Nepal for those who want to create a habit of saving and wealth creation on a monthly basis and transform their savings culture.
This article explains what a Systematic Investment Plan is,
how it works,
and how one can begin their journey of wealth creation through a monthly investment plan in Nepal by learning more about mutual fund.
Understanding the Systematic Investment Plan
A Systematic Investment Plan is a process wherein an investor subscribes to a mutual fund scheme through regular periodic contributions to build wealth overtime.
It is a simple method of investing where a person can begin right away with an affordable amount and invest a certain amount of money on a regular basis in a certain mutual fund scheme of his/her choice.
It is similar to paying monthly bills, however, the money paid towards the mutual fund subscription gets transformed into units of the chosen fund.
The unit allocation depends upon the amount invested and the price of a unit, whereas the fund manager manages the whole portfolio and makes investment decisions about the fund.
The advantage of a systematic investment plan is that it helps in achieving two significant benefits of rupee cost averaging and compounding benefit.
Rupee Cost Averaging
Rupee cost averaging enables an investor to minimize the effect of market fluctuation on his/her investment.
It is a systematic process of investing a certain amount of money on a regular basis regardless of the market condition.
A SIP investor buys more units when prices are low and fewer units when prices are high; thus, it balances the average cost price per unit.
Therefore, instead of waiting for the right time to invest, a SIP subscriber can continue buying units in a mutual fund scheme on a regular basis.
Compounding Benefit
The second significant advantage of a SIP is a compounding benefit.
The benefit of compounding arises due to earning profits on top of the profits or reinvestment of profits.
For example, the money earned from the mutual fund can be reinvested to begin earning again.
The longer the investment tenure, the more the compounding benefit as the profits get reinvested on a regular basis in the mutual fund scheme.
Although small deposits may not seem significant from a monthly investment plan perspective, over decades, compounding benefit can build substantial wealth and help achieve long-term financial goals.
Systematic Investment Plan in Nepal
Nepalese investors have been more inclined towards savings accounts and term deposits for a long period due to the complexity and lack of proper awareness about the stock market.
The introduction of mutual fund SIP has helped a lot of residents to ease the process of monthly investing and diversify their risk, and the Securities Board of Nepal (SEBON) has certified the process and monitored the compliance by the respective fund managers.
There are several advantages of a SIP that attracts a lot of residents to begin their wealth creation journey through monthly deposits.
Some of the key benefits are:
Lower minimum subscription: There are SIP schemes in the Nepalese market that require as low as NPR 1,000 monthly deposits. Hence, it supports creating wealth even for students, young professionals, and those in the middle class with modest monthly savings.
Flexibility: There are various options to stop, pause, and restart the SIP according to the financial requirements. However, it is important to check the specific details while registering for the scheme.
Professional fund management: The fund manager manages the whole portfolio and makes investment decisions about the fund.
Reduces unsystematic risk: A mutual fund scheme helps diversify the risk across several stocks and instruments.
Lock-in period: A SIP offers long-term benefits; thus, it assists investors to avoid the pitfalls of a short-term investment horizon.
Although a SIP offers a wide range of benefits, it is important to remember that the returns are not guaranteed as the value of the mutual fund schemes depends on the market conditions and other factors.
Therefore, an investor should research, review, and analyse the risk, expense ratio, performance, and investment objective before considering the investment in a SIP.
How to Begin the SIP in Nepal
One can easily begin a SIP in Nepal with the help of a capital company or a merchant bank.
Steps to begin SIP are:
Open a Demat account: An investor needs to have an active Demat account to open and operate the mutual fund subscription, so it is a mandatory requirement.
A Demat account can be opened by a depository participant or a capital market company.
Fund scheme consideration: An investor should research and review various open-ended mutual fund schemes in Nepal and evaluate their risk appetite, expense ratio, investment objective, and performance before selecting the fund.
The past performance does not guarantee future returns; therefore, it is essential to choose the best-matched scheme in terms of income, risk, and goal.
Register for a SIP: The next step is to register for a SIP with the selected fund manager through their website, online portal, or office.
An investor will be required to provide basic personal information, bank details, subscription amount, and preferred payment date.
Set up standing instruction: The last step is to set up a standing instruction for the automatic debiting of monthly deposits from the bank account to the mutual fund subscription.
Wealth creation through regular savings and investing has long been advocated by financial experts as a reliable method to earn consistent and sustainable returns on the investments made.
A SIP assists an investor to build wealth overtime, and the process is effortless, simple, and more importantly, affordable.
With the additional time and effort, the returns can be maximized by choosing the best-matched open-ended mutual fund scheme based on the risk appetite, expense ratio, investment objective, and performance.
Although a SIP cannot remove the market-related risks completely, it can surely support reducing the risk and enable an investor to begin their wealth creation journey with ease and convenience.
Frequently Asked Questions About SIP in Nepal
1. Is SIP safer than a fixed deposit?
A fixed deposit normally provides a fixed interest rate for a set period. It offers more predictable returns and carries lower market risk.
SIP investments are linked to mutual funds, which may invest in shares, bonds, and other market instruments. Their value can rise or fall, and returns are not fixed.
2. What happens if I miss a monthly SIP payment?
The result depends on the rules of your fund provider. In many cases, missing one payment does not close your SIP account or lead to an immediate penalty.
However, missed payments reduce the amount invested over time. Contact the fund manager if you need to pause, restart, or change your monthly contribution.
3. Can I withdraw money from a SIP whenever I want?
Many open-ended mutual funds allow investors to redeem their units when they need money. The amount you receive depends on the current value of the units.
Some funds may charge an exit fee if you withdraw within a short period after investing. Review the scheme documents before making a withdrawal.
Conclusion
Long-term wealth usually grows through regular action rather than one large investment. SIP makes that process easier by turning small monthly deposits into a steady investment habit.