Systematic Investment Plan (SIP)

SIP has become quite a commonly used term over the last few years and almost everyone has heard about it, especially those who are interested in investing and stock market. You must have at some point or the other, either heard your colleagues talking about it or someone might have recommended SIP as an investment vehicle to you. So let’s take a look at what SIP actually is.

What is a Systematic Investment Plan (SIP)?

Systematic Investment Plan (SIP) is an investment method offered by mutual funds in which an individual can invest a fixed amount in a mutual fund scheme at regular intervals – such as once a month or once in a quarter, instead of making a lump sum investment. The installment amount can be as low as Rs 500 per month and is similar to a recurring deposit. This is convenient as you can give standing instructions to your bank to debit the amount every month.

In common and simple terms, it can be said that you can use SIP to automate your financial habit, so that you will get good financial results in the long term.

Systematic Investment Plan(SIP) working?

Systematic investment plans are a flexible and easy to use. Investments in a mutual fund scheme are made with monthly automatic debits from your bank account. The number of units you receive each day is based on the current market rate (NAV or Net Asset Value). Every time you invest money the scheme buys additional units at the market rate. As a result units are purchased at different rates, so investors benefit from the power of compound interest and rupee-cost averaging.

Let us understand this with an example

Suppose you want to invest in a mutual fund and you have kept aside an amount of Rs 1 lakh with you to invest in it. Now there are two ways in which you can make this investment.

Or you can make a lump sum payment of Rs 1 lakh in mutual funds, also known as a lump sum investment. Or you can choose to invest through Systematic Investment Plan or SIP.

You have to start a SIP of a fixed amount to invest. Suppose Rs 100. Then Rs 100 will be deducted from your account and auto credited to the mutual fund you want to invest in on a fixed date every month. This will continue for a period of time.

When to invest in SIP?

It is very important for the investor to choose a scheme that suits his long-term goals. Therefore, there is no suitable time limit within which an investor should start a SIP investment plan, SIP investment can be started anytime, the sooner the better.

Types of Systematic Investment Plans-

• Regular SIP –

Regular SIP allows to invest a fixed amount periodically. A regular SIP does not allow a change in investment amount during the investment period.

• Top-up SIP – 

The Top-up SIP allows you to increase your SIP amount periodically giving you the flexibility to invest higher when you have a higher income or available amount to be invested.

This also helps in making the most out of the investments by investing in the best and high-performing funds at regular intervals. The power of compounding will allow them to create their investment corpus faster.

• Flexible SIP –

Flexible SIP allow their investors to adjust the amount of their investments. An investor can increase or decrease the amount to be invested as per his own cash flow needs or preferences.

• Perpetual SIP –

A perpetual SIP Plan allows you to carry on the investments without an end to the mandate date.

Generally, an SIP carries an end date after 1 Year, 3 Years or 5 years of investment. The investor can hence withdraw the amount invested whenever he wishes or as per his financial goals.

Key features of Systematic Investment Plan-

• Investors can invest and take out the money anytime in SIP.
• There is no fixed tenure for running SIP. Even if you choose a SIP tenure, you can stop it at any time or continue it even after it expires.
• The SIP can be withdrawn either completely or partially during the tenure.
• Investment amount in SIP can be increased or decreased.
• A SIP is a method of investing in mutual funds, so its risk profile is the same as the asset you invest in.
• Mutual fund investors earning regular monthly income can benefit greatly from SIPs.

The Benefits Of Investing In SIP-

Benefits of investing in SIP over Lumpsum are listed below :

• Small investment size-   You can invest as little as Rs. 500 per month with most mutual fund schemes that offer SIPs. Compared with other investment options, this is a relatively small investment size.

• Flexibility is a key feature of SIPs. Your savings can be increased in the future or you can start a new SIP in the same mutual fund scheme or another of your choice if your savings increase.

• It is not necessary to invest in SIPs every month for a fixed period of time. You can skip SIP payments for a few months if you are not able to invest adequate funds in an emergency.

• Disciplined Investor-  If you do not possess superior financial knowledge about the way the market moves. You become a disciplined investor by investing in SIPs, as SIPs adds more discipline to your investment journey by their very nature.

• Rupee Cost Averaging Factor- You don’t have to time the markets in any way with SIPs. No matter what the market conditions are, you keep investing a fixed amount each month. If the market is down, you will receive more fund units, and if it is high, you will receive fewer units.