What is Systematic Investment Plan (SIP)



Thanks to demonetisation, the popularity of SIP Investment has risen like never before. However, a few investors are still confused about SIP. Let us help you clear that confusion once and for all. We will start with the basics.

What is SIP?

SIP is an abbreviation for Systematic Investment Plan and is one of the best ways to invest in mutual funds. It is a planned investment plan in which an investor can invest at regular intervals such as weekly, quarterly or monthly basis, according to convenience.

You can speak to an expert and invest a small amount of Rs.500 in the beginning to understand how SIP works. Later, you can opt for a better scheme and enjoy the benefits.

Interestingly, this disciplined approach of not investing lump sum will help you hedge the investment against inflation.

Why should you invest in SIP?

Firstly, it helps you be financially disciplined and secondly it allows you to invest without worrying about the market ups-and- downs.

For instance, if you decide to invest in mutual funds every month, you will firstly need to have time to get it done. Once you get the time, you will probably start analyzing the market conditions and decide to invest accordingly or even postpone your investment plans and wait for the market to improve. SIP helps put an end to all your dilemmas. All you need to do is, invest in a regular scheme and sit back.

How does SIP work?

It works almost like mutual funds and helps your money grow over a period of time. It works on two major mechanisms: Compounding and Rupee cost averaging.

  1. Compounding: SIP follows the compounding method in which the interest earned is made a part of your base capital to calculate the subsequent interest. As the tenure increases, this method leads to an exponential growth of your money

  2. Rupee Cost Averaging: This strategy is primarily the reason for making SIP more lucrative. SIP allows you to invest a pre-decided amount at regular intervals . Once you start investing regularly irrespective of the market conditions, you can avail more units when the market is low and fewer units when the market is high. This averages out the cost.

Have a look at the table below to understand it better.


How to get started with SIP Investment?

Follow these four steps if you wish to get started with SIP Investment

  • Set an attainable financial goal

  • Decide an investment tenure

  • Decide an amount to invest

  • Consult a financial advisor for advice

Next, you can pay the money through post-dated cheques or opt for the Electronic Clearing Service (ECS) in which you can instruct the bank to auto debit the money. The amount you invest in SIP is then invested in mutual fund which helps grow your money. You can track your profile by logging onto the company’s website.

How to choose a SIP Plans?

There are several mutual funds to choose from. However, keep in mind the following aspects while choosing the SIP Plans;

  • The duration of SIP is important from return, tax and risk point. Always check the performance of the SIP mutual fund for at least for five years.

  • Make it a point to check the reputation of the SIP fund house. It will help you understand how they were able survive the market conditions without letting their investors know about it.

  • Choose a fund having Rs.500 crore asset size to be on the safe side. Try and avoid SIP funds below this benchmark.

What are the different types of SIP Plans for Investment?

There are four major types of SIP investment plans available in the market.

  1. Top-up: Top-up SIP plan allows investors to increase the SIP amount. This plan offers investors the advantage of investing in high-performing mutual fund schemes in the market. Also, as it allows you to increase your SIP amount, you can accumulate a huge corpus.

  2. Flexible: Flexible SIP plan allows you to increase or decrease your SIP amount according to your cash flow. You can decrease the amount in case of any cash crisis and even skip paying a few instalments of SIP till your financial condition improves. On the other hand, you may increase you SIP amount in case you make big gains financially. The plan provides you with an option to change the SIP investment seven days before the SIP date of that particular month.

  3. Perpetual SIP: Perpetual SIP plan allows investors to invest in a mutual fund scheme of their choice every month for a pre-determined tenure. Investors can leave the end date column blank in the SIP mandate. This plan allows investors to redeem the fund at the time of closing and achieve their financial goal.

  4. Trigger SIP: Trigger SIP plan is suitable for people who have a thorough understanding of the financial market and its volatility. You can start this plan by setting an event, an index, NAV or a specific date. However, it is advisable to stay away from this plan as it incites speculations.

What are the benefits of SIP Investment Plans?

  1. Convenient and easy to monitor: You can invest in best SIP plans by simply filling up an application form without taking out extra time from your busy schedule. You can avail the auto debit facility or submit post-dated cheques and relax. In order to monitor the progress of your investment you can check your periodic accounts statement.

  2. Discipline approach: Most people believe that investing in stocks is the best option to become wealthy. However, it is not so. While investing in stocks one must have sound knowledge about the market, ability to analyze technically and time. Also, it could involve a lot of risk. Through online SIP investment, you can decide how much to invest at regular intervals and then not worry too much about it. Additionally, it also does not require thorough understanding of the market.

  3. Compounding: As SIP offers compounded returns over the years, it helps accumulate a substantial amount of wealth. All you need to do is invest a small amount regularly over a period of few years to reap the benefits.

  4. Advantage of Rupee Cost Averaging: As explained above, it is an effective strategy that eliminates the need to time the market. You can invest in SIP as soon as you start earning to enjoy its maximum benefits.

  5. Start early: One can start investing in SIP at an early age. You can invest Rs. 1000 on a monthly basis till your retirement age of 60 years.This will help create more wealth according to the rate of return on investment. The later in life you start investing in SIP, you will realize the loss you may have incurred.

  6. Emergency Fund: You can withdraw SIP easily to act as an emergency fund during medical crisis or job loss.

A few tips to consider while investing in SIP

  • Start early to enjoy maximum benefits

  • Be patient, be consistent

  • Avoid skipping your regular payment

Conclusion

SIP Investment is a great way to invest that has almost negligible risks. You can customize your SIP investment Plans and relax. However, as SIP scheme is designed to instill financial discipline, it is recommended that you start SIP for a fixed tenure. Think about it.

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