What is Systematic Investment Plan (SIP)?

SIP stands for Systematic Investment Plan. It is an investment strategy in which a fixed amount of money is deposited at regular intervals in a mutual fund scheme to generate returns over a period of time. You can generate a comprehensive corpus by investing at regular intervals small sum of money through SIPs over a long term to achieve your financial goals.

It is an automatic investment route, so after the SIP mandate is set up, the fixed amount of money is automatically debited from your account and credited to your mutual fund account on a predetermined date and in a selected fund scheme. If you are thinking, 'what is SIP,' you have come to the right place. In this article, we will see what is SIP and how it works, among others.

Also Read – What is Mutual Fund?

What is SIP?

Systematic Investment Plan (SIP) is a method that allows investors to contribute a fixed amount in mutual funds at regular periodic intervals like weekly, monthly, or quarterly instead of a lump sum capital investment. Investors can invest as less as INR 100 in each SIP installment. SIPs are similar to recurring deposits and offer an automated and hassle-free investment option. Mutual fund investors in India often choose SIPs as it offers a disciplined investment approach. Additionally, it is an excellent option for long-term investments that emphasizes the importance of consistent and early contributions to create wealth. “Start Early, Invest Regularly” is the best way to earn maximum returns over the long-term.

How does Systematic Investment Plan work?

A Systematic Investment Plan (SIP) allows investors to invest a fixed amount of money at regular intervals. The amount can be weekly, monthly, or quarterly. The idea behind SIPs is that it helps investors to invest in a disciplined manner and to take advantage of the power of compounding. SIP Mutual Fund facility was created with investors comfort in mind. You can choose the plan, the amount you want to invest, the frequency, and the dates you want to invest, among other options.

When an investor chooses to invest in a SIP, they will receive units of the mutual fund at a predetermined rate. The price at which these units are purchased will depend on the prevailing NAV (Net Asset Value) of the fund. For example, if the NAV of a fund is Rs. 10 and the SIP amount is Rs. 500, then the investor will receive 50 units of the mutual fund.

Over time, as the market fluctuates, the NAV of the mutual fund will also vary. Therefore, the number of units that the investor will receive for the same SIP amount will also vary.

At the end of each SIP period, the investor will receive a statement from the mutual fund, which will contain details about the amount invested, the number of units purchased, and the current NAV of the fund.

When you set up a SIP in a mutual fund, you are effectively linking your bank account to the in-vestment account, allowing cash to flow easily from your bank account to the fund you've chosen to invest in via SIP. If you initiate a monthly SIP, it implies that a defined amount from your bank account will be debited and deposited to the fund each month on a specific day. The fund house will convert the fixed payment to fund units at the current unit price of the fund, i.e., (NAV), and will add those units to your mutual fund folio. Also Read – How to Invest in Mutual Funds?

Systematic Investment Plan (SIP) Example

For better understanding, let us explain SIP with an example. Assume that you commence a monthly SIP of INR 10,000 and the current NAV is INR 100. This means you will receive 100 units of the chosen fund.

Based on the NAV, the number of allocated units varies from one month to another, which also impacts the value of your investment. SIPs mitigate the market volatility risks and helps investors to meet their financial goals .

Note – The example shown above is for illustration purposes only.

Types of SIP Plans

Given below are some of the popular types of SIP plans.

1. Top-Up SIP

   This type of SIP allows investors to increase their investment amount in a mutual fund over time. This can be done at regular intervals or as per the investor’s preference.

2. Flexible SIP

   This form of SIP allows investors to vary their investment amount at regular intervals. This is beneficial for investors who want to adjust their investment amount as per their financial situation.

3. Perpetual SIP

   In Perpetual SIP, investors make regular, fixed payments into a particular investment fund over a long period of time. This type of investment plan allows investors to benefit from the power of compounding and take advantage of market fluctuations, as well as to achieve long-term financial goals.
   
   Also Read – Types of Mutual Fund

Benefits of Investing in SIP

Given below are some of the advantages of investing in SIP

1. It helps you start investing early

   You can start investing in mutual funds as soon as you start earning money. You may want to start thinking about your financial objectives to have enough time to fulfill your goals. A SIP (Systematic Investment Plan) helps you in this regard.

2. Low entry cost

   Systematic Investment Plans (SIPs) require a low entry cost, making them ideal for those who are just starting to invest and do not have a large sum of money to invest in one go.

3. Low investment amount

   With a SIP, you can begin investing in mutual funds with as little as Rs 100 . You can gradually increase your monthly SIPs when you know what mutual funds are capable of.

4. Power of Compounding

   The most prominent benefit of investing in mutual funds is the ability to build a larger portfolio through the power of compounding. When you invest in the growth option of mutual funds through SIP, the fund managers reinvest profits from the fund into the same scheme. As a result, your money might earn you additional money. To get the most out of compounding, you must start investing early and stick with it for a long time.

5. Rupee cost averaging

   You can get the benefits of rupee cost averaging out when you invest a particular amount of money at regular intervals for a longer period, irrespective of the market's ups and downs. The cost of investment through SIP gets averaged out as you get more units when the markets are low and lesser units when they are high.

6. Hassle-free

   A SIP is an easy and quick method to start investing. At the predetermined date, the fund house will deduct your SIP investment money from your bank account regularly. You don't have to make a new transaction every month.

7. Flexibility

   SIP provides you with the benefits of flexibility. You can increase the SIP amount when your income rises or pause it when facing financial difficulty and restart your SIP investment later. Such options in SIP allow you to optimize your investment and reach your financial objectives efficiently.

8. Disciplined Savings

   With SIP, you can set up an automated deduction from your bank account each month and invest it in your chosen mutual fund. This helps you to save regularly and without fail, thus helping you to accumulate wealth over a period of time.

9. Professional management

   SIPs are professionally managed, allowing investors to benefit from the expertise of experienced fund managers.

10. Diversification

    By investing in a SIP, investors can spread their money across a range of funds, thus diversifying their portfolio and reducing their risk.

Why is SIP a good Investment Option?

There are two features of SIP that make it a good investment option.

Power of Compounding

Simple interest provides returns only on the capital invested. In comparison, compound interest provides returns on the interest earned on the base investment. In other words, the investment offers exponential returns. For better understanding, assume you invest INR 10,000 for 5 years at an interest rate of 7%. The simple interest earned during this period is INR 3,500. However, compound interest will earn you INR 4,025, which is 15% more interest when compared to simple interest. The difference between simple and compound interest is significantly higher when you invest for a longer period.

Rupee Cost Averaging

Another benefit of SIP is that your investment allows you to buy more units when the markets are low and vice versa. Let us understand this with an example.

Over six months, SIP provides higher number of units (578.43) at an average price of INR 10.37. In comparison, lump sum investment of INR 6000 provides 545.45 units at the initial NAV of INR 11 .

Note - SIP does not assure a profit or guarantee protection against loss in a declining market. The illustration mentioned above is not based on any judgements of the future return of the debt and equity markets / sectors or of any individual security and should not be construed as promise on minimum returns and / or safeguard of capital.

Factors to Consider before Investing in Systematic Investment Plan

Given below are some of the key factors that you should be aware of before investing in SIP.

1. Your Financial Goals

   Make sure you understand your financial goals and how the SIP can help you reach them. This can include helping you to save for retirement or a child’s education, or simply creating a financial cushion for unexpected expenses.

2. Financial Risk Tolerance

   Investing in SIP comes with some risks. Make sure you understand how much financial risk you are comfortable with.

3. Investment Horizon

   SIP works best when you have a long-term investment horizon. Before investing, consider how long you plan to stay invested in the SIP.

4. Investment Amount

   The amount you invest in SIP should be determined by your financial goals and risk tolerance. Consider how much you can comfortably invest in SIP each month.

5. Tax Implications

   Different types of SIPs have different tax implications. Make sure you understand the tax implications of your particular SIP before investing.

How to Invest in SIP Online?

Given below is the process to know how you can invest in SIP Online.

1. Choose Mutual Fund scheme for SIP

   The first step would be to choose the right mutual fund scheme that suits your needs.

2. Choose a suitable mutual fund platform

   Choose a mutual fund platform that offers investment in SIPs.

3. Open an account

   Open an account with that mutual fund platform

4. Set up an SIP

   Set up an SIP with the mutual fund platform. This may involve entering information like your bank account details, the amount you want to invest, and the date you want your SIP to start.

5. Make the payment

   Make the payment for the SIP. This can usually be done via Net banking or UPI

6. Track your SIP

   Track your SIP regularly. This will allow you to monitor your investments and view performance reports.

Who Should Invest in SIP?

SIP is suitable for investors who want to adopt a disciplined and systematic investment habit, which is appropriate for beginners and seasoned individuals. Beginners can start their investment journey with a modest amount and gradually increase the amount as they gain more experience and understanding. Seasoned investors benefit by allowing them to navigate through market fluctuations and choose an investment avenue that suits their financial goals and investment horizons.

How to choose right SIP to invest in India?

This requires evaluating several factors, which are as below:

• Duration

  Minimum investment duration should be five years to gauge the fund performance across market fluctuations and align with long-term wealth creation.

• Performance

  Evaluate the reputation and performance of the asset management company to determine the fund managers’ capabilities of navigating through different market conditions

• Asset under management (AUM)

  Check the total AUM, which is more important for beginners as higher AUM offers assurance of a well-managed and substantial corpus.

• Investment goals

  SIPs must align with specific financial goals and investors must choose funds that suit their risk appetite and objectives.

• Diversification

  You must invest in multiple schemes to ensure diversification, which mitigates the portfolio risk and maximizes the potential returns.

• Regular monitoring

  Periodic review is important to make the necessary adjustments to align your investments with changing goals and market conditions

Why Should I Invest in SIP?

Assume that you are a 30-year male with a wife and daughter. Your goals over the next two decades include buying a home, purchasing a car, and your daughter’s wedding. Currently, your investments are primarily in bonds and on evaluating the same, you find that your savings may potentially be inadequate to meet your goals. The two primary reasons for this include:

Inflation

The returns offered by bonds are often lower than the inflation rate. Over a period, this erodes the purchasing power of money and your savings will have a lower real value than expected

Safety

You understand that equity investments may yield higher returns but carry greater risks. Therefore, you prefer a safer investment option like bonds to assure capital preservation The question now is how you can achieve your financial goals without taking a higher risk? The answer is by opting for a Systematic Investment Plan.

This approach offers a balanced investment method that allows you to benefit from the SIP returns while mitigating investment risk. SIPs offer an opportunity to earn higher returns (when compared to bonds) through equity funds while inculcating a disciplined and systematic investment approach. SIPs mitigate the risk of market fluctuations over the longer period, which makes it an excellent choice for investors who prioritize financial security.

Conclusion

Investing in mutual funds through SIP will can help create wealth for you and your family over a period of time. Choose the mutual fund scheme where you want to start your SIP per your risk tolerance and investment duration.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.