SIP

A Systematic Investment Plan or SIP is an option by which you can invest in mutual funds in a regular manner. This follows the simple principle of regular investments for a fixed amount that can help you accumulate wealth over a specific period.

 

The SIP investment method is ideal for those looking to invest a small amount systematically rather than investing a huge lump sum. While SIPs help you generate potential returns over time, it inculcates the habit of financial discipline as well. 

While there are different SIP schemes available in the market, you need to invest in one that best aligns with your financial goals. To help you understand a few essential attributes of the systematic investment plan, here is a brief overview.

When learning about SIPs, it helps to know the actual investment, which is the mutual fund. Simply put, this is a pool of funds managed by professional fund managers, who buy and sell securities based on the objectives of a specific investment scheme.

 

Fund houses collect your and other investors’ funds and invest across a diverse range of assets ranging across corporate bonds, government securities, equity, debt, etc. However, the money is invested based on the nature of the scheme.

 

For instance, if it is a small-cap fund, it will primarily invest in stocks of companies having small market capitalisation. Mutual funds allow you to invest via SIPs or make a lump sum payment.

 

When you opt for a lump sum investment, it means you need to make the entire payment in a single go at the beginning of your investment cycle. However, when you opt for a SIP in a mutual fund, you need to pay a smaller amount regularly over the investment timeline.

 

All you have to do is instruct your bank to debit a fixed sum every month on the same date from your account. This amount is transferred to the respective mutual fund. This is comparatively a hassle-free and easy approach, which helps you invest in any type of mutual fund without the need to visit a fund house personally. 

Once you have complied with all KYC requirements, you may invest via SIP from the comfort of your home as well. You can also use the SIP Calculator to find out how much you will be required to invest to get an idea of the returns your investment would earn over time.

As mentioned, the bank debits a specific amount that is invested in a mutual fund you have purchased. You need to provide an ECS mandate to your bank authorising the institution to debit a specific amount from your account. 

 

Based on the NAV or Net Asset Value of your mutual fund scheme, you are allocated specific units. As you continue making these monthly investments, these units keep accumulating in the account based on the prevailing market conditions. 

 

After every month, a larger amount is reinvested, helping you earn potential returns on your investment. It is entirely your choice whether or not you plan to receive your returns periodically or at the maturity of the scheme. 

Understanding the working can help you choose the best SIP mutual fund option available in the market, enabling you to generate handsome returns in the long term.

Now that you are familiar with the SIP full form and how it works, here are a few different SIP types you need to understand. 

• Flexible SIPs

This provides the flexibility to invest in an amount of your choice. In addition, you are also allowed to increase or decrease the SIP amount depending on your finances.

• Top-up SIPs

When you opt for this type of SIP, you have the added advantage of increasing your investment amount regularly. This simply means you can invest a larger sum when your finances allow or when you have additional idle funds in your account.

• Perpetual SIPs

As the name suggests, you can invest in this type of scheme when you want to avoid an end date. Normally, SIPs have maturity dates ranging across 1, 3 or 5 years. This plan allows an investor to withdraw the amount invested whenever required, depending on the financial goals.

• Trigger SIPs

As a seasoned investor, you can invest in this type of SIP that enables you to set a trigger, helping you switch or redeem from a plan instantly. This is an ideal option when the market volatility increases.

SIPs offer a diverse range of benefits across varying risk profiles and age groups. Check out a few of them outlined below:

• Convenience of Investment

Investing in SIPs does not require large sums; instead, a small fixed amount of ₹500 is sufficient. This helps you invest in a phased and disciplined manner. Some funds also allow you to invest an amount as low as ₹100. 

 

Also, regular investments at fixed intervals help you analyse the market volatility and make the most of it. This encourages financial discipline, and there is no need for extensive market research if you are planning to start a SIP investment. 

• Compounding Power

A systematic investment plan helps compound your returns over a specific investment horizon. Your earnings are being reinvested into the scheme, helping you generate potential returns. 

 

Here, the power of compounding comes into play, and you can earn a significant sum by opting for this investment mode.

• Rupee Cost Averaging

SIPs also offer the unique advantage of rupee cost averaging that enables you to take advantage of market volatility. As you invest a fixed amount, you have the benefit of buying higher units when the market seems bearish.

 

Similarly, you get a reduced number of units when the cost is higher, which lowers your average unit cost.

• Simple Investment Process

You can easily initiate a SIP investment from the convenience of your home. You can give a standing instruction to your bank to deduct your SIP amount every month. This amount is then transferred to your mutual fund.

 

While SIP investments are a great way to accumulate wealth over time, you need to choose the right mutual fund with due diligence. Understand your financial goals and scout the market properly before selecting a fund house. 

 

Also, remember that the longer the SIP, the better your returns. Consider these factors when planning to invest in systematic investment plans.