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Systematic Investment Plan (SIP)
Stands For Systematic Investment Plan(SIP)
It’s a way to invest in mutual funds by contributing a fixed amount of money at regular intervals. SIPs are a popular way to invest in mutual funds. The fixed amount of money can be as low as Rs. 500. SIPs help build wealth over time by reducing risks and averaging market highs and lows. SIPs can be started with small amounts, making them accessible to a wider range of investors.
Systematic Investment Plan (SIP), is a smart and steady way to invest money in mutual funds. In this investment approach, investors contribute a fixed amount regularly in an investment vehicle like mutual funds. Instead of investing a large amount as lumpsum, this way of investing makes it easy for investors to grow their wealth in the form of regular investments.
You can start with as little as Rs. 100 per month. It is flexible, so you can choose how much you want to invest regularly, whether it’s Rs. 500, Rs. 1000, or more. This method of investing in mutual funds helps you stay disciplined and takes away the stress of timing the market. Over time, this steady form of investment can help you reach your financial goals. It’s like setting up a savings plan where your money works harder for you in the long run. SIP intervals can be weekly, monthly, quarterly, semi-annually, or annually.
Benefits of a SIP
A systematic Investment Plan Offers a host of, Different SIP benefits. here’s a quick Overview of a few of them
. Convenience
Another very important benefit of investing in a mutual fund through a SIP is that it eliminates the need to time the market. A Systematic Investment Plan is designed to work through the different market phases. Therefore, once a Systematic Investment Plan is set up, you won’t have to spend time researching or analysing market movements. This makes a SIP the perfect option for beginner investors who lack an in-depth understanding of the stock market and those who don’t have the time to conduct extensive research.
Flexibility
One of the major advantages of a SIP is that it is very customizable. You get the freedom to choose the amount of investment, the tenure, and the mutual fund. Such a high level of flexibility makes Systematic Investment Plans the perfect investment mode for all kinds of investors irrespective of their risk profile.
Low Investment
Systematic Investment Plans have no entry barriers whatsoever. You can start a SIP in a mutual fund by investing as low as just ₹500 per month. Thanks to such low minimum investment limits, you can easily partake in the wealth-creation process without burning a hole in your wallet. That’s not all. Most SIPs also give you the option to increase the amount of investment over time as well.
Automation
Unlike a lump sum investment, you won’t have to invest manually if you opt for a SIP. Once you’ve set it up, the chosen amount of investment is automatically deducted from the linked bank account and is used to purchase units of the mutual fund of your choice.
Rupee Cost Averaging
When the market is at a high, the SIP purchases fewer mutual fund units and when the market is at a low, the number of units purchased would be higher. As a SIP continues to invest in the mutual fund for a long period, the cost of your investment is reduced significantly through a phenomenon known as rupee cost averaging. Thanks to the lower per-unit cost, the returns that you get are likely to be higher than what you would have experienced had you made a lump-sum investment.
Financial Discipline
Many individuals lack financial discipline, which happens to be a major reason for them not reaching their financial goals. When you start a SIP, you essentially commit to investing a fixed sum of money for a specific period. This tends to automatically bring about the financial discipline required for the wealth creation process.
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Why should I Invest in SIP?
Consider Ram, a 30-year-old accountant, as an example to understand why SIP could be the perfect choice for you.
Ram has significant financial goals for the next two decades, including buying a car, owning a home, and funding his daughter’s wedding. While he currently invests in bonds, projecting his savings forward reveals a potential shortfall in achieving these goals.
This shortfall arises from two key factors:
- Inflation tends to outpace the returns from bonds. Over time, this erodes the purchasing power of his savings, leaving him with less real value than he expected.
- Ram acknowledges that investing in equities can offer higher returns than bonds. However, he prefers a safer approach to investing, opting for bonds.
Now, the question is, how can Ram achieve substantial growth without exposing himself to excessive risk? The answer lies in embracing a Systematic Investment Plan. Investing in SIP provides individuals like Ram with a balanced approach reaping the benefits of the SIP return rate. It allows them to participate in the potential for higher returns through equity instruments while maintaining a disciplined and systematic approach. SIPs mitigate the risks associated with market turbulence by spreading investments over time, making it an ideal choice for those prioritising financial security.
Types of SIP (Systematic Investment Plans)
When considering Systematic Investment Plans (SIPs), there isn’t a universal solution that fits everyone. SIPs come in various forms, each catering to a specific objective, offering the flexibility to tailor your investment strategy to align with your requirements. Some of the types are:
Fixed SIP: The SIP requires you to invest a fixed amount consistently.
Top-up SIP: The SIP requires you to periodically add more to your investments
Flexible SIP: You can adjust your investment amount in this SIP to suit changing circumstances.
Perpetual SIP: Such SIP does not have any end date.
Trigger SIP: You can invest in this SIP based on predetermined market conditions or triggers.
Systematic Withdrawal Plan (SWP): You can receive regular payouts in this SIP by withdrawing from your investments.
Flexible SWP: The amount you pay varies across various instalments.
Systematic Transfer Plan (STP): In this SIP, you can regularly shift funds from one mutual fund to another.