What is an SIP?
Systematic Investment Plan (SIP) is a hassle-free method of investment that helps you achieve your financial goals by investing small sums of money on a periodic basis. It allows you to smartly invest in a Mutual Fund by making smaller periodic investments (monthly or quarterly) in place of a heavy one-time investment. It is a great alternative to long term commitments like PPF or Insurance plans. Starting early and investing regularly is advisable to minimize the investment amount needed to achieve your goals.
Systematic Investment Plan (SIP) is a facility offered by the mutual funds to investors. Here one can opt to invest in mutual fund SIP on regular basis by registering a standing instruction, wherein mandated amount by the investor is deducted automatically from the bank account and invested in the mutual fund scheme as specified in the registration process.
Benefits of SIP
Here are five key SIP benefits:
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Financial Discipline
SIP enables automation of mutual fund investments, whereby the investments are made at periodic intervals, like daily, weekly, monthly, quarterly etc. As such, it allows the investors to inculcate a sense of financial discipline into their lives, as the savings get converted into investments at pre-specified intervals without any manual intervention.
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Convenience of Investing
SIP investment is convenient for the investors as they need to undertake a registration process only once. After that, the SIP amount is automatically deducted from the bank account and invested in mutual funds. The investors can also pre-set the number of SIP investments, like 12, 24, 36, 60, perpetual, etc. One can also register a SIP top-up, wherein the SIP amount increases gradually, which may sync with the increasing income over time.
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Rupee Cost Averaging
SIP helps the investors mitigate the risk of timing the market, as the investments are made at different market levels over longer period time would help in averaging the investments by adding invests irrespective of markets being expensive or cheap. As such, the investment cost gets averaged over time. This concept is called Rupee Cost Averaging, which means that the costs are averaged over time with equal investment amounts.
For example, if an investor has invested Rs. 10,000 at NAV of Rs. 10 in a month, they are allotted 1000 units. In the next month, the NAV increases to Rs. 12.5, they are allotted 800 units. So, while the number of units allotted in the next month at higher valuations is less, the overall portfolio valuation increases for the investor, as the portfolio is now valued at Rs. 22,500 for 1800 units as against the investment cost of Rs. 20,000 with an average price of Rs. 11.11 per unit.
Assuming the NAV next month lowers to Rs. 12 per unit, the number of units allotted to the investor for investment amount of Rs. 10,000 are 833.33 units. The number of units allocated increases at lower valuations, which can benefit the investors later when the valuations rebound.
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Eliminates Emotional Bias
When the markets are volatile and particularly when the investment value drops due to fall in market valuation, investors tend to get worried by seeing the notional drop in the valuations and in return may discontinue the investments. This is because the emotions of fear may take the front seat, as the investors prioritize the safety of capital over returns.
However, discontinuing the investments during such a period can harm in achieving the financial goals significantly since, at lower valuations, higher units get allotted for the investors, also lowering the overall average cost of investing. Further, it also takes away the potential benefits of such investments when the markets rebound.
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Enables Wealth Accumulation
One can invest in SIP with an amount as low as Rs. 500 without any upper ceiling. One can enjoy flexibility while registering a SIP in terms of SIP amount and mutual fund scheme. SIP enables wealth accumulation for the investors without any inhibitions of starting with a lower amount.
Further, since SIP ensures consistent investing, a small amount of savings every month can indeed work wonders. Just like tiny drops of water make an ocean, small savings can help accumulate a healthy corpus over time. For example, Rs. 10,000 invested per month in a mutual fund SIP for 30 years can turn into an investment value of Rs. 2.08 crores, assuming 10% annualized returns.
How SIP Works – Understanding SIP Investment
With SIP, your amount to be invested will be periodically auto-debited from your bank account and will be invested into a specific a href="https://www.utimf.com/mutual-fund-schemes/">mutual fund scheme/a>. You will be allocated a particular number of units accordingly, based on the current market rate (net asset value or NAV in short) for the day.
You also have the option to choose from direct and regular plans. Direct plans are bought directly from the mutual fund company, whereas a Regular plan is bought through an intermediary (advisor, broker or distributor)
You can calculate the expected returns on your investment using our easy SIP calculator .
Please read the terms and conditions carefully before investing. Do keep in mind that minimum amounts may differ for each SIP Scheme. Please refer to the SIP Enrolment Form for details.
Read More - What are the different types of SIP in India?
Choosing SIP Investment - Things to keep in mind before starting an SIP
Investment Horizon
Even though SIPs are flexible, it doesn’t mean that the investment horizon can be shortened. It all depends upon your investment goals and the type of funds in the SIP portfolio. SIPs with longer investment horizons generally have better wealth accumulation.
Risk Appetite
Before investing in SIP, it is very important to understand your risk appetite. It will be determined based on various factors - age, liquidity needs, nature of employment, investment horizon and investment goals. Knowing your risk appetite will help you choose the right SIP to match your goals.
Exit Load
In SIP, each installment is taken as a new investment and, hence, you will be charged an exit load on the NAV, if you withdraw your investment within the predefined time.
Volatility
Like all Mutual Funds, SIP is also subject to market risks. However, it is also one of the best vehicles to counter market volatility due to rupee cost averaging and long investment horizons. It is highly advisable to read the offer document carefully before investing.
Read More - How to Start an SIP Online?