Understanding Systematic Investment Plan(SIP)

 

New investors can mistake mutual funds and SIPs for one another. SIPs are only one way to invest in mutual funds, but; lump sums are also an option. Investments now play an essential role in financial planning. Savings were the only activity at first, but investing has since become necessary to increase returns. 

One such investment strategy that many investors have chosen is SIP. The method of investing a set amount of money in mutual funds regularly is known as a systematic investment plan, or SIP. SIPs let you make weekly, quarterly, or monthly investments. 

What is SIP?

The Systematic Investment Plan (SIP) is an organized approach to making investments. Its many benefits enable investors to build up money by regularly making fixed-sum investments at specified times. Quarterly, monthly, or weekly periods are possible. Investors can also choose auto-debit to automate withdrawals from their bank accounts for investments in the selected scheme.

SIPs give investors an adaptable method to make investments. Depending on their financial situation, they might change the amount they invest. Due to this flexibility, investors have amazing freedom over how much they contribute to their SIP.

How does SIP Work?

A SIP invests in the mutual fund of your choice via an automatic deduction from your bank account, much like a recurring investment. You receive a specified number of units of the mutual fund scheme in which you have invested after making the payment. Your investment amount is determined by the Net Asset Value (NAV) of that specific scheme on that specific day.

You get assigned additional scheme units with each installment of a SIP mutual fund. You may purchase more units during a down market and fewer units during a boom according to the scheme's constantly changing net asset value (NAV).

• Power of Compounding

The compounding ability of SIP mutual funds is one extremely helpful feature. As compared to simple interest, which computes interest based only on the principal, compound interest reinvests earnings, resulting in continuous rapid growth.

Let's use an example to better understand it. Investing Rs 100 for five years at a 10% interest rate will earn Rs 150 in simple interest but Rs 161 in compound interest. The difference becomes much more visible after 20 years. 

Through early and consistent SIP investment starts, participants can take advantage of compound interest to build significant wealth for their long-term financial goals.

In SIP mutual funds, compounding has several advantages. It increases the growth of your money by earning income on both your initial investment and the returns you have already gained. Because of this constant rise over time, you may build up wealth more quickly and achieve your financial objectives.

• Rupee Cost Averaging

Purchasing more units during a down market and fewer units during an expanding market is another benefit of the SIP. Here demonstrates rupee cost averaging. It looks at two types of mutual fund investments: one made by a lump sum and the other through a systematic investment plan.

Over six months, the investment made through SIP yields greater units—300 units—at Rs 12. Similar to this, a lump sum investment only yields 240 units at a maximum cost of Rs 15 per unit.

Features of SIP

A flexible investment approach called the Systematic Investment Plan (SIP) enables people to purchase mutual funds that have many beneficial qualities.

1. Small investment plan: 

Despite large lumpsum investments, SIPs are a great choice for people who want to start investing with a relatively small amount. With SIP, you can start with as little as Rs 500 per month and increase it gradually as your income rises.

2. Regular investment intervals: 

By giving you the option to select from a variety of investment intervals, including weekly, monthly, or quarterly, SIP encourages a disciplined approach to saving and investing. Establishing a systematic investment habit and facilitating rupee cost averaging are two benefits of this regular investment pattern.

3. Fixed investment amount: 

The initial amount invested in a SIP is fixed. It's important to remember that while you can utilize the "SIP Top-up" feature to make more payments, you are unable to lower the SIP amount without canceling the current plan and starting a new one.

4. Investment pause option: 

SIP mutual funds provide you the option to put your investments on hold for a period of one to three months. This flexibility can be very helpful during difficult times financially. When the pause period ends, the SIP automatically resumes. It is advisable to check if this pause provision is available by speaking with your mutual fund provider.

5. Adjustable SIP intervals: 

With SIP, you may quickly shift between investment intervals of one week, one month, or one quarter. You have the option to start this modification online or by sending a written request to the mutual fund provider of your choice.

6. No upper investment limit: 

Although the minimum SIP contribution is Rs 500, there is no strict upper limit. This enables investors to use the SIP to invest any amount they wish. Throughout the plan's duration, your SIP investment must remain consistent.

7. Cancellation section: 

SIP gives users the option to end the subscription whenever they choose. You have two options for canceling: either online or by sending the SIP cancellation form to the appropriate mutual fund provider.

Benefits of SIP

For individuals looking to invest in mutual funds in a systematic and organized way, purchasing a Systematic Investment Plan (SIP) is a smart decision with many advantages.

• Investment discipline: 

By enforcing monthly contributions of a fixed amount, SIP encourages investment discipline. This strategy encourages people to stay away from trying to forecast the unpredictable nature of the market.

• Cost-effectiveness: 

Because SIP has a low minimum investment requirement, it opens up mutual fund investing to a wide range of investors. Furthermore, dividing the investment into more manageable, regular portions reduces the impact of market swings.

• Compounding power: 

SIP makes use of the compounding power. Frequent contributions over a longer period enable the generated profits as well as the initial investment to increase in value.

• Flexibility: 

SIP mutual funds give investors the freedom to start, stop, raise, or lower their investments, allowing them to adjust their plans to suit changing goals and conditions.

• Diversification: 

Since mutual funds generally invest in a variety of securities, including stocks, bonds, and other instruments, SIP provides access to a broad portfolio of assets. By efficiently spreading out investment risk, this diversification lowers sensitivity to fluctuations in the market.

Types of SIP

Through consistent investments over time, a systematic investment plan (SIP) offers investors an organized approach that frequently benefits in building up wealth. Let's explore the several kinds of SIPs that have been created to take investors' varied goals and preferences into account.

1) Fixed SIP: By demonstrating their dedication and consistently devoting a certain, specified amount, investors form an effective saving and investing habit.

2) Flexible SIP: Individuals who participate in this type of plan have the option of being flexible with the amount they invest in each installment. They can arrange their compensation based on their financial status and specified spending targets.

3) Permanent SIP: Investors select this kind of investment with no expiration date specified or information lacking. They can keep making their investment until they decide to stop.

4) Trigger SIP: Depending on the state of the market, investors designate a few trigger points, and when those criteria are met, the investment will immediately start.

5) Top-Up SIP: This feature enables investors to gradually increase their investment amount by allowing them to do so regularly.

6) Step-Up SIP: In this investment plan, investors make frequent, systematic increases to their initial contribution amount. The higher investment is decided after taking into account their expanding budgets and expansion objectives.

7) Calculating averages SIP: By changing the investment according to its current value, investors achieve a balance in the process of building up wealth through investments.

8) Multiple SIP: This improves profile management and risk management by allowing investors to have diverse investment portfolios and invest in various schemes at the same time under an SIP requirement.

When to Invest in SIP

You can begin investing in SIP at the following time:

1. The advantage of being young

Investing in SIPs in your 20s and 30s allows you to take advantage of compound interest, which can lead to long-term growth. You have plenty of time to build significant wealth for your future needs.

2. Start of Adulthood

Start SIP while you're in your 40s or 50s to achieve your financial objectives or ensure a happy retirement. Even though disciplined investment takes longer to compound, it can produce significant results.

3. Constant Revenue

Before starting a SIP, make sure you have a regular flow of income so you can easily make contributions. Examine your financial status to make sure you have extra money after all the bills for relaxed investing.

4. Beginning of the Month: 

To encourage financial discipline and prevent delaying investments, start SIP at the beginning of each month. By routinely making your investments early, you can potentially lower your overall investment costs by utilizing Rupee Cost Averaging.

5. Particular Events

Upon receiving a lump sum payment, such as a bonus or transmission, invest in SIP to make the most of your money. Start a SIP to remember milestones in your life, such as anniversaries or births, and experience significant financial development.

6. Specific Financial Objectives

Establish SIPs for certain objectives like retirement planning, buying a house, funding a trip, or supporting schooling. Ensure that SIP contributions are in line with specific and devoted savings goals.

Things to Consider Before Starting SIP

Before starting SIP, it's beneficial to think about the following:

Budgetary Objectives

Establish your investing goals to match your SIPs with certain objectives, such as retirement preparation, wealth growth, or financing for education.

Capacity for Risk

Determine the right asset allocation between debt, equity, and hybrid SIPs by evaluating your capacity for risk.

Horizon of Investment

Establish your investing horizon while taking your long-term financial goals and immediate cash requirements into account.

Fund Selection

Examine and choose SIP mutual funds according to criteria like consistency, fund manager experience, fee ratio, and performance of the fund.

Analyzing Costs

Make sure that the overall cost of SIPs, including taxes, exit loads, and fund administration fees, fits into your investment plan and budget.

SIP Total

Based on your financial situation, figure out the ideal amount, taking into account your income, expenses, and existing Investments.

Regular Examination

As you work toward your financial objectives, commit to tracking the success of your SIP and balancing your portfolio as necessary.

Conclusion

Only when an individual begins investing early and keeps their money in the market for a longer amount of time can the SIP procedure as a whole be advantageous. Compounding offers the advantage of minimal initial investment requirements that can be increased over time. 

You may compute the returns on your systematic investment with the aid of the SIP calculator. Start using SIP to invest in the fund of your choice to achieve your long-aspired financial objectives.