What is Systematic Investment Plan (SIP) ?
A Systematic Investment Plan or SIP is a smart and hassle free mode for investing money in mutual funds. SIP allows you to invest a certain pre-determined amount at a regular interval (weekly, monthly, quarterly, etc.). A SIP is a planned approach towards investments and helps you inculcate the habit of saving and building wealth for the future.
How does it work?
A SIP is a flexible and easy investment plan. Your money is auto-debited from your bank account and invested into a specific mutual fund scheme. You are allocated certain number of units based on the ongoing market rate (called NAV or net asset value) for the day.
Every time you invest money, additional units of the scheme are purchased at the market rate and added to your account. Hence, units are bought at different rates and investors benefit from Rupee-Cost Averaging and the Power of Compounding.
Check out – SIP Performance
With volatile markets, most investors remain skeptical about the best time to invest and try to ‘time’ their entry into the market. Rupee-cost averaging allows you to opt out of the guessing game. Since you are a regular investor, your money fetches more units when the price is low and lesser when the price is high. During volatile period, it may allow you to achieve a lower average cost per unit.
Power of Compounding
Albert Einstein once said,
“Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.”
The rule for compounding is simple – the sooner you start investing, the more time your money has to grow.
If you started investing Rs. 10000 a month on your 40th birthday, in 20 year time you would have put aside Rs. 24 lakhs. If that investment grew by an average of 7% a year, it would be worth Rs. 52.4 lakhs when you reach 60.
However, if you started investing 10 years earlier, your Rs. 10000 each month would add up to Rs. 36 lakh over 30 years. Assuming the same average annual growth of 7%, you would have Rs. 1.22 Cr on your 60th birthday – more than double the amount you would have received if you had started ten years later!
Other Benefits of Systematic Investment Plans
· Disciplined Saving – Discipline is the key to successful investments. When you invest through SIP, you commit yourself to save regularly. Every investment is a step towards attaining your financial objectives.
· Flexibility – While it is advisable to continue SIP investments with a long-term perspective, there is no compulsion. Investors can discontinue the plan at any time. One can also increase/ decrease the amount being invested.
· Long-Term Gains – Due to rupee-cost averaging and the power of compounding SIPs have the potential to deliver attractive returns over a long investment horizon.
· Convenience – SIP is a hassle-free mode of investment. You can issue a standing instruction to your bank to facilitate auto-debits from your bank account.
SIPs have proved to be an ideal mode of investment for retail investors who do not have the resources to pursue active investments.
Benefits of SIPs
- No big investment: You can invest small amounts of money in SIPs at regular intervals — even as low as 500/month. The minimum amount of lump sum investment in a Mutual Fund is typically Rs. 5,000.
- No worries about market timing: SIP investments are a good option for eliminating the worries of entering the market at the right time. You don’t have to worry about the high and low of market. Staying invested for a long time using SIPs can even-out the volatility of the stock market.
- SIPs have rupee-cost averaging effect: SIPs work much better than lump sum investing or one-time investing. You will get more units when the price is lower and fewer units when the price is higher. It averages out your risks in the market.
- SIPs have the power of compounding: The money that gets invested regularly and systematically through SIPs is compounded over time through regular investments — since a SIP can potentially allow you to start investing early. The quicker you start, the more compounding impact you’ll see.
- Convenience: It is fairly convenient to start a SIP investment. Start investing after choosing a mutual fund of your choice. You can track the day to day performance of your investments and act accordingly. You also have the option of skipping a SIP if you have insufficient funds.
- Future goal planning: We’ve all got future goals — buying a house, a dream car, children’s education, retirement etc. If you don’t have a lot of knowledge about the stock market, SIPs can be the best alternative for all your future goals.
- Disciplined investing: SIP investments encourage discipline and regularity in investments. They are a time tested method for disciplined investing
Types of SIPs
Some types of SIPs are given below.
- Top-up SIP allows you to increase the SIP investment amount at regular intervals. This will be an advantage over normal SIP investments as you can increase your investment when a Mutual Fund scheme is performing well, or when there’s a bull run. You could even increase your SIP investment when your salary increases.
- Flexible SIP allows you to increase or decrease the SIP amount as per your requirement. For example, you can cancel some SIP installments in times when you’re not in a position to make an investment. You can even re-invest the whole amount or partial amount of your bonus received from a Mutual Fund scheme.
- Perpetual SIP: Normally, you are expected to select a fixed period for your investment — say, 1 year, 3 years, 5 years and so on. But if you do not provide any fixed date for your investment, your investment will be deemed as a perpetual SIP. This leaves you an option to redeem your investments fully or partially as per your requirement or financial goals. However, it is better to start a SIP for a fixed period as it brings financial discipline in your life.
- A Trigger SIP is usually preferred by investors with sound knowledge of the financial markets. A Trigger SIP allows you to set either a particular date, or an event to start this SIP — such as the index level or a NAV threshold. But this type of SIP is not preferable for investors who have less knowledge about the financial market. It also encourages speculation.
There are researches are going on and according to requirement of investors, many products and features are being launched in the market and many are in pipeline.
What is Net Asset Value (NAV)?
NAV is the total asset value (net of expenses) per unit of the fund and is calculated by the Asset Management Company (AMC) at the end of every business day. Net asset value on a particular date reflects the realizable value that the investor will get for each unit that he his holding if the scheme is liquidated on that date.
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. Before making any investments, the readers are advised to seek independent professional advice, verify the contents in order to arrive at an informed investment decision.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.