Systematic investment plans are one of the most popular approaches to investing in mutual funds. SIP helps inculcate financial discipline to build future wealth.
Investors can start small and steadily build a corpus through a systematic and planned approach. Upon activating a SIP, a pre-confirmed amount of funds is deducted and transferred from the investor’s bank account periodically to the mutual fund.
What is SIP?
SIP is an acronym for Systematic Investment Plan. It is an investment route generally offered by mutual funds. SIPs are generally for the investors who wish to begin investing but do not know how and where. The Systematic Investment Plans offered by the mutual funds offer various schemes where an individual can easily invest a fixed amount at regular intervals- say once in a quarter, in a month or one can even invest in a lump sum.
In SIPs, one can invest or start with even 500 INR per month. It is quite similar to recurring deposits. Also, you can automate the process by giving instructions to your banks. This way, you will not have to worry about depositing every month, your banks will deduct the amount automatically.
SIPs have been becoming very popular among the Indian Mutual Fund Investors because it helps in investing in a much more disciplined and systematic manner. Here, the investor doesn't have to worry about the timing and volatility of the market.
All in all, the SIP or Systematic Investment Plans offered by mutual funds are one of the best ways to make an entry into the investment world for the long term. SIPs are best when you start them from a young age. In the case of SIP, the sooner the better!
So, if you wish to maximise your end returns, then you need to start early. So, while investing in mutual funds, your mission should be to start investing early to fetch the maximum returns you can.
What Is a SIP Account?
The very first thing that you need while investing in a SIP is a Systematic Investment Plan account.
When you have finally decided to invest in the SIP, the next step is to find out how that investment can be made.
You can invest a fixed amount quarterly, monthly, or weekly or you can invest in a lump sum also. In SIPs, a fixed amount is deducted from the savings of an investor's account and it is then invested in the selected mutual funds.
Moreover, you can either invest on your own or by instructing your bank to do so. It is very significant to make sure to not invest in too many funds at the same time. Ideally, only three to four funds are sufficient for an investor to invest and generate consistent returns.
What Are The Types of SIPs?
Wondering what are the different types of SIPs? C'mon, let's have a look at four main types of SIPs. Here they are:
● Top-Up SIP
As you excel in your career and start earning more and more, then you can use top-up facilities to increase your investments. Under this SIP, you can increase the amount of your SIP periodically. For instance, you can increase your SIP of 2000 per month by Rs.1000 after every six months. That means, after the end of six months your SIP will become Rs. 3000. Further, after six months it will rise to 4000 and so on.
● Perpetual SIP
While starting a perpetual SIP, the end date is not definite. The investments keep on going until and unless you wish to stop them.
● Flexible SIP
These sips offer you the convenience of increasing or decreasing the investment as per your wish or cash flow. However, a fixed amount is decided at the beginning of a SIP but it is flexible enough to get changed. This is much more convenient when you do online SIP.
● Trigger SIP
Trigger SIP is for experienced investors. They can choose SIP through triggers. This SIP lets you set a trigger to automatically switch to another scheme if the market becomes volatile.
Now you have a quick understanding of the different types of SIP. But how SIP works? To know more about it, keep reading further.
How does SIP work?
To be very honest, you do not even have to wonder how SIPs work because you only need to invest a fixed sum of money at regular intervals to generate returns in the future. But for your knowledge, let's understand how SIP works.
With the help of a systematic investment plan, you don't need to bother about how money is being handled. Because SIPs are generally managed by a team of experts, which are known as the fund managers. These are the professionals who have the required knowledge of the market, they invest in different areas after analysing the market.
With that being said, it is always a good option to understand how SIPs work and make your money grow faster.
In a SIP, the units of mutual funds are purchased at predetermined intervals based on their Net asset value or NAV. These units of SIP keep on accumulating till the tenure of your investment. Once you redeem those units, the value of the units is credited to your account.
Moreover, SIPs generally work on two principles i.e., Rupee Cost Averaging and Compounding.
● Rupee Cost Averaging
SIPs can assist you in escaping the volatility of the market. When the markets rise, the investors get lesser units and when the markets fall, then the investors get more units. This way, SIPs minimise your risk and ensure that you purchase the units at a low average cost.
Heard about the power of Compounding? Saving a little sum of money regularly for a long time can have an unbelievable effect on compounding. Let's have a look at this example:
Y begins investing for his 50th birthday at the age of 30.
Assuming the returns of 7% and a monthly investment of Rs.1000. So, the total Investment corpus of that person Y would be 5,28,000.
Z begins investing for his 60th birthday at the age of 20.
Assuming the returns of 7% and a monthly investment of Rs. 1000. The total Investment corpus of B would be 26,56,436 at the end of 40 years. This is almost the five times Y. Because Z had started investing from an early age.
To conclude, regular investments for a long period can give you great returns.
What Are The Benefits Of Investing In SIPs?
The following are the benefits of investing in the Systematic Investment Plans.
● Savings In A Disciplined Way
SIPs are the most disciplined way of investing. When a person invests through a systematic investment plan, then he/she commits to save regularly in order to invest. Each instalment is towards achieving the desired financial objectives.
SIPs are the most flexible. Although it's significant to invest for the long term to get maximum returns, it's not compulsory. You can choose to quit or discontinue the investment as and when you want. Also, you can decrease or increase the amount depending upon your cash flow.
● Long-Term Benefit
It is an investment tool that has the potential to generate attractive returns over a long period of time. This all is possible because of the rupee cost averaging and compounding principle of mutual funds.
To Sum Up
Since the lockdown and the arrival of COVID, investing has become very popular. SIPs have become the favourite and easiest source of investment among individuals.
One can easily start investing with the help of SIP. It assists you in saving a lot for achieving the financial goals of your future. All that you need is the required knowledge and the potential to invest a particular amount at fixed intervals.
Yes, you heard it right! It's as simple as that. So, what are you waiting for? Take that first step with 5paisa. Download the application and start investing in less than 5 minutes.
More About Mutual Funds
Frequently Asked Questions
Depending on the investor’s financial goals, they can decide between a SIP or an FD. While investing in mutual funds can generate more interest on an investment, a fixed deposit is a more secure option that offers assured returns.
Periodic investments through SIPs allow the returns to get reinvested. Throughout long-term investment, the returns can increase manifold due to the power of compounding. An ideal way to maximize the gain from the investment is to continue investing for an extended period.
Investing via SIP allows for a systematic approach to investing. It is also an excellent approach for beginners as their convenience can decide the frequency and investment amount. Furthermore, investors can benefit from two effective investment strategies when investing via SIP - compounding and rupee cost averaging.
You can withdraw the investments made in SIP periodically unless the mutual fund SIP has a lock-in period as a part of its investing terms. ELSS-linked mutual funds are the best example of this.