What is SIP

What is SIP is a very common question asked by investors new to mutual funds. The question what is SIP or what is systematic investment plan can be answered very differently by different people. But simply speaking, if you dream to become wealthy and want to work towards it, Systematic Investment Plans (SIP) of mutual funds may be able to help you achieve that.

SIP is a method of investing a fixed amount, regularly – monthly or quarterly in a mutual fund scheme. SIP allows you to buy the units of your selected scheme on a date chosen by you. An investor can invest a pre-determined fixed amount in a chosen scheme every month or quarter, depending on his convenience through post-dated cheques or through ECS (auto-debit) facility.

How does SIP work - Investors need to fill up an Application form and SIP registration cum mandate form on which they need to indicate their choice of scheme name, amount, frequency and SIP date on which the amount will be deducted from their bank account / or the post- dated cheque will be banked by the AMC and invested in the chosen fund.

With rising popularity of SIPs, few AMCs have launched Goal SIP and SIP Top-up facility. Goal SIP helps you start SIP to save for a future goal while SIP top-up facility helps you increase your SIP investment amount half yearly or annually by a fixed amount.

With SIPs, you can invest an amount as small as Rs 500 per month over a period of time. It helps you averaging out your cost of investing and benefit from the power of compounding. The power of compounding works best when you stay invested over a long period of time and thus helps your money earn money over the years.

Benefits of SIP

  • Disciplined approach to investing – By choosing to invest regularly you bring discipline to your investments as you treat your SIPs like any other fixed expenses in a month, be it paying house rent, buying groceries, eating out or paying monthly tuition fee for your kids.
  • Inculcates the savings habit - It inculcates the habit of savings as you commit a fixed amount and invest it systematically every month or quarter.
  • Flexibility - Starting a SIP or closing the same is very easy and there is no penalty for foreclosure.
  • Wide choice of schemes - You get a wide choice of Mutual Fund schemes and can invest in one matching your risk profile, investment objective or financial goals.
  • Convenience - You need not go to the AMC office or deposit a cheque every month. All you have to do is sign an auto debt / ECS form and the amount will be deducted from your bank account on one of the dates chosen by you. SIP can also be started online from the AMC’s website.
  • Low investment amount -You can start a SIP in India with as low as Rs. 500 per month.
  • Diversified investments -Starting a SIP in an equity mutual fund allows you to take advantage of investing in various sectors and companies thus spread your risk across companies, sectors and market capitalization.
  • Helps achieve your long term goals -SIPs help you achieve your long term goals, like - Retirement, Children higher education and their marriage or so on. You can actually set a target amount for your goal and invest every month over a period of time in order to achieve the same. For example – You are aged 30 and want to build a 5 Crores corpus for your retirement at age 55. You need to invest only Rs 27,000 per month for next 25 years (assuming return of 12%).
  • Rupee cost averaging -A simple approach to long term investing is discipline and commitment to invest a fixed sum for a fixed period and sticking to this schedule regardless of the market conditions. Rupee cost averaging in a way ensures that you automatically buy more units when the NAV is low and fewer units when the NAV is high. Suppose you are investing Rs 5,000 every month. When the NAV is Rs 20, you will get 250 units because Rs 5000/20 = 500. However, if the market dips and the NAV drops to 18, you will get 277.777 units, as Rs 5,000/18 = 277.777. As you can see you have bought more units when the markets are at lower level.

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