Systematic Investment Plan (SIP)

What is Systematic Investment Plan (SIP)?

Systematic Investment Plan (SIP) is an investment route offered by Mutual Funds wherein one can invest a fixed amount in a Mutual Fund scheme at regular intervals– say once a month or once a quarter, instead of making a lump-sum investment. The installment amount could be as little as INR 500 a month and is similar to a recurring deposit. It’s convenient as you can give your bank standing instructions to debit the amount every month.

SIP has been gaining popularity among Indian MF investors, as it helps in investing in a disciplined manner without worrying about market volatility and timing the market.

Systematic Investment Plans offered by Mutual Funds are easily the best way to enter the world of investments for the long term. It is very important to invest for the long-term, which means that you should start investing early, in order to maximize the end returns. So your mantra should be - Start Early, Invest Regularly to get the best out of your investments.

How Does a SIP Work?

SIPs operate on the principle of Rupee Cost Averaging, which means that when the market is low, you buy more units, and when the market is up, you buy less units while investing the same amount of money every time. In this manner, you average out the cost of acquisition and benefit from the market's ups and downs without the stress of timing. However, the investments you make in mutual funds through the SIP manner would also be subject to market volatility and risks.

Let’s understand how an SIP investment works with an example.

Let's assume the market price of the mutual fund units fluctuates over these 5 months.

Therefore, you can see that -

Total Investment: ₹5,000

Total Units Purchased: 20 + 25 + 50 + 40 + 20 = 155 units.

Average Cost per Unit: ₹5,000 / 155 units ≈ ₹32.26 per unit.

How Mutual Fund SIP Investments Can Benefit You

Investing in Mutual Fund SIPs offers various benefits, and the list of the benefits is given below:

Disciplined Approach to Investing

SIPs tend to promote regular and disciplined investing. Through a fixed amount regularly, investors can build the habit of investing.

Compounding Benefits

The power of compounding works best when the investments are made for a long period of time, on a regular basis. SIPs let investors benefit from compounding returns, as the returns generated are reinvested.

Rupee Cost Averaging

SIPs help investors with rupee cost averaging. Rupee cost averaging means that when the market is down, you will buy more units, and when the market is up, you will buy fewer units with SIPs. This helps to spread the effect of market movements on the investments.

Convenience

SIPs are a more convenient form of investment. You can automate SIPs to a mutual fund scheme through a bank mandate and ensure that a fixed amount is deducted from your bank account and invested in the chosen mutual fund scheme.

Lower Investment Capital

SIPs come up as affordable investments since you can start investing with a small amount, which makes it affordable. This can mainly be useful for young investors, or those with limited funds to begin investing.

SIPs Offer Flexibility

SIPs offer flexibility in terms of the amount of SIP you want to invest and the frequency of investment, such as monthly, quarterly, and more. You could also increase or decrease your SIP amount according to your financial situation.

Professional Managed Investment

Mutual fund schemes are managed by professional fund managers, and they have expertise to analyze and select the best investment opportunities, providing investors with more possibilities of achieving their financial goals.

SIPs Offer Diversification

Investing through SIPs in mutual fund schemes offer diversification across different asset classes based on the kind of mutual fund it is – such as, sectors, geographies, and more.

Passively Managed Funds

Passively managed mutual funds are investment funds that aim to replicate the performance of a specific market index or benchmark rather than trying to outperform it. The primary goal of these funds is to mirror the returns of the chosen index as closely as possible, and investors can invest in these funds through SIP method too.

Types of Mutual Fund SIPs

Here are the main types of Mutual Fund SIPs:

Regular SIP

In this SIP, you will invest a fixed amount at regular intervals.

Flexible SIP

This SIP allows investors to change the investment amount or skip investments at their convenience.

Perpetual SIP

Regular SIPs usually have an end date, but perpetual SIPs continue until the investor decides to stop them.

Trigger SIP

This allows you to set certain triggers for investments, such as a particular date, NAV level, or index level.

Multi SIP

You can use a single SIP to invest in multiple mutual fund schemes.

Step-up SIP

This form of SIP is like a top-up SIP, but the increase in investment amount is predefined and occurs at regular intervals.

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