Systematic Investment Plan (SIP) is a medium for investing money in mutual funds. In SIP one can invest certain amount of money at a regular interval (weekly, monthly, quarterly etc) instead of investing a lump sum amount all at once in a year. Hence, SIP is considered a hassle free way of investing in mutual funds and saving wealth for a secured future.
SIP is a convenient way of investing as the money is automatically debited from the bank account into the specific mutual fund scheme one purchased. In SIP one is allocated certain number of units based on the ongoing market rate (called NAV or net asset value) for the day. Every time one invests in SIP, additional units get added to the account based on the ongoing market rate (NAV).
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Two methods to benefit the investors under SIP
- Rupee – Cost Averaging – Keeping the unpredictable stock markets in India; it is difficult to speculate the best time for the investment. Rupee Cost Averaging helps the investors deal with this problem. It allows the invested money to earn less units when the price is high and more units when the price is low.
- Compounding – In compound interest, one earns interest in whatever amount they invest. Such interest get compounded and accumulated over a period of time. Hence, there is more chance of an early bird to earn more wealth with the power of compounding.
Benefits of Systematic Investment Plan(SIP)
- There is moderate risk in this investment scheme as it allows the investors to earn above average return on their investments. Hence, small retail investors who cannot go for active investments can opt for SIP.
- It is the most convenient way for investment as it has ECS (Electronic Clearance Service) facility, where the amount will be auto debited from the account.
- SIP is a long term investment gains, as ones gets a high return on investment because of Rupee cost averaging and Power of compounding.
- SIP is a flexible investment mode as it does not have a lock in period. Also, one can choose to opt out from the scheme any time they wish to. However, it is suggested that one should start early and invest for a longer time.
- Planning and discipline plays a vital part in investment. In SIP one agrees to invest at certain intervals (weekly, monthly, quarterly etc). Which in turn helps saving regularly in a more disciplined manner. Hence it is important to start investing early in life to get the benefits of SIP.
Comparing the Mutual Fund Schemes and their Values
| Category | Mutual Fund Scheme | Crisil Rank | Assets under Management (AUM) (Rs. Crores) | 3 months | 1 year | 3 years | 5 years |
| Large-cap | UTI Equity Fund | Rank – 2 | 4,499 | 0.6% | 12.0% | 19.7% | 12.2% |
| Large-cap | Birla SL Frontline Equity Fund | Rank – 2 | 9,792 | -1.1% | 11.4% | 20.4% | 11.2% |
| Large-cap | ICICI Pru Focussed Blue Chip Fund | Rank – 3 | 9,433 | -1.1% | 7.6% | 18% | 10.9% |
| Mid-cap/ small -cap | Franklin India Smaller Companies Fund | Rank – 2 | 2,512 | 2.3% | 20.6% | 35.8% | 19.3% |
source: http://www.moneycontrol.com/
Debunking Myths on SIP
- SIP is not only for small investors but it is meant for anybody who wishes to build wealth systematically. SIP inculcates saving habit as it allows investing systematically – daily, monthly and quarterly – for a said tenure which in turns helps attaining the financial goal. There are no special schemes for SIP investments. SIPs are just a mode of investing.
- If for some reason one haven’t maintained the balance in the account and a SIP installment doesn’t get debited and one miss that installment, but the folio / account remains active for further SIPs to debit from the bank account. So, it’s not like the EMI (Equated Monthly Installment) of a loan, where if you miss an installment; you are penalized.
- Also, SIP pause facility is also available. If someone is facing financial crisis, fund houses will allow pausing the SIP for a period of 1 to 3 months until normalcy returns.
Methods to invest in SIP
- KYC – KYC (Know Your Customer) process has been mandated to do investments in mutual funds. And this can be done online as well, which requires to fill a basic form along with the documents.
- Select the suitable Mutual Fund – Select the mutual fund keeping your needs in mind. There are more than 700 basic schemes (and around 5000 including the dividend variation). Therefore it is very important to know which one is best for you.
- Set up the SIP – Once it is decided on the right mutual fund. The next step is to decide the amount and set up the SIPs in those mutual funds.
In a Nutshell
- An SIP is a specific amount, invested for a continuous period at regular intervals
- It is similar to a regular saving scheme like a recurring deposit.
- It allows the investor to buy units as per a pre decided frequency; the investor decides the amount and also the scheme / scrip to invest in.
- Due to the principle of cost averaging, more number of units are bought in a falling market and fewer units in a rising market
- SIPs allow to take part in the stock market, without trying to time it, also bringing discipline to your investments.