Systematic Investment Plan

What Is a Systematic Investment Plan (SIP)?

A systematic investment plan (SIP) is a plan in which investors make regular, equal payments into a mutual fund, trading account, or retirement account such. SIPs allow investors to save regularly with a smaller amount of money while benefiting from the long-term advantages of Rupee-cost averaging (RCA). By using a RCA strategy, an investor buys an investment using periodic equal transfers of funds to build wealth or a portfolio over time slowly.

  • A systematic investment plan involves investing a consistent sum of money regularly, and usually into the same security.
  • A SIP generally pulls automatic withdrawals from the funding account and may require extended commitments from the investor.
  • SIPs operate on the principle of Rupee-cost averaging.
  • Most brokerages and mutual fund companies offer SIPs

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    How SIPs Work

    Mutual funds and other investment companies offer investors a variety of investment options including systematic investment plans. SIPs give investors a chance to invest small sums of money over a longer period of time rather than having to make large lump sums all at once. Most SIPs require payments into the plans on a consistent basis—whether that’s weekly, monthly, or quarterly.

    SIPs allow investors to use smaller amounts of money with the benefits of Rupee-cost averaging.

    The principle of systematic investing is simple. It works on regular and periodic purchases of shares or units of securities of a fund or other investment. Rupee-cost averaging involves buying the same fixed-Rupee amount of a security regardless of its price at each periodic interval. As a result, shares are bought at various prices and in varying amounts—though some plans may let you designate a fixed number of shares to buy. Because the amount invested is generally fixed and doesn’t depend on unit or share prices, an investor ends up buying fewer shares when unit prices rise and more shares when prices drop.

    SIPs tend to be passive investments because once you put money in, you continue to invest in it regardless of how it performs. That’s why it’s important to keep an eye on how much wealth you accumulate in your SIP. Once you’ve hit a certain amount or get to a point near your retirement, you may want to reconsider your investment plans. Moving to a strategy or investment that’s actively managed may allow you to grow your money even more. But it’s always a good idea to speak to a financial advisor or expert to determine the best situation for you

    Advantages of investing in SIP:
    1. Simplicity of choice:
      With SIP, you can start investing small amounts, and watch it grow big. You can start investing with a minimum amount of Rs 500 each month. A SIP is not only simple and convenient to track, but also inculcates a sense of financial discipline, where you save more.
    2. Rupee Cost Averaging:
      The unique feature of SIP is the Rupee Cost averaging, where you end up buying more units when the market is low. Conversely, you will buy less when the market is on the upswing. This is because of the inherent feature of SIP, where at every market correction, you will buy more. Not only does this reduce your cost of investment, but also results in significant gains
    3. Flexibility:
      SIP provides you with tremendous flexibility. If you are afraid of long-term commitment by investing in instruments like Public Provident Fund (PPF) or Unit Linked Insurance Plans (ULIPs), then SIP is just the right answer. These are open ended funds, and could be withdrawn as per your choice. In other words, SIPs do not have a fixed tenor. You can either withdraw the full or a partial amount from your investment, without incurring any losses. What’s more the amount of investment is also flexible: it can be either increased or decreased. You must, however, remember to have a long investment horizon for wealth creation.
    4. Higher returns:
      As compared to traditional fixed deposits or recurring deposits, SIP provides double the returns. This can help you beat the rising costs because of inflation.
    5. Power of compounding:
      SIP operates on the principle of compounding or receiving compound interest on your investments. In other words, a small amount invested for a long time period would fetch better returns than a one-time investment.
    6. Acts as an emergency fund:
      Being an open-ended fund without any tenor, you can withdraw your SIP investment to meet any emergency situations like sudden hospitalisation or loss of job.
    One-time investment vs SIP: Which is better?

    If you are confused between one-time investment or SIP, refer to the comparison chart below:

    SIP investment One-time investment
    Tenor Can be withdrawn anytime without any monetary loss. Sudden withdrawal might attract charges, penalties, or might just not be allowed.
    Earnings Earns better during market lows. Investment yields higher returns because of the power of compounding. Earns better during market highs. The investment yields fixed income, which is lower than SIP.
    Protection from market volatility SIP can protect your investment from any potential market crash. One-time investment is not cushioned against market volatility. As such, this investment could be a major loss, if the market crashes.
    Knowledge of market This is a simple plan, and you do not require to have a thorough knowledge of the market. In many cases, one-time investments may either require expert counsel, or a thorough knowledge of the market.