What Is SIP? A Quick Guide To Systematic Investment Plans
Mutual Funds are among the most popular investment options available today – as they are well diversified and tax efficient in addition to providing stellar returns. They are an ideal investment option for individuals who neither have the expertise to invest in stocks, nor the funds required for a large one-time investment in mutual funds. Depending upon an individual’s budget and several other factors, one can invest in mutual funds with a lump sum amount or with a Systematic Investment Plan (SIP). Not only do SIPs provide better returns on investment, they also help inculcate financial discipline in the early stages of your career.
The concept of SIP has become popular amongst investors for making mutual fund investments. As per the Association of Mutual Funds in India (AMFI), Indian mutual funds have about 2.29 crore SIP accounts in operation during June 2018. Also, AMFI data reports that the mutual fund industry was able to add approx. 9.83 lakh SIP accounts each month on an average during the FY 2018-19.
However, there are many individuals who are unsure about SIPs. If you happen to be one of them, here’s a quick guide to Systematic Investment Plans that will help you step into the world of mutual fund investments, assist you to earn wealth and achieve your financial goals. Let us first understand what SIPs are all about.
What is SIP?
Systematic Investment Plan (commonly known as SIP) is an investment method which allows an investor to invest a fixed amount of money in a mutual fund scheme at fixed intervals, say once a month, instead of making a lump sum investment. With SIP, the investor has the flexibility to choose an amount according to his/her specific financial situation and can invest regularly in a mutual fund scheme.
Systematic Investment Plans are among the most convenient investment avenues as they give you the advantage of rupee-cost averaging. SIP also allows investors to increase or decrease their invested amount at any time during the duration of the investment tenure. Also, it is possible for investors to withdraw the money from their mutual fund investments at a later stage.
Why should you choose SIPs over lump sum investment?
A lump sum investment can only be done when the investor has a big corpus to invest. A majority of investors, however, do not possess the lump sum of funds required for a large one-time investment. Thus, SIPs have grown in popularity among meticulous investors who plan a fixed investment amount each month. Investing in Systematic Investment Plans also relieves you from the worry of timing the market. Also, SIP allows you to invest at different levels of the market and purchase different instruments at different prices. This method helps in reducing per unit cost of buying the units.
Systematic Investment Plans are more effective than lump sum investments when it comes to handling market volatility. Financial markets are affected my many global and local factors. Thus, it is always recommended to invest in SIPs as you will be able to average your cost by investing.
What are the factors you should consider before investing in SIPs?
Below mentioned are some of the factors that you should consider before investing in a Systematic Investment Plan to get the desired results:
- Expense ratio of the Company – Every company has a different expense ratio for different types of mutual fund schemes. This represents the expenses which are incurred to keep the fund running.
- Age of the Mutual Fund Scheme – It is always recommended to invest in a mutual fund scheme which has been in operation for at least 4-5 years, as it will have gone through fluctuations in the financial markets which can help assess returns in different scenarios.
- Performance and Returns of the fund – It is of extreme importance to check the performance and returns of the fund thoroughly before you invest your hard earned money. You can even use an SIP Calculator to calculate and compare the returns of different mutual fund schemes.
SIP Installments – SIP is a long term investment obligation, which makes it important for every investor to know how the SIP amount for a particular fund is calculated . SIP Investment Calculator is an easy-to-use online tool which saves you from complex calculations and calculates your installments based on the financial goal that you want to
Benefits of choosing Systematic Investment Plans
Following are some of the benefits of investing in SIPs:
- SIPs enable you to invest small amounts of money in a mutual fund scheme with a minimum of Rs. 500.
- You can customize your SIP as per your financial situation.
- With a Systematic Investment Plan, you can increase or decrease the investment size at a later stage.
- SIPs yield better returns when compared to individual stocks.
- With Systematic Investment Plans, you can invest according to your convenience on a monthly or bi-monthly basis.
- Develops financial discipline in individuals, which helps save their money and enables budgeting to fulfill their future requirements.
- Some SIP schemes can also provide different tax benefits, under Section 80C of the Income Tax Act, 1961.
- SIP averages the cost of purchasing mutual fund units, which helps get the best returns in the long run.
- With SIPs, you earn compounded returns which result in increasing your earnings in the future.
What is Rupee Cost Averaging in SIP?
Rupee Cost Averaging is one of the biggest factors which distinguish SIPs from other investment plans available in the market. Rupee Cost Averaging is a simple concept which means that you will be investing a fixed amount of money to buy mutual fund units over regular intervals of time. If the price per unit increases, you will get fewer units for that given sum of money. But, on the other hand, when the price per unit decreases, you get more units for the same sum of money.. This saves you from any additional burden on your finances and averages the per-unit cost of your investment.
How to invest in SIPs?
Investing your funds in SIPs these days is quite easy and hassle-free.. What used to be a tedious process of submitting documents after choosing the right plan has now become a streamlined, secure, and paperless process online. You can even approach your bank to ask for different mutual fund options available and learn about the returns of various SIP mutual funds.. You can also check the returns on various mutual fund schemes using SIP Returns Calculator.
Systematic Investment Plans are an effective investment method, which makes investment systematic, easy and hassle-free. With SIPs you can invest as less as you want and earn returns on the same. Also, SIP enables you to invest in multiple plans to help you to yield better returns on your investments.