Systematic Investment Plan (SIP)

What is SIP?

A Systematic Investment Plan, which is popularly known as SIP, is a method that allows an investor to make disciplined investments in a mutual fund scheme. Through the SIP facility, an investor can invest fixed amounts in their preferred mutual fund scheme at fixed intervals. The fixed amount that can be invested through SIP can start from Rs. 500, and the investment frequency can be monthly, weekly, quarterly, semi-annually, or annually.

Unlike a lump sum investment, the SIP method allows investors to spread their investments over time. They can start by making regular contributions to mutual fund schemes and grow their wealth over time. The SIP investment plan is the best for those who are looking to build a long-term corpus by investing smaller amounts every month.

When you sign up for an SIP, you allow the Asset Management Company (AMC) to deduct a fixed amount from your bank account at a fixed date every month. This amount is then automatically invested in the mutual fund scheme of your choice.

How Does SIP Work?

By taking the SIP route to invest in mutual funds, you stand a chance to build a corpus for your long-term financial goals. You can gain from the rupee cost averaging and the power of compounding to grow your wealth over the years. The biggest advantage of the Systematic Investment Plan or SIP is that you’re not required to time the market.

When you activate an SIP plan, you allow the fund house to deduct a fixed amount from your bank account on a specific date every month and then invest this amount in a particular mutual fund scheme. Every time an investment is made in a mutual fund scheme through an SIP, you’re allotted a certain number of fund units corresponding to your SIP amount.

When the market is bearish, the NAVs of all mutual funds are down, and hence, you will purchase more units. Similarly, when the market is bullish, the NAVs will be higher, and hence, you will purchase fewer units. Over the years, the cost of your purchase will average out and come out on the lower side. This phenomenon is known as rupee cost averaging.

For example, suppose you’re investing in a mutual fund scheme through an SIP of Rs. 1,000 per month. After investing for six months, let’s calculate the average cost of your purchase:

So, after six months, the total amount invested is Rs. 6,000, while the total units purchased is 119.75. The average cost of purchase turns out to be Rs. (6,000/119.75), i.e., Rs. 50.10.

Benefits of Investing in Mutual Funds via SIP

Below are a few benefits of investing in mutual funds through a Systematic Investment Plan:

• Convenience
  The SIP investment plan is one of the most convenient methods for investing in mutual funds. When you invest via SIP, you are not required to invest multiple times. The SIP amount is deducted from your bank account every month and gets invested in the mutual fund scheme of your choice automatically.

• Rupee Cost Averaging
  When you invest in mutual funds via SIP, the cost of your purchase averages out over the years. This not only eliminates the need to time the market but also lessens the impact of short-term market volatility on your investments.

• Power of Compounding
  By investing in mutual funds through an SIP, you can reap the benefits of the power of compounding. It is because the profits generated from your mutual fund investments keep on getting reinvested to form a very large corpus in the long term. 

How should you Invest in SIP?

There are two ways to invest in mutual funds - the SIP method or the one-time lump sum method. Rookie investors often get confused about whether they should opt for the SIP route or make one-time investments. 

Investing through the SIP mode has several benefits, as mentioned above. The most notable advantage is that you’re not required to time the market. You can invest a fixed amount every month, and your cost of purchase gets averaged out in the long term. Also, you can start an SIP with as low as Rs. 500 and make recurring investments to create a large corpus for your long-term financial goals.

On the other hand, one-time investments can lead to severe losses during bearish markets. Also, it becomes necessary for the investor to time the market. That is why it’s always better to opt for the SIP route to invest in mutual funds.