Systematic Investment Plan (SIP) is a plan in which investors at fixed time intervals (mostly monthly or quarterly) invest a fixed amount of money in mutual funds. This plan is similar to that of a traditional way of investing except that here your money gets invested into various asset classes such as equity, bonds, gold, etc. as per the asset allocation pattern and investment strategy as specified in Scheme Information Document.

SIP has been gaining popularity among Mutual Fund investors in India as it allows them to be disciplined with their investments and without having to worry about the volatility of the market. When one invests steadily it may make it easier for them to achieve their financial goals in the long haul.

How does a SIP work?

In a SIP a fixed amount of money is invested over a given time frame. The amount invested helps you purchase a certain number of units of the fund. In the long term you get the opportunity to invest in the fund through its ups and downs, which may give investors the benefit of rupee cost averaging.

How to start an SIP?

• The first and most important step to start an SIP is to complete all the KYC requirements with your respective fund house or broker.
• One should focus on selecting and registering for the SIP scheme of their choice with a fund house.
• For this you will have to visit the website of the fund house and research about the schemes offered by them or contact a Mutual Fund distributor/advisor
• The next step would be selecting the right SIP in accordance with your needs.

• Amount of the SIP
• Tenure
• Frequency (weekly,monthly, quarterly, half yearly,etc.)

Types of SIP

• Regular SIP: It is most basic type of SIP under which you invest fixed amounts of money at regular intervals of time in the selected scheme
• Top up SIP: Also known as Step up SIP, this type of SIP allows you to increase the amount invested periodically
• Perpetual SIP: This is a type of SIP where the tenure is not specified, hence becoming a perpetual SIP.
• Multi SIP: This type of SIP helps you diversify your investment portfolio by investing in multiple schemes of a fund house via a single instrument.

Benefits of SIP

1. Disciplined Investing: Investing through SIPs you invest fixed amounts at regular intervals hence bringing discipline in your investing journey. It can be treated like any other regular outflow of the month.
2. Small investment amounts: Through SIPs mutual funds allow us to invest a small amount regularly in their schemes. With the minimum amount per instalment, it allows new investors to aim to achieve their financial goals.
3. Flexibility: SIPs allow the investor to change the amount of their investment in case their savings increase or decrease in the future. Making it a highly flexible investment method
4. The Compounding effect: Upon selecting the growth option in your SIP. The returns generated would be added to the amount invested initially. This effect may lead to greater outcomes in the future thus, helping you achieve your financial goals in the long-run. It must also be noted that the longer you stay invested, The possibility of wealth creation is much more as can be seen from the illustration given below

Illustration
Amount Invested per month: Rs.500
Estimated Returns on Investment: 12% pa CAGR

 

It’s important to not only START EARLY…but also to START RIGHT

Views are personal: The author - Raghavv S Roongta is associated with Roongta Securities Pvt. Ltd and is a founder of YouTube channel ‘cluelessabtfinance’

Back