What is systematic investment planning (SIP)?

• SIP is known as a systematic investment plan.
• An SIP investment will help you grow and save money over time.
• With the help of SIP, it is easier to invest small sums at a fixed interval.
• For example, it might be difficult to invest INR 12000 all at once; hence, with SIP, you can invest INR 1000 every month.
• They are considered to be the most flexible and convenient option for investing in mutual funds.
• Here, you can also choose the value of your investment and ask your bank to automatically deduct the required instalment from your bank.
• Hence, this also helps us with manual payments.
• The main principle behind starting the SIP is to average out the cost of investment over time.

Benefits of SIP:

The following are the major benefits of investing in an SIP:

Rupee cost averaging (RCA):

• This concept is inspired by the approach of dollar cost averaging, or DCA.
• This approach was first introduced to us by Benjamin Graham in his book, The Intelligent Investor.
• RCA allows the investor to invest small amounts regularly, which will help you average out the cost of your investment over time.
• For example, you are planning to invest INR 5000 in the shares of XYZ Ltd., which has 50 shares worth Rs. 100 each.
• Now, with the fluctuations in the market, the price of the shares increased, and they got expensive, so with the invested amount of INR 5,000, you simply received 45 shares.
• In the next month, the price of the share decreased, and you received 55 shares.
• So when the market was expensive, you got a few shares, and when the market was cheap, you got more shares.
• This means that we have averaged out the cost of our investment.

Convenience:

• SIPs allow the investment amount to be automatically deducted from the bank account every month, so they are easy to set up and manage.
• This will reduce the manual investment time, and hence they are considered to be a convenient option.

Investment discipline:

• SIP helps you maintain discipline with your investment by setting aside a fixed sum every month.
• This will also help you to build a discipline of saving a fixed sum every month, which will reap the benefits of compounding wealth over decades.

Diversification:

• SIPs allow diversification because mutual funds invest in a variety of stocks and bonds, which will also help to balance the portfolio and reduce the risk of loss due to market volatility.

Cost- effective:

• SIPs are cost-effective due to their small investment amounts, and the fees of such investments are also spread over a long period of time.

Flexibility:

• SIPs allow flexibility because they allow us to choose the amount we wish to invest, the frequency of the investment, and the duration of the investment.

Professional management:

• SIPs are managed by trained professionals with several years of experience.
• They also help us make informed investment decisions and achieve our financial goals.

Long-term benefits:

• SIPs are good for long-term investments because they allow individuals to invest regularly over an extended period of time.

How does SIP work?

SIP works as a process, and for this, you will have to set up an SIP mandate.

The SIP mandate is as follows:

Choose a mutual fund scheme:

• The first step is to choose an SIP scheme that will match your financial goals as well as your risk tolerance.

Set up the SIP:

• Once the SIP is selected, you have to set it up by filling out the form and giving a few details, such as your bank account number, for automatic deductions from your investment.

Determine the investment amount and frequency.

• Choose the amount you wish to invest and then determine the time period for such an investment, for example, monthly, quarterly, year-end, etc.

Start investing:

• Once the SIP is set up, the investment sum will automatically be deducted from your bank account.

Track your investments:

• You can track your SIP through your mutual fund account or the fund’s website.

Types of SIP:

The following are the main types of SIPs:

Regular SIP:

• This is the regular and most common SIP, where you invest a fixed sum at regular intervals of time.

Flexi SIP:

• This is the most flexible SIP, where you can change the investment amount and frequency of your investment based on your financial situation and goals.

Perpetual SIP:

• This SIP is the one that has no fixed end date and will continue until you choose to stop it.

Top-Up SIP:

• This SIP will allow you to increase the investment amount with each and every instalment.
• This is helpful for the power of compounding.

Trigger SIP:

• This SIP is triggered by certain market conditions and events.
• This SIP is for people who wish to take advantage of market conditions.

Things to consider before starting SIP:

The following are the major points to be considered before starting SIP:

Investment goals:

• To establish your investment goals, you will have to determine the amount you wish to save, the time frame of your investment, and the type of return you are looking for.

Risk tolerance:

• The next step is to assess your risk-bearing capacity.
• Different mutual funds have different risk-bearing capacities, and this step refers to your willingness to take risks in order to achieve a higher return.

Investment amount:

• This step will help you identify the amount of instalment you can afford every month.

Fund selection:

• Once you are clear with everything, it is time for you to choose the mutual fund for your SIP, such as equity debts, debt funds, etc.

Expense ratio:

• This is the annual fee that the mutual funds will charge for managing our investments.

Tax implications:

• The tax liability of mutual funds varies depending on the type of mutual fund as well as the length of the investment.

Conclusion:

SIP is considered to be the most effective way of investing for every class of individuals.

Frequently Asked Questions (FAQs)

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