What is SIP ( Systematic Investment Plan)?
Systematic Investment Plan (SIP) is a mode of investment in mutual funds in which a consumer can invest money in a scheme via periodic installments over a period of time. It is not a mutual fund scheme but a mode of investment into a Mutual Fund of your choice.
What is SIP in Mutual Fund?
A Systematic Investment Plan (SIP) is an alternative to the traditional lump sum mode of investment. Under a SIP, a certain amount is deposited in a mutual fund scheme at periodic intervals. A SIP helps an investor to benefit from the power of compounding and rupee cost averaging while keeping the periodic investment requirement light on the pocket as a SIP can be started with an amount as low as Rs. 100 or Rs 500.
Who Should Invest?
- Investors who are looking for long-term investment with the objective of wealth creation. Although SIP can be adopted for investing in debt funds, it is a more suitable form of investment in equities. It is advisable to stay invested for a minimum of 3-5 years and avoid short-term investment
- If you want to invest in mutual fund but can’t afford to cough a large amount at once, then you can start investing through SIP with minimum monthly installment of as low as ₹100 or ₹500 (it differs for every scheme)
- If you want to make your investments hassle free by giving a one time mandate to your bank for automated debit of the SIP amount for instead of actively deciding to buy units (and losing out on rupee cost averaging)
- If you are a novice and do not particularly understand equity markets, investing through SIPs could shield you from a sudden crash in markets.
- Investing via SIPs will help you benefit from the power of compounding as you continue to invest and also rupee cost averaging where the prices of units balance out over time
- SIP also helps one develop an investment discipline as it pushes you to become a regular investor. When it comes to ELSS one can also become a disciplined saver
How do SIPs work?
Each time an investor makes a payment, the fund manager purchases more units of the assets (shares and securities) of the firms the fund is invested in. This gradually increases the number of units owned by the investor and hence SIPs are suitable for the long term. There are several advantages of investing through SIP as explained next.