What is SIP or Systematic Investment Plan?

What is SIP or Systematic Investment Plan?

A SIP or Systematic Investment Plan is a smart and hassle-free financial tool, offered by mutual funds to help investors invest regularly in the disciplined manner. SIP allows you to invest a pre-determined amount of money at a regular interval, over a period of time. The frequency of investment is usually weekly, monthly or quarterly.

The concept of SIP (Systematic Investment Plan) is similar to a recurring deposit where the investment of a fixed amount is made on a regular basis. A SIP is a disciplined approach towards investments and helps you to create wealth for the future by investing a small amount of money periodically instead of lump sums. In this post, let’s take a look at how does SIP work and what are the benefits of SIP.

Also read: How to start a SIP?

How does SIP work?

A SIP works on the principle of regular investments. In a SIP, your pre-determined amount of money is auto-debited from your bank account and invested into a particular mutual fund scheme chosen by you. A certain number of units based on the ongoing market rate (called NAV or net asset value) for the day are allocated to you.

Every time you invest money, additional units of the mutual fund scheme are allocated to you on the basis of the market rate. In this way, SIP provides with the flexibility to buy more units when the price declines and lesser units when the price surges. 

Hence, units are bought at different market rates and investors avail from Rupee Cost Averaging and the Power of Compounding. Moreover, the handling of your money is done by professional fund managers and is none of your headaches.

Benefits of SIP (Systematic Investment Plan)

Following are the benefits of investing in mutual funds through SIP route.

1. Rupee-Cost Averaging

With the volatile market, timing the market is a difficult task. Rupee Cost Averaging is an automatic investment strategy that eliminates the need to time the market. When you invest a fixed amount in a mutual fund at a regular interval over a period of time, you fetch more units when the price is lower and lesser units when the price is high. In this way, you would reduce your average cost per unit over time. This strategy is called 'rupee cost averaging'.

2. Benefits of Compounding

Investment experts always recommend that one must start investing early in life and to keep investing regularly. The main reason for doing that is the benefit of compounding. A small sum of money invested regularly can grow to a large sum. This helps in creating a large amount of wealth which includes your own contribution, plus returns compounded over the years. Compounding means earning a return on returns. The longer the compounding period, the higher the returns.

3. Disciplined Investing

Discipline is the key to investing success. The important rule of building your corpus is to invest regularly and maintain a discipline in your investing pattern. When you invest through SIP, you commit yourself to invest a fixed amount regularly. Investing regularly a small amount of money can often lead to better results than investing in a lump sum. Every small investment is a step towards achieving your financial goals.

4. Flexibility

It is always advisable to continue SIP investments with a long-term perspective but there is no such compulsion. You can discontinue the plan at any time. SIP amount can also be increased or decreased.

5. Simple and Convenient to monitor

SIP is a simple and convenient mode of investment in mutual funds. You do not have to spare time from your busy schedule to make your investments. SIPs come with easy payment options. You can either give post-dated cheques for your fund or just opt for an Auto Debit from your bank account. You can also monitor your investment online or through the monthly statement of accounts.

6. Long-Term Gains

SIPs have the potential to deliver good returns over a long investment horizon due to rupee-cost averaging and the benefits of compounding.

7. Affordable

SIPs in mutual funds are affordable because you can start investing with an amount as low as Rs 500/month.

You may also like to read: How to start a SIP?

You may also like to read: How to set your financial life in order?

You may also like to read: What should be the duration of the SIP?

You may also like to read: All about ELSS | Equity linked saving scheme | Tax saving mutual funds

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What is SIP or Systematic Investment Plan?