SIP - Systematic Investment Plan
A Systematic Investment Plan (SIP) is a way of investing in mutual funds where an investor selects a mutual fund scheme and contributes a fixed amount at regular intervals.
Instead of making a large one-time investment, SIP involves investing smaller amounts consistently over time, which can lead to higher returns.
How Does SIP work?
Once you enroll in one or more SIP plans, the chosen investment amount is automatically deducted from your bank account and invested in the selected mutual funds at regular intervals.
At the end of each investment cycle, you receive mutual fund units based on the Net Asset Value (NAV) of the fund. With every SIP contribution, additional units are credited to your account according to the prevailing market rate. Over time, as your invested amount grows, so do the potential returns on your investment.
Investors can choose to receive returns either at the end of the SIP tenure or at periodic intervals.
Example:
Suppose you want to invest ₹1 lakh in a mutual fund. You have two options:
- Lump Sum Investment – Invest the entire ₹1 lakh at once.
- Systematic Investment Plan (SIP) – Invest in smaller, regular installments.
If you opt for an SIP and set an investment amount of ₹500, this amount will be deducted from your bank account and credited to the mutual fund on a fixed date every month. This process continues for the chosen investment duration.
When to Invest in SIP?
SIP investments can be initiated at any time, allowing investors to minimize risk by selecting a suitable scheme that aligns with their financial goals.
Choosing the right mutual fund scheme that matches long-term objectives is crucial for investors. There is no fixed timeframe for starting an SIP; however, the earlier one begins, the better the potential benefits.
Types of SIP
Understanding the various types of SIPs can help you select the most suitable scheme based on your financial goals.
Here are the different types of Systematic Investment Plans available:
Top-up SIP
A Top-up SIP enables you to gradually increase your investment amount over time, providing the flexibility to invest more as your income grows or when you have additional funds available.
This approach allows you to maximize your returns by consistently investing in high-performing funds at regular intervals.
Flexible SIP
As the name implies, a Flexible SIP offers the freedom to adjust the investment amount. Investors can increase or decrease their contributions based on their cash flow, financial needs, or preferences.
Perpetual SIP
A Perpetual SIP Plan allows you to continue investing without a fixed end date.
Typically, SIPs have a predefined tenure of 1, 3, or 5 years. However, with a perpetual SIP, investors have the flexibility to withdraw their investments anytime based on their financial goals or requirements.
Benefits of Investing in SIP
Benefits of Investing in SIP Over Lump Sum
1. Encourages Financial Discipline
SIP is an excellent investment option for those who may not have in-depth knowledge of market trends.
- It eliminates the need to constantly analyze market movements or time investments.
- Since the investment amount is automatically deducted from your account, you can stay consistent without active monitoring.
- Unlike lump sum investments, SIP ensures regular contributions, helping you build wealth over time.
2. Advantage of Rupee Cost Averaging
SIP allows you to benefit from rupee cost averaging by spreading investments over time.
- Since you invest a fixed amount regularly, market fluctuations work in your favor.
- When prices are low, you buy more units; when prices are high, you buy fewer units, reducing the overall cost per unit.
- This helps balance out market volatility and minimizes risk.
3. Power of Compounding
SIP leverages the power of compounding, ensuring steady wealth accumulation.
- The automation ensures you never miss an investment, unlike lump sum investments where you may delay or forget.
- Even small, consistent investments grow into a substantial corpus over time due to compounded returns.
For example, using a SIP calculator, if you invest ₹1,000 per month for 20 years at an average return of 10%, your total investment of ₹2,40,000 grows to approximately ₹7,18,259 due to the compounding effect.
4. Hassle-Free Investment Process
- With an SIP, you can automate payments through an auto-debit facility or post-dated cheques.
- You simply need to decide the investment amount based on your financial goals and let the SIP take care of the rest.
Related Mutual Fund Terms
- SIP (Systematic Investment Plan)
- Lump Sum Investment
- AUM (Assets Under Management)
- Systematic Transfer Plan (STP)
- Exit Load
- Mutual Fund Units
- Expense Ratio
- Children’s Fund
- NAV (Net Asset Value)
- Interval Funds
- Systematic Withdrawal Plan (SWP)
- Emerging Market Funds
- Hedge Funds
- Benchmark
