Systematic Investment Plan, commonly called an SIP, is a plan through which a fixed amount of money is invested into a mutual fund scheme at fixed intervals, for a fixed or variable duration of time (depending on the type of plan/fund scheme). In SIPs, instructions to increase/decrease the value of the monthly installment, start/stop at predetermined intervals, etc. can also be given.


What is SIP?

SIP or Systematic Investment Plan is a method of investing in mutual funds. Under the SIP investment method, an investor picks a mutual fund scheme and decides to invest a certain fixed amount at fixed intervals. Investing in one scheme through small installments over time (rather than with a large amount at once or lumpsum) is Systematic Investment Planning.

For example: Mr. XYZ wishes to invest ₹25,000 in a mutual fund, but does not have this amount ready to invest at the moment. Mr. XYZ can invest ₹2,500 per month for the next 10 months, so the eventual total value of his investment will be ₹25,000. In this way, Mr. XYZ has fulfilled his investment goal and also gained many benefits - such as Rupee Cost Averaging, budgeting, etc. (which are explained below). This method of investing a fixed amount over time for a particular goal through a particular mutual fund is called Systematic Investment Planning or SIP.


How does SIP work?

A systematic investment plan deposits a certain amount of money, which could be as low as ₹500 or as high as the investor wishes, at certain fixed intervals of time, which could be a week, a month, an annual quarter, etc., and allows this amount to build up over time. The biggest difference between the piggy bank and the SIP, however, is the fact that SIPs don’t just keep the money aside for you, but also invest that money into profitable businesses and give you a share of the earnings. Also, with every periodic investment, the amount being reinvested keeps growing larger - which means that returns on the investments grow larger as well.

It’s up to the investor to decide whether he/she wishes to receive these investment returns in a periodic format, or as a lump sum at the end of the SIP’s tenure, when the investment matures. Of course, the detailed workings of a systematic investment plan that invests in mutual funds are a bit more complex and they sometimes speak a different language, but understanding the different types of SIPs can help patient investors reap massive rewards.


Why Invest through SIP?

There are many reasons as to why investors prefer investing in mutual funds through SIP, the benefits of SIP are listed below:
  1. Rupee Cost Averaging: SIP investments facilitate a phenomenon called Rupee Cost Averaging. While the investor's investment remains the same, more number of units can be bought in a declining market and less number of units in a rising market. To understand it, let’s first see how mutual funds are purchased and held as investments with an example:

    In October 2018, Mr. Anand has ₹60,000 on hand to invest into a mutual fund scheme. He has two options: Lump sum or SIP.
    Lump sum: He decides to invest it all at one go in October. He goes online, signs up with an online mutual fund investment platform and purchases ‘Units’ of a fund in exchange for his money. These ‘mutual fund units’ represent his ownership of the fund. Let’s assume the NAV in October is ‘200’ and Mr. Anand received 300 units for his ₹60,000 lump sum investment. SIP: In the same scenario where the NAV in October is ‘200’. Mr. Anand purchased 100 units for ₹20,000. In November, the NAV rose to ‘250’ and Mr. Anand’s next investment of ₹20,000 fetched him only 80 units - for the same price. In December, the NAV dropped to ‘100’ and his ₹20,000 gets him 200 units. So through SIPs, Mr. Anand’s ₹60,000 has bought him a total of 380 units only because of the fluctuating market.

    So, for ₹60,000 in total, Mr. Anand received 300 units through lump sum investing at a cost of Rs 200 per unit and 380 units through SIP at an average cost of Rs 157.9. Through SIP, Mr. Anand has the benefit of owning a greater number of fund units because of Rupee Cost Averaging. The cost of funds averaged over time, giving Mr. Anand more units for the same investment amount.

    In reality, the NAV of mutual fund schemes rises and drops on a daily basis, and savvy investors get ahead of the game and own more mutual fund units through planning their investments around NAV fluctuations. The NAV of all funds rises and drops based on the performance of its investments. ‘Mutual Fund Units’ represent an investor’s share of ownership in a particular fund and form the basis on which the mutual fund is traded with the investor. When the fund’s investments are doing well, the price of Units increases. This means that the Net Asset Value (NAV) of the fund has increased.

  2. Minimizes risk: Investing small amounts on a monthly basis rather than one large amount at once means that the investments can be stopped at any time the investor desires. In the rare and unfortunate event that a well-performing fund has a change in fund manager, or a risky investment doesn’t pan out well, or the fund displays below average returns for an extended time, the investor can simply stop investing. The SIP can simply be stopped and the investment can be to another well-performing fund to recoup any negative returns.

  3. Compounding: Earnings in a mutual fund scheme invested through SIP are added back to the investment itself, thus increasing its value. As subsequent investments are made through the course of the investment term, the total value is allowed to keep on growing by adding earnings to itself, to allow for greater growth.

  4. Budgeting: The importance of proper periodical financial planning cannot be understated. Many would-be investors earn more than enough to invest and multiply their wealth, but because of inadequate financial planning, don’t save enough to invest. Strict monthly budgeting can allow for huge amounts to be earned through investing very little. Systematic investment plans with standing instructions in one’s bank account can take the old saying ‘a penny saved is a penny earned’ to a whole new level.

  5. Financial discipline: By establishing that an investment has to be made every month, a person can establish financial discipline. This is nothing but being disciplined and attentive when handling one’s money - a trait that is, by and large, lacking in modern India. A typical salaried corporate employee between 25-30 years of age typically realizes far too late that he/she regularly spends way too much on non-vital and largely unnecessary things. Once this realization happens, more importance is given to saving and spending only on the essentials. With an SIP, a positive expense is listed as a recurring month-on-month investment. By allocating funds separately for this, the remaining income is divided among vital expenses in a planned and disciplined way.

  6. Convenience: There is no reason for investors to go out of their way to invest in SIPs. The amount is automatically deducted from the investor’s bank account at a particular date every month. The state of the investment, its returns being generated, etc. can all be tracked online.

It is for these reasons, among many others, that the SIP investment route is preferred over the lump sum investment route. Experts keep saying that the best time to buy is when markets are falling and the right time to sell is when the market is peaking, it's just not possible for a normal investor because when the market is falling it's difficult to buy. But investing through SIPs help one avoid the mistake of buying more when the market peaks and less when the market fall.

nvesting money is the process of committing resources in a strategic way to accomplish a specific objective.
– Alan Gotthardt

Read more on Groww:
 Investing money is the process of committing resources in a strategic way to accomplish a specific objective - Alan Gotthardt

Post a Comment

Previous Post Next Post