In any activity or task, we are often advised to take a step-by-step approach. Essentially, set smaller milestones to achieve the end goal.
This is precisely the purpose of a Systematic Investment Plan (SIP). SIP is a tool to invest in mutual funds, and has been gaining popularity among investors.
So, let’s take a deep dive into Systematic Investment Plan and understand how it works.
We will cover:
- What is SIP Investment
- How Does SIP work
- Why Invest in SIPs
For details on what are mutual funds and the key benefits of investing in mutual funds, you can check our previous article here.
PL’s qualified professionals can help you in selecting the right mutual funds for your portfolio. To invest in mutual funds with PL, click here
What is SIP Investment
There are two ways to invest in a mutual fund – either as lumpsum, or as SIPs. As the name suggests, Systematic Investment Plan is a systematic way of investing. SIPs enable an investor to invest a fixed amount, periodically, in a particular mutual fund scheme. These regular, automated contributions help in achieving long-term goals in a disciplined manner.
This is why SIPs are a great way to get started on your investment and wealth creation journey. It inculcates the habit of saving and eliminates the need to constantly monitor your portfolio. You also don’t need to worry about timing the market, as you continue to invest periodically through the highs and the lows of the market.
When you invest in SIPs for the longterm, you can minimise risk, maximise returns potential and benefit from the Power of Compounding.
Here are a few types of SIPs
- Regular SIP: Invest a fixed amount at regular intervals
- Top-up SIP: Periodically increase the SIP amount by a fixed percentage
- Flexible SIP: Flexibility to alter your SIP amount/investment intervals
- Perpetual SIP: Wherein the tenure i.e. end-date of the SIP is not specified
How Does SIP work
Let us now understand how a Systematic Investment Plan process works.
To invest in SIPs, you need to first get clarity on – your financial goals, risk appetite, and investment horizon.
Based on this, you can select the mutual fund category and the scheme that you want to invest in. You also need to decide the SIP amount and the investment frequency. You can invest in SIPs daily, weekly, monthly, quarterly, semi-annually, or annually. You can determine how much you want to invest, and how often you wish to invest based on several factors, including your income, other investments, expenses, and financial goals.
Also, you can get expert advisory from our qualified professionals in choosing the right mutual funds for your portfolio. Click here to open an account with PL.
Once you open an account and complete your KYC, you need to enter your bank details and link it to your investment account. Then, enter the SIP contribution details (amount and frequency) for the mutual fund scheme you have chosen.
Example:
You choose to invest Rs 1,000 on the 10th of every month, for the next 12 months. So, Rs 1,000 will automatically get debited from your bank account on the 10th of every month for 1 year. This amount gets invested into your mutual fund scheme, and you get an acknowledgement for this investment. It also specifies the number of units that are allotted in return for this investment – based on the prevailing Net Asset Value (NAV) of the scheme.
Since the NAV varies on a daily basis, the number of units you get in return for the SIP investment also varies. For 12 months, the units keep getting credited into your investment account. You can choose to redeem these units, in part or fully, whenever you deem fit. Note that some mutual funds may have a lock-in period or early redemption fee (exit load).
When you invest in mutual funds with PL, you can easily keep track of your investments with PL’s DigiMF app. It acts as a one-stop solution for all your Mutual Fund needs. The appenables you to view mutual fund reports like Portfolio Performance Reports, Capital Gains Report, Dividend Report, and many more. You can also purchase and redeem your investment through the DigiMF app.
Why Invest in SIPs
Now that you have clarity on what is SIP investment, it is time to understand the key benefits of a Systematic Investment Plan.
Flexibility & Convenience: SIPs offer the flexibility to invest the amount you want, when you want. Also, SIPs enable you to start investing without worrying about timing the market. All this makes it a convenient investment avenue.
Transparency: The mutual fund industry is well-regulated. Details including investment objective, portfolio construction, fund manager track record, and fund performance are easily accessible for investors. This helps you in evaluating a mutual fund and make an informed choice.
Rupee-cost averaging: Irrespective of the market conditions, you invest a fixed amount at a fixed date. This means, when the markets are at a high, you get fewer units. Whereas, when the markets are at a low, you get more units for the same amount. In the longterm, this reduces the average cost of investment per unit.
Professional management: With mutual funds, you get the benefit of a professional and highly-qualified fund manager managing your money. The fund manager will rebalance your portfolio, as necessary, in line with the investment objective of the scheme.
Financial discipline: When you invest in SIPs, it inculcates a financial discipline because the SIP amount gets automatically debited from your bank account.
Power of compounding: When you invest in SIPs for the longterm, your returns receive a strong boost. This is because your returns are reinvested into the scheme, which enables compounding of investment.
Tax benefits: You can invest in ELSS mutual funds through SIP investments to get the benefit of tax savings.
So that’s all you need to know about Systematic Investment Plans. For more details on SIPs, and to understand the right mutual funds for your portfolio, click here