Systematic Investment Plan(SIP): Definition, Types, Benefits, Working, Features, Plans, Steps To Invest, Things to Consider, Who Should Invest and More!

SIP stands for Systematic Investment Plan. It is a method of investing money in mutual funds regularly over a period of time. It is an automatic monthly education process, which starts with 100 Rs per month. You can decide your SIP amount as per your income. It is a long-term investment for the optimal return. SIP is based on the “Start Early, Invest Regularly” mantra. SIP is popular with investors due to its simplicity, affordability, and potential for long-term wealth creation.

Understanding Systematic Investment Plan (SIP) through an Example

Let’s understand the SIP with an example. If you decide to invest Rs 5000 every month in an equity mutual fund. In the first month, 5000 will be deducted from your linked bank and invested in your mutual funds. The process continues every month. If the market is up, you’ll buy fewer units of the mutual fund with Rs. 5,000, and if it’s down, you’ll buy more units. This unit’s allocation will chase each month and will add to your portfolio and return amount.

Types of SIPs:-

• Regular SIP

• Top-up SIP

• Flexible SIP

• Trigger SIP

• Perpetual SIP

• Multi SIP

• SIP with Insurance

 

Let’s understand How SIPs Works:-

• Set Up: At first, the investor has to select a mutual fund scheme and decide on the investment amount and frequency (monthly, quarterly, etc.) followed by linking the bank account to the SIP. After a bank link, the amount deducted will be automatic.

• Investment: On the decided date, a predetermined amount will be deducted from the linked investor bank account. These amounts will go to the selected mutual fund’s scheme. Units of the mutual fund are allocated based on the prevailing Net Asset Value (NAV).

• Compounding: With time, the investor’s amount earns returns, which are reinvested back into the scheme. This process of reinvestment is known as compounding. Hence. it accelerates wealth accumulation as returns start earning returns.

• Regular Contribution: Sip is a regular investment. Investors can contribute a fixed amount at regular intervals as per the market condition. During market downturns, the fixed investment amount buys more units, while during market upswings, it buys fewer units.

• Long-term Investing: SIP is designed for the long-term investment process. It encourages investors to invest for a longer duration even with an amount. Likewise, investors benefit from the power of compounding and rupee cost averaging, resulting in potentially higher returns.

 

Features & Benefits of SIP:-

• Regular Investment: With SIP, investors can invest a fixed amount of money at regular intervals like monthly or quarterly. This investment is automated, meaning a fixed amount will auto deducted from the lined bank on the decided date.

• Disciplined Investing: SIP SIPs encourage disciplined investing by creating an automated investment process for the investors. It is a regular investment which builds up a saving habit and financial discipline in the investors.

• Rupee Cost Averaging: SIP is based on the rupee cost averaging, which means when the market prices are high, the SIP buys fewer units of the mutual fund, and when the market prices are low, the SIP buys more units. Hence, it helps in averaging out the cost of investment with time.

• Compounding Benefits: SIPs benefit from the power of compounding. If investors continue to invest regularly over time, their investment earns a return. A long-term investment leads to significant wealth accumulation.

• Flexibility: SIP is flexible for all investors. It is flexible in terms of investment amount, frequency, and duration. Investment can be increased or decreased, change the frequency of investment,net, stop the SIP is you want, or pay SIP whenever you want, even without any penalties.

• Affordability: SIP is very accessible to a wide range of investors because it allows them to invest with a small amount of money. Investors can start investing with 100 rupees too. This investment process is affordable and achievable for those with limited financial resources.

• Diversification: SIPs allow investors to diversify their investment portfolios by investing in various types of mutual funds. This diversification helps in spreading the investment risk and achieving optimal returns.

• Convenience: Sips are very convenient to use because they automate the investment process. Once you set it up, there is no worry about it. It will be managed every month automatically.

• Long-Term Wealth Creation: SIPs are well-suited for long-term wealth creation because they encourage investment for extended periods.

 

Who Should Invest in SIP?

SIPs (Systematic Investment Plans) are suitable for a wide range of people from housewives to the businessman. Anyone can start investing in the SIPs anytime. Start your investment in your mutual funds with SIP if you belong to the following-

• Beginners: SIPs are ideal for beginners. It is suitable for those who are new in the investment world because they can start with small amounts and gradually increase them. They are simple and convenient.

• Young Professional: Young professionals who have just started their careers can benefit from the SIP. It is a regular investment and a kind of saving for the future with good returns.

• Salaried Individuals: Salaried Individuals who get a steady income can start investing in the  SIPs regularly. It helps you to build a savings habit and provides a systematic approach to wealth creation.

• Long-term investors: SIP is also suitable for long-term investors who have a horizon of 5 years or more. By long-term investment, they benefit from the power of compounding and rupee cost averaging.

• Busy Individual: SIPs are convenient for busy individuals who have no time to manage their investments. It is an automatic process. They just have to set up the investment once only.

• Income Tax Savers: SIPs in equity-linked saving schemes (ELSS) offer the dual benefit of tax savings under Section 80C of the Income Tax Act. It is ideal to invest in the SIp by all income tax savers.

 

Top 5 Plans for SIP:-

If you have decided to invest in the SIPs, then here are the top 5 SIp plans that you should consider. It is good to invest in them-

• Quant Small Cap Fund Direct Plan-Growth: It is suitable for medium to short-run investments. Its expected growth rate is 67.91% in 3 years and 22.49% in 5 years.

• Tata Digital India Fund Direct-Growth: This SIP is managed by the Tata Mutual Fund. It is also good for medium and short-term investment. The fund’s current expense ratio is 0.31%.

• ICICI Prudential Technology Direct Plan-Growth: It is also a popular SIP plan. Its expected growth rate is 51.73% in 3 years and 21.60% in 5 years: You can start investing 100 rs in it.

• SBI Technology Opportunities Fund Direct-Growth: The lowest investment amount is 500rs. Its expected growth rate is 36.75% in 3 years and 20.84% in 5 years.

• Aditya Birla Sun Life Digital India Fund Direct-Growth: This SIP plan is managed by Aditya Birla. It has an expense ratio of 0.88% and a 40.10% rate of return in 3 years.

 

 

Things To Consider In SIPs:-

Here is the list of things you should consider if you are investing the SIPs-

• Define your financial goals, whether it’s wealth accumulation, retirement planning, children’s education, or buying a house. Your investment strategy will depend on your goals.

• Risk Tolerance: Decide your risk tolerance based on your age, income, and investment experience.

• Investment Amount: Decide your investment amount to invest in the SIP. Make it affordable, do not burden yourself.

• Investment Horizon: Decide your investment duration.SIPs are ideal for long-term investing, but you can also choose shorter durations not ideal.

• Fund Selection: Research and select mutual fund schemes which suit your investment goals, risk profile, and investment horizon. Consider factors such as fund performance, fund manager expertise, expense ratio, and asset allocation.

 

How to Choose the Right SIP?

If you decide to start investing in the SIP, here is the suggestion to choose the right SIP.

• Evaluate your financial goals, risk tolerance, and investment horizon first.

• Now research about the mutual funds schemes and compare them all based on their performance, fund manager expertise, expense ratio, and asset allocation.

• You should also consider factors like historical returns, consistency of performance, and risk-adjusted returns.

• Look for mutual fund schemes with a track record of generating returns in line with your expectations and benchmark indices.

•  It is good to Opt for schemes managed by experienced fund managers.

 

Steps to Invest in SIP:-

1. Ensure all the necessary documents like ID Proof, PAN Card, Address Proof, Bank Details and many more.

2. After collecting all required documents, complete your KYC process.

3. Sign in to the SIP account. You can create a Demat account or trading account with a registered stockbroker or mutual fund distributor. Well, now you can all start with SIP in the PhonePe, Paytm Account. SIP is not very easy.

4. Choose a suitable plan for yourself like how many units you want, what types of investors you want, etc.

5. Select the amount of investment. You can decide the amount of investment you want from 100 to 1000 or more.

6. Select the date of SIP. It is an automatic process, so decide the date you want to deduct the amount of SIP.

7. Now, set up the auto-debit by linking the bank.

8. Review and confirm the details and submit the application form.

9. Once the SIP is set up, monitor your investments regularly

 

FAQs:-

1. What is SIP?
– SIP stands for Systematic Investment Plan. It’s a method of investing in mutual funds regularly over time, typically monthly, with a fixed amount.

2. How does SIP work?
– With SIP, a predetermined amount is deducted from your bank account monthly and invested in mutual funds. The number of units bought varies with market conditions.

3. Is SIP only for long-term investments?
– While SIP is designed for long-term wealth creation, it can also be used for short-term goals. However, its effectiveness is maximized over a longer duration.

4. Can I change my SIP amount?
– Yes, you can increase, decrease, or even stop your SIP anytime without penalties. It offers flexibility to align with your financial situation.

5. Are SIPs risky?
– SIPs are subject to market risks like any other investment. However, investing regularly mitigates risks through rupee cost averaging and long-term growth potential.

6. Can I invest in multiple SIPs?
– Yes, you can invest in multiple SIPs simultaneously to diversify your portfolio and manage risk effectively.

7. What if I miss a SIP payment?
– Missing a SIP payment doesn’t incur penalties, but it disrupts the disciplined investment approach. Consider catching up on missed payments when possible.

8. Are SIP returns guaranteed?
– No, SIP returns are subject to market fluctuations. However, disciplined investing over time tends to yield favorable returns due to the power of compounding.

9. Can I withdraw from my SIP anytime?
– Yes, you can withdraw from your SIP anytime, but it’s advisable to stay invested for the long term to maximize returns.

10. How do I start investing in SIP?
– To start investing in SIP, complete your KYC process, choose a suitable mutual fund, set up auto-debit from your bank account, and monitor your investments regularly.