Systematic Investment Plans (SIPs) are a mode of investment in mutual funds, an alternative to lump-sum investment. Most investors are often confused if SIPs are a type of mutual fund scheme or whether it is any different type of investment other than mutual funds. Well, it is important to note that SIPs allow investors to invest periodically where you can buy units of a mutual fund scheme every month by investing some amount.
What is a SIP?
SIP refers to the Systematic Investment Plan where you can invest a small amount at regular intervals in a mutual fund (MF) scheme. Each time you invest, you buy more units of the scheme and you can set a date for auto payment. You can start and stop the SIP any month, without any charges or fees, unlike the Recurring Deposits, where they charge you for premature closure. You can also skip the SIP installment and then continue from the next month without paying any additional charges.
Benefits of SIP
With a SIP, an investor enjoys not only the benefits of a mutual fund scheme through its returns but also gains some additional advantages. SIPs have certain benefits over lump sum investments as explained below:
- Power of Compounding
One of the most advantageous features of SIP is the power of compounding. Each time you make a payment, you buy more units, which generate returns on your investment. These returns are further reinvested in the scheme and hence, investors benefit from the effect of compounding. If investors start investing early and stay invested for a long time, they will reap optimum returns from the SIP.
- Rupee Cost Averaging
Investors tend to invest in schemes that seem profitable and have been performing well. Usually, when they outperform the benchmark, more investors invest, thereby increasing the NAV (per unit market value) of the mutual funds. Investing in a lump-sum mode means buying lesser units at high prices. But due to market upheavals, the stocks and the returns also rise and fall. The prices of mutual funds units fluctuate. Through SIP investment, the cost of the total units purchased by the investors as long as they continue the scheme is averaged out. When prices are high, fewer units are bought and vice-versa. This is called rupee cost averaging. This is a benefit unique to SIP and not to lump-sum investments.
- Light On Pocket
SIP is light on the pocket because you do not invest a huge amount at once but contribute small amounts at periodic intervals. You can also skip the installments when you are running short of money and increase/decrease the monthly SIP amount as per the requirement and financial conditions. Beginners can start with amounts as low as Rs. 500, which makes it convenient even for students and young earners with low-paid/part-time jobs to invest.
SIPs are flexible not only because you can start or stop them anytime or skip an installment but also because you can make changes in the SIP amount. It also offers the flexibility to withdraw money partially or fully without any charges or discontinuing the scheme. This way it can serve as an emergency fund where the money is credited into the bank account once you request the withdrawal. Moreover, several types of SIPs like ELSS and ULIPS are tax-saving and insurance-cum-investment plans respectively. Some schemes also allow investing bi-monthly or fortnightly and allow you to opt for ‘Step-up SIP’ which will uniformly increase the installment amount.
- Saving Discipline
SIPs inculcate a habit of regular saving and investments. In fact, you can set a date for auto-debit from the bank account to invest in a scheme and this way you develop a disciplined habit of investment. Every month, you end up contributing a small part of your income to investments that can reap you good returns. It will help you build an inflation-beating corpus in the long run.
Wrapping it up:
Systematic Investment Plans (SIPs) are a mode of investment in mutual funds where the investors do not buy units at one time paying a lump-sum amount. Rather, they invest through installments paying small amounts periodically. This helps them to stay invested in mutual funds by dedicating a small part of their income which is light on their wallet. Also, it averages out the total costs of the scheme’s units purchased and has a compounding effect on returns. The flexibility and the low minimum amount of SIPs make it convenient for small investors.