What is a Systematic Investment Plan(SIP)? Benefits Of SIP – ‘SIP’ means Systematic Investment Plan. SIP is a facility or plan, where one investor can invest money in a systematic way, say on a weekly/monthly/quarterly/semi-annually or annual basis, instead of making a lump-sum investment.
Here, in this investment plan,the investor does not worry about market or asset ups and downs (volatility) as SIP gives the benefits of average costing of the investment, power of compounding and decreasing the risk.
SIP is popularly used in mutual funds and the stock market. A systematic investment plan is a powerful tool to fight market volatility and benefit from the enormous potential of compounding over time.
Benefits of SIP:
1. COMPOUNDING –
“Compounding is the magic of investing” said Jim Rogers, the famous American businessman and financial commentator. The power of compounding works by growing your wealth exponentially. Through SIP you can take the full benefits of Compounding, which means to earn interest on interest. You can earn huge with this concept applying SIP in your investment journey.
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For example, a monthly SIP of Rs 10000 at the rate of 15% would grow to Rs 27.86 lacs in 10 years, Rs. 7 cr in 30 years. The true benefit of SIP is reaped by investing at lower levels.
Imagine there are four investors: A, B, C and D.
A – 20 years
B – 30 years
C – 40 years and
D – 50 years
All of them invest Rs. 2,000 per month in an equity fund through SIPs.
Assuming the equity fund offers an annual return of 12%, here’s how much each one could earn by the time they turn 60:
| Monthly SIP (Rs.) | No. of years | Investment amount (Rs.) | Wealth gain (Rs.) | Final corpus (Rs.) | |
| A | 2000 | 40 | 9.6 lakh | 2.3 crore | 2.4 crores |
| B | 2000 | 30 | 7.2 lakh | 63.4 lakh | 70.6 lakhs |
| C | 2000 | 20 | 4.8 lakh | 15.2 lakh | 20 lakhs |
| D | 2000 | 10 | 2.4 lakh | 2.2 lakh | 4.6 lakhs |
2. RUPEE COST AVERAGE –
In the rupee cost averaging approach, an investor invests a certain amount of money at regular intervals irrespective of whether the markets are bullish or bearish. This ensures the investor to buy more units when the markets are low and lesser units when they are high. The Systematic Investment Plan approach brings down your average cost per unit over the long-term.
Investment via SIPs in market will allow you to take advantage of rupee-cost averaging in an automated manner.
3. REGULAR INVESTOR –
SIP allows the advantage of investing in small amount of money each time without any hassle to the investor. The investor can send an one-time instruction to allow auto debit of the fixed investment amount each month from his bank account without worrying about missing out on any instalment interval.
Disciplined approach towards investment helps the investor to keep his emotions in control. Equity has proven to be the best-performing asset class over long period of time, which is when the magic of compounding returns starts to show. But to get the best of this, you need to not only invest through SIP but also stay invested.
4. HIGHER RETURN –
In the long-term, SIP investments help investors take better care of their finances. When you invest a fixed amount of money each month, you can manage your money in a manner that can fulfil your investment. Your progress might appear slow, but when you look back after a while (long-term); you would have invested a considerable amount. The SIP mode can help you earn a large corpus slowly and steadily.
As compared to traditional fixed deposits or recurring deposits, SIP provides greater returns. This can help you beat the rising costs because of inflation.
5. FLEXIBILITY –
You can invest in assets class through a SIP with low amount per month. This can be an affordable way to invest each month without hurting your wallet. You can increase your monthly investment amount with a rise in your income via SIP step-up feature. Even if you start with very low amount every month, you can invest more over the years. This strategy can help you reach your investment goals at a faster rate.
SIP provides you with tremendous flexibility. If you are afraid of long-term commitment by investing in instruments like Public Provident Fund (PPF) or Unit Linked Insurance Plans (ULIPs), then SIP is just the right answer. These are open ended funds, and could be withdrawn as per your choice. In other words, SIPs do not have a fixed tenor. You can either withdraw the full or a partial amount from your investment, without incurring any losses. What’s more the amount of investment is also flexible: it can be either increased or decreased. You must, however, remember to have a long investment horizon for wealth creation.
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 lower amounts, which makes it convenient even for students and young earners with low-paid/part-time jobs to invest.
How to invest in SIP?
Here’s a simple step-by-step guide on how to invest in SIP:
Conclusion:
The goal of investing in assets is to let your investments grow and yield better returns. SIPs offer the convenience and ease of investing small amounts on a monthly, weekly, or quarterly basis. Moreover, you get the option of investing in different schemes (debt or equity) based on your risk appetite. However, it is paramount that you thoroughly understand the market before investing. Consult your financial advisor before investing.
Systematic Investment Plans or SIPs are a mode of investment, 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 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.
Frequently Asked Questions About “Systematic Investment Plan(SIP)”:
A SIP is a simple and cost-effective way to invest your money. It can be a good option if you want to minimize your risks and invest a fixed amount to get the benefits of compounding in long-run.
You can start investing in an investment plan via SIP with a very minimum amount, depending upon the plan or asset.
There is no ‘good’ or ‘best’ time to invest through a SIP. The best thing about SIP investments is that you don’t have to time the market or wait for the perfect opportunity to invest. Once you select a particular fund to invest, you can choose any date of the month and invest regularly. Automate your investments to make the entire process simpler.
Yes. You can miss your SIP payments. And even if you do, your account will not get deactivated. You can pause your payments for a specific period. This is a useful feature you can use in case you are unable to make your SIP payments.
Yes. You can pause a SIP anytime you want. After you’ve stopped paying for your SIP plan, you can either redeem your money or remain invested.
SIP is only a mode of investment. It is not an investment in itself. For example, you can invest in equity funds, debt funds and hybrid funds through SIPs. So, the risk feature depends on the type of investment you select.
No, SIP generates returns over the long term and hence, it is not a good investment for short-term purposes.
Investing through SIPs for the long-term can be an effortless way towards wealth creation. This is because compounding comes into play. The returns you could earn on your investments grow large over time. And the longer you invest, the higher profits you could garner.
No, SIP cannot be an alternative to liquid funds or other short-term funds for emergencies. Liquid/short-term debt funds are meant for a short duration while SIP is a long-term investment. However, you can withdraw money from the SIP in emergencies.
