SIP: What is Systematic Investment Plan, Benefits & How it works

Does SIP have maturity?

What exactly is NAV in SIP?

Systematic Investment Plan (SIP) is one of the most convenient modes of investment. It enables you to begin your investment journey by allowing you to invest even with a small amount. Investing in mutual funds through SIP can help you achieve your goals and instil financial discipline.

This article will help you understand the meaning and benefits of investing through SIP.

What is SIP?

A systematic investment plan is one of the modes through which you can invest in mutual funds. It enables you to invest a fixed amount of money periodically, monthly, quarterly, semi-annually or annually.

Understanding Systematic Investment Plan (SIP) with an example

An SIP is essentially a way to invest in mutual funds. It helps in investing a fixed amount of money at regular intervals, like monthly, instead of investing a lump sum. This would thereby average the cost of purchase, reducing the impact of market volatility. An SIP is always a disciplined way to invest and build wealth over time.

Example:

Let's assume you invest ₹1,000 every month in a mutual fund through SIP.

After five months, you have invested ₹5,000 and purchased a total of 105.4 units. The value of your investment will depend on the NAV at that time. SIP helps in averaging the purchase cost, minimizing the impact of market fluctuations.

What are the different types of SIP?

SIPs (Systematic Investment Plans) offer flexibility! Here are some options to suit your needs:

1. Regular SIP: Invest a fixed amount at regular intervals (monthly or quarterly) for a set period. Perfect for beginners!

2. Top-Up SIP: Gradually increase your investment amount as your income grows. Great for long-term goals.

3. Flexible SIP: Adjust your investment amount based on your financial situation. Ideal for those with fluctuating income.

4. Perpetual SIP: Invest for an indefinite period, allowing your wealth to accumulate over time.

5. Trigger SIP: Set investment rules based on market movements. This is more suitable for experienced investors.

Benefits of SIP Investment

• Pocket Friendly

SIP is ideal for people who do not want to invest a lump sum amount into mutual funds. With a SIP, you can invest an amount that can be as low as Rs. 500 per month. It is a pocket-friendly way of investing your money without having any burden on your wallet. Therefore, SIP suits investors of every budget. Moreover, people who do not have a regular source of income can easily opt for this mode of investment. A low investment at regular intervals ensures that you will be saving a part of your income with discipline.

• Compounding Effect

The most significant advantage of investing in mutual funds is that you get the opportunity to accumulate a higher corpus using the power of compounding. When you invest in mutual funds through SIP, you are reinvesting your returns in the same scheme. Therefore, your dividends can earn more income for you using the compounding effect. To gain maximum benefit of compounding, you must invest early and stay invested for a long time.

• Ease of Investing

SIP is one of the easiest and convenient ways of investing your money. If you do not know about the financial market and how it works, a Systematic Investment Plan is ideal for you. All you need to do is select a good fund and give standing instructions to your bank to manage your SIP investment.

• Rupee Cost Averaging

Systematic Investment Plan offers the benefit of rupee cost averaging. In simple language, rupee cost averaging means when the NAV is higher, your SIP investment will purchase lesser units of the mutual fund. Similarly, when the NAV is lower, the same instalment of SIP will buy more mutual funds. Therefore, you will be able to average out the purchase cost of mutual fund units over your period of investment.

• Emergency Fund

When you invest your money in open-ended funds, you can withdraw your SIP money at any point in time. This flexible facility of withdrawal can help you meet your expenses during an emergency.

• Protection from Volatile Financial Markets

SIP protects investors from the volatility of the financial markets. It saves the investors from speculation and panic decisions. When the markets are volatile and fall, you can accumulate more units of mutual funds at a lower cost. Thus, SIP protects the investors from speculation and helps procure more units at lower prices.

• Inculcates Discipline

SIP is known to bring discipline to the investor. When you invest in SIP, a fixed amount of money is deducted at regular intervals from your bank account. Here, your investment is not dependent on your willingness or other factors. SIP investment ensures that you regularly save and invest money to meet your financial goals.

How does Systematic Investment Plan (SIP) work?

An SIP, or Systematic Investment Plan is like a routine savings plan for your future. Here's how it works:

• You pick a mutual fund (like a basket of investments) and choose a fixed amount (even as low as ₹100) to invest regularly, monthly or quarterly.
• The magic lies in automatic debits. The money gets withdrawn from your account and gets invested on schedule—no need to worry.
• Depending on the market value (NAV) that day, you get more units when the price is low and fewer when it's high. This is called rupee-cost averaging, balancing your investment over time.
• Over time, you continue to invest, and your units increase in number; hopefully, your wealth, too!

When to Invest in SIP?

There is no pre-determined time to invest in an SIP. The best time to start investing is when you want to regularly save and grow your money. It's ideal for long-term goals like buying a house, education, or retirement. Further, start investing early to benefit from compounding and market fluctuations, and invest consistently regardless of market conditions.

Conclusion

There are many mutual fund schemes available in the market. All you need to do is select the fund that meets your requirements. If you do not have sufficient knowledge of the financial markets, you may seek the assistance of experts and invest in mutual funds schemes according to your long-term goals.

Systematic Investment Plan FAQs

What Are the Charges Associated with SIP Investments?

SIPs typically involve two charges:

• Transaction Fee: A one-time fee (around ₹100-₹150) for investments exceeding ₹10,000.
• Expense Ratio: An annual fee (as a %) charged by the mutual fund to cover management costs.

What exactly is NAV in SIP?

NAV (Net Asset Value) is the price per unit of a mutual fund. With SIPs, you buy units based on the NAV on the investment date. When the NAV is low, you get more units, and vice versa. This helps average out your investment cost over time.

How to calculate SIP returns?

Calculating exact SIP returns can be complex. However, online SIP calculators are readily available. These tools estimate your total returns based on your investment amount, duration, and expected rate of return.

Is SIP tax-free?

SIPs themselves are not tax-free. Yet, investing in ELSS through an SIP allows getting deductions in taxes under Section 80C, up to ₹1.5 lakh annually. Again, periodic returns from the SIP might be subject to the capital gains tax, depending upon the period and type of fund held.

Which SIP plan is best for 5 years?

A 5-year timeframe falls under medium-risk territory. Balanced funds or large-cap funds could be a good fit. However, the "best" SIP depends on your goals and risk tolerance. Discuss options with a financial advisor for a personalized recommendation.

Does SIP have maturity?

No, SIPs (Systematic Investment Plans) don't have a fixed maturity date. It's an ongoing investment method. You can keep investing as long as you want and redeem your accumulated units whenever needed.

What happens to SIP after maturity?

SIPs don't actually mature! They're designed for long-term investing. You can choose to continue investing after your initial goal is reached, allowing your wealth to further grow. You can also redeem your investments at any point, though exit load fees might apply within a specific timeframe.