What are SIPs?
In a Systematic Investment Plan (SIP), an investor invests a fixed amount at intervals that he chooses in a mutual fund scheme. In an SIP investment plan, a small amount is invested over time rather than a large amount invested at one time.
How does SIP work?
An SIP plan is an automatic investment plan that deducts your payment from your bank account and invests it in your mutual funds at a predetermined time interval. Mutual fund units are ultimately distributed to you based on the mutual fund’s NAV. When you invest in an Indian SIP plan, more units are added to your account according to the market rate. The earningsarereinvested and the return on investments increase with each investment.
The investor has the option of receiving the return at the conclusion of the SIP’s tenure or at predetermined intervals. Let’s use an example to understand this better. Consider that you have set aside 1 lakh rupees to invest in a mutual fund. You can now do this investment in two ways. You can invest Rs 1 lakh in a mutual fund in one-time, generally known as a lump sum investment.
Alternatively, you could decide to invest through an SIP, or Systematic Investment Plan. You must start the SIP for a specific sum, say,₹1,000. Then, at a predetermined fixed date each month, ₹1,000 will automatically be debited from your account and deposited to the mutual fund you choose to invest in. This will carry on until the deadline.
Types Of SIPs:
There are mainly five types of SIPs:
- Regular SIP: The simplest type of SIP is regular SIP, which requires regular contributions from investors. A monthly, quarterly, bimonthly, half-yearly, or annual interval can all be possible. The investor has the option to select their time interval whenever it’s convenient when they open the online SIP. However, once a time interval has been chosen, it cannot be changed.
- Flexible SIP: The only difference between the flexible Systematic Investment Plan and the standard SIP is the investment amount. Investors can change the amount of a flexible SIP at any time. This enables investors to have more control over their portfolios.
- Step-up SIP: The Step-up or Top-up SIP allows participants to increase their monthly investments each year. For instance, the investor could begin with an SIP of ₹1,000 per month. He may specify that every year, the amount would be increased by 10%. Hence, in the second year, the monthly contribution would be ₹1,000 + (10% × ₹1,000) = ₹1,100. Similarly, in the third year, the monthly contribution would be ₹1,100 + (10% × ₹1,100) = ₹1,210, and so on.
- Trigger SIP: A trigger SIP facility in mutual fund enables investors to redeem either a part or full amount, or switch investment to another scheme automatically when it reaches a pre-defined trigger point. A trigger can be set for both upside and downside events. Thus, the facility helps investors to reduce market risk to an extent, but the investor must have a deep understanding of the market to properly implement it.
- Perpetual SIP: There is no end duration for the perpetual SIP. The investment continues until the investor stops making it. The only distinction between a regular and perpetual SIP is that perpetual SIP goes on forever, while a regular SIP ends after a certain time. In a perpetual SIP, the investor is not under any obligation and may stop the SIP he chooses.
Why SIP Investment is the best investment?
Small Amount Investment
A monthly SIP investment can be as low as ₹500 in most mutual fund programs.Compared to the most common investing choices, such FDs and ETFs, this investment amount is significantly less. This makes sure that most people who have just begun to make money can invest to achieve their long-term objectives.
Adjust the SIP Amount the Way You Want
SIPs are very adaptable. For instance, you are not required to continue investing ₹1,000 each month if you begin an SIP of ₹1,000 in a mutual fund scheme of your choice. SIP amounts can be changed or even a new SIP can be started if your savings grow.
Stop or Skip the SIP
The SIP investment does not have to be deposited every month for a set period of time. If you don’t have enough money to invest, you can skip the SIP for a few months or even stop it altogether.
Creates a Disciplined Investor in You
The majority of investors struggle to continue investing for an extended period of time after they begin. SIPs, by their very nature, increase your investment journey’s discipline. You don’t need to make the monthly contributions yourself because a predetermined amount you specify is automatically invested in the plan of your choice.
Complete Transparency
The AMFI and SEBI have put in place a number of strict regulations that every mutual fund scheme and AMC must adhere to in order to protect the interests of investors. Due to this, the mutual fund sector has become transparent and secure for investors who are just beginning their investment journey.
Advantages of Investing in SIP:
Systematic investment plans have several advantages. Here are some benefits of SIPs:
- SIPs’ simple investment plans allow investors to invest a minimum of ₹500 at regular intervals and watch their money grow. The investor has complete control over the amount and tenure.
- SIPs have a respectable rate of return. Therefore, an investor would gain more from their return if they planned a long-term investment in SIP. However, since investments tend to compound in accordance with the rate of return, a good rate of return is also advantageous to investors looking for short-term investments.
- An investor receives a larger return on their investment when they begin investing in SIP. SIP guarantees much higher returns than conventional fixed deposits. The regular increase in inflation has no effect on SIP.
- Emergency funding is a term used to describe SIP. Systematic investment plans are flexible and unrestricted investment strategies.
- Investors can choose SIP with ease, thanks to options like flexible investment, picking the preferred timeline, and selecting any SIP from the five plans.
Conclusion:
SIP is the most profitable investment plan in this competitive market. It allows an investor to get a respectable return on their capital. The SIP benefits are reflected in the five distinct SIP programs.
SIP draws a lot of investors to invest in mutual funds with the lowest risk on the market because of its adjustable plans, investments, and tenure. Before beginning a SIP, an investor should speak with a fund manager because they can offer the best guidance on which SIP to start investing in.