What is SIP?

  • A systematic investment plan (SIP), better known as SIP, is an investment mutual fund option for investors to invest in a disciplined manner.
  • The SIP function allows the investor to invest a fixed amount in the chosen investment fund at fixed intervals.
  • The fixed amount of money can be as low as 500 rupees, while the predefined SIP intervals can be weekly / monthly / quarterly / semi-annual or yearly.
  • By using the SIP channel to invest, the investor invests over time without worrying about market dynamics and could benefit in the long term due to the average cost and capitalization power.

What Is SIP?

How SIP works?

The systematic investment plan works more or less like a mutual fund. It is important to know about how to start a sip investment.

The processing of your money is done by money market experts and is not your headache. But it’s good to know how your money grows with a systematic investment plan.

A fixed amount is automatically deducted from the policyholder’s SIP account and invested in investment funds. The current market price is assigned a predetermined number of units. Because these plans are flexible in nature, investors can increase the amount at any time or stop investing in the plan.

Well, the following mechanisms underlying the operation of a systematic investment plan,

  1. Effect Of Compounding
  2. Rupee Cost Averaging

These mechanisms are further explained below.


Also Read: Top 10 Mutual Fund Providers In India 2019


Benefits Of SIP( Systematic Investment Plan )

1. Effect Of Compounding

Unlike simple interest, the compound interest involves making the interest earned, a part of your base capital and the subsequent interest is calculated on the basis of this newly increased capital.

Thus, Compound Interest leads to an exponential growth of your money. The effect of compounding increases as the investment tenure increases.

The table below illustrates the fact.

SIP Inputs SIP TenureRate Of Interest (ROI)ReturnsTotal Output
Simple Interest1005 years10%50150
Compound Interest1005 years10%60161

As can be seen, the total output increases by 7% when interest rates are calculated. This seemingly minimal difference in final production fluctuates with increasing investment time.

The following table shows the numbers calculated for a period of 20 years. As you can see, in the long run, the difference will be more than twice as long as the effect of the composition increases.

SIP Inputs SIP TenureRate Of Interest (ROI)ReturnsTotal Output
Simple Interest10020 years10%200300
Compound Interest10020 years10%573673

Also Read: Types Of Mutual Funds


2. Rupee Cost Averaging

The concept of average rupee costs is to average the costs at which you buy shares in a mutual fund. Stock markets have always been volatile, reflecting the ups and downs of the economy.

Remembering the law of demand means that more of a product is bought when it is the cheapest. Conversely, demand tends to lower the price of goods.

The fundamental principle of investment strengthens the same. It leads the investor to “buy low and sell high”. This means that you should buy more shares in a mutual fund as markets fall and fewer shares as markets go up.

However, most investors do exactly the opposite. They buy when markets rise and suddenly buy up after a slump. In the end, their average investment costs and their returns go down.

A SIP investment allows you to take advantage of rupee-cost averaging in an automated manner. For example, have a look at this table below

TIMEAmount
Paid
Price per
share
Number of
shares bought
Jan- 201720004050
Feb- 201720004841.67
Mar- 201720004247.62
Apr- 201720003458.82
May-201720002871.42
Jun- 201720003066.67
Jul- 201720005040
Aug- 201720004247.62
Sep- 201720004445.45
Oct- 201720003262.5
Nov- 201520003655.55
Dec- 201720004050
  • Total Investment: Rs. 24,000
  • Total number of shares bought: 637.32
  • Average price per share: Rs. 37.67

Also Read: Aditya Birla Sun Life Mutual Fund


3. 2xHigher returns than RD

Compared to traditional FD, ELSS, a systematic investment plan offers higher returns to effectively prevent inflation.

Top 5 ELSS Mutual Funds in 2019

Top 5 ELSS Mutual Funds in 2019

Types of SIPs

  • Top-up SIP: This type of SIP allows you to increase the investment amount at regular intervals and take advantage of a well-performing mutual fund scheme by increasing your investment amount. For example, if your investment amount is Rs 5,000 per month in June 2019, you can increase it to any amount, say Rs 6,000 per month in July 2019 or any other succeeding month under Top-up SIP.
  • Flexible SIP: Flexible SIP allows you to increase or decrease the amount as per your disposable income. Thus, with this, you can decrease or skip the payment of a few installments when there is a cash crunch. Similarly, a flexible simple investment plan also allows you to increase the amount during an increase in cash inflows.
  • Perpetual SIP: While doing a SIP investment, investors have a choice to provide the end date of the SIP. If the investor chooses to not give an end date then it is a perpetual SIP. This allows you to end your simple investment plan at the time of your choice or when your financial goal is achieved since there is no fixed tenure attached to the SIP.
  • Trigger SIP: This SIP is suitable for investors who have knowledge and awareness of financial markets. It allows you to set either an index level, NAV or a particular date as the start date of the SIP. However, it is not advisable to invest via a trigger simple investment plan as it is essentially an attempt to time the market which is nearly impossible to do with 100% accuracy.


SIP Calculator

systematic investment plan returns are calculated based on compound interest. Enter the amount you want to invest each month, select the number of years you want to invest, and our calculator will automatically calculate the amount of the return.

It also shows you a comparative study of your simple investment plan performance with other investment options such as time deposits.


Common SIP Investment Mistakes

Be careful of the following mistakes while making a SIP mutual fund investment so that you can create and appreciate your wealth to maximum levels:

  • Investing too small or huge amount: It is often observed that many investors invest a very small amount via a simple investment plan. It is fine, to begin with, a small amount, in the beginning, however, the investment amount should be gradually increased to get substantial gains. Similarly, many investors begin a SIP investment with considerably large amounts. This approach must be avoided and large sums must be invested once the investor has enough confidence about the performance of the fund. An investor should always try to invest an amount which is optimal according to their financial position and investment objectives.
  • Not investing in the long term: Investors often withdraw their investment as soon as it starts giving a decent return, they don’t realize that the value of a SIP investment also depends on the simple investment plan time period. A SIP investment is always capable of giving its maximum returns over a long tenure. Thus, it is advisable to remain invested for at least 4-5 years in order to earn some really good returns.
  • Not increasing SIP amount with time: This is another mistake that investors often end up committing is they fail to increase the simple investment plan amount with time. With an increased disposable income, an investor should increase the contribution in order to continue receiving inflation-beating returns. This must be done when an investor is confident about his investment fund’s performance.


Best SIP plans In India 2019

  • Aditya Birla Sun Life Frontline Equity Fund
  • Kotak Standard Multicap Fund
  • Axis Bluechip Fund
  • ICICI Prudential Bluechip Fund
  • SIP HDFC Short Term Debt Fund

Top 3 Mutual Funds In India 2019-20

Top 3 Mutual Funds In India 2019 | Now In Hindi

The above video also explains what is sip in Hindi. What is SIP account, how to start sip investment these points also covered in this video. I hope it will help you.

FAQs:

Q. Why Choose a Systematic Investment Plan?

Ans. If you are short on cash to make a lump sum investment or if you want to reduce your risks you can choose SIP. Also, SIP would bring in discipline, which helps you to make logical decisions instead of giving in to tricky needs.

Q. How To Set Up SIP?

Ans. In order to set up a SIP, you fill up a SIP form and a bank mandate. With online platforms like Paisabazaar, you can complete both these steps online in a matter of minutes by filling in your KYC details such as Aadhar and your bank details for debits.
The amount deducted is then invested in the mutual fund scheme of your choice according to the applicable NAV.

Q. Should I Choose SIP for Long term wealth?

Ans. Any investment period can be chosen by a customer. But, it has been proven that a long term investment has been rewarded with greater returns as compared to short term investment.

Q. Can I miss a SIP payment?

Ans. Yes, you can miss your payment and still your SIP account wouldn’t be deactivated. Also, there are options to pause your payments in various mutual funds.

Q. How is NAV calculated?

Ans. For example, let’s say you set up Rs. 1,000 per month SIP plan for 12 months starting from the 7th of the month. Every month around the same date, your SIP

account will show Rs. 1,000 deduction towards investment in the mutual fund of your choice.
The case of applicable NAV is based on whether the 7th is a day when the markets are open or closed. If the 7th is a working day for the stock market, the applicable NAV for SIP installment would be the chosen mutual fund’s NAV at the close of markets on the 7th. If 7th is a holiday such as a Saturday, Sunday or Public Holiday, then the applicable NAV would be the one obtained at the end of the next working day.


This Article was written by,

Akshay M.

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