Systematic Investment Plan
The full form of SIP in mutual funds is Systematic Investment Plan. It is not an asset class or an investment instrument. It is, in reality, one of the methods of investing in mutual funds. Therefore, SIP refers to investment in mutual funds regularly with a fixed amount of money in a disciplined manner. The other method of investing in mutual funds is a one-time lump-sum investment.
SIP meaning is it helps you invest a fixed amount of money regularly in various mutual funds schemes depending on your financial goals. You have the potential to create long-term wealth, by investing a small sum of money through a Systematic Investment Plan. The Systematic Investment Plan approach suits people with regular cash flow or a fixed salary.
For example – You want to build a fund of Rs. 5.4 Lakhs in 3 years for foreign travel trip. By starting a monthly SIP investment for Rs. 15,000, you can achieve the goal conveniently.
Systematic Investment Plan is the best way to get into the habit of saving and investing regularly. Apart from that, if you start Systematic Investment Plan early you have a longer investment horizon to avail benefits of the power of compounding. Additionally, a SIP investment avoids timing the market. SIP investment is least affected by the market volatility due to rupee cost averaging. When the markets are high, you purchase a fewer number of units as compared to the down market.
Benefits of SIP Investment
- Power of Compounding
Systematic Investment Plan helps compound returns over the long term. In other words, when you invest through the Systematic Investment Plan route, the earnings are reinvested into the mutual fund scheme. Thus, when the returns are reinvested, the compounding effect comes into play, which aids in the creation of further wealth. - Low Investment
Systematic Investment Plan is a set amount that you invest each month. This helps reduce the pressure of investing a large lump-sum amount at a time. You can invest any amount that is comfortable for you and use SIPs to create a significant corpus over time. - Lower Average Costs
While you invest consistently over time, you gain more units when prices are low and fewer units when prices are high. This contributes to the reduction of your average cost of investment. - Convenience
SIPs are an extremely convenient way to invest your money. They do not necessitate extensive market research or being proactive in response to market movements. This enables small investors to invest their capital easily. - Brings Financial Discipline
SIP meaning in mutual fund is that you have to invest a particular sum of money at regular intervals. That brings financial discipline where you first allocate money for savings and investing for future expenses. This means that you are getting financially disciplined and are consciously planning for the financial needs for the coming days. Being disciplined, helps you make logical decisions and make prudent investments. - Simple and Convenient
It brings convenience while investing, in a sense, you can choose any amount of Rs. 500 or more depending on your cash flows. Additionally, the SIP investment process is automated. Once set, you do not require to worry at every investment interval. A fixed amount gets deducted from your bank account. This fixed amount gets deposited to the mutual fund house for purchasing units. The mutual fund units get credited in your mutual fund’s account. - Investing across market cycles
When the markets are low the same Systematic Investment Plan amount can purchase a higher number of units. In higher market cycles you get lower units. Overall, the investor is least affected by the market volatility using Systematic Investment Plan as compared to a lump-sum investment. Because lump-sum investment could be at a high or low price but in Systematic Investment Plan allows the cost to be spread over a period and you get an average purchase price. Thus, this also gives a benefit of rupee cost averaging. - Phased Investment
Using Systematic Investment Plan you are purchasing a smaller number of mutual fund units every month. Thus helping you to invest in a phased manner over a period of time.
