SIP or Systematic Investment Plan is a type of investment method in mutual fund schemes. It does not refer to a specific kind of mutual fund.
An SIP can be termed as a specific amount that gets invested regularly over a period of time, such as weekly, monthly, quarterly, bi-annually, etc. It can be compared to a recurring savings deposit bank account. The investor can use SIP to buy units at regular intervals that is pre-decided; he/she can fix the scheme and the amount of money that needs to be invested. It is possible to reduce or increase the amount at any time or altogether discontinue SIP plan at any time.
The cost averaging principle allows investors to buy more units in bear markets and fewer units in bull markets. SIPs permit participation in the share market without the need for market timing and also inculcate disciplined investment habits. The power of compounding ensures that you end up with a big corpus over time.
Benefits of SIP
Some of the common benefits of SIP are listed below:
- Convenient: It is very easy to invest in SIP. You do not have to get an appointment. You can register online, fill in all the necessary details in the application form, make a fixed amount investment, and ensure that the funds are available in the bank account. The fixed amount SIP payment can be made via an auto-debit facility or through post-dated cheques. Then, periodic account statements can help track how your investment is progressing.
- Rupee Cost Averaging: The process of timing the market can be very hard. One has to do research, get an understanding of the market, and devote lots of time to it. The mechanism of rupee cost averaging helps automatically time the market and thus gets rid of the need for timely investments. As Investments are made periodically, the use of SIP method of investment eliminates the need to keep a lookout for interest rates or share prices. This is because, as the investment amount is fixed, increased units are bought when the price is lower and fewer units when cost is high. Profit is not guaranteed by SIP, but it help minimize the adverse effects of unpredictable market conditions.
- Power of Saving: The concept of saving is underlined by the fact that money will work best only if investment starts at a young age. The more you delay commencing investment, then the more is the financial burden to achieve all the goals of life. Regularly saving small sums from a young age can help fully realize the potential of the power of saving and will allow the money to better work towards accumulation of wealth.
- Power of Compounding: Starting early is one of key fundamentals of becoming a successful investor. As investment, its returns, and creation of wealth have its basis in the power of compounding, individuals who start investing early on are more likely to get higher yields than those who begin late even with a somewhat higher fixed sum or corpus.
- Low Cost: SIP is an investment method that does not ask for a big amount to be invested. Hence, people can begin the task of investment with an amount as low as INR 500 on a monthly basis and change it as per improvements in their financial condition. Such a low sum means that anyone can start with SIP investments at an early age and end up with a large corpus in 30 to 40 years.
- Disciplined investment: Another factor which plays a major role in successful investment is discipline. When you begin investing regularly, then it imbibes discipline in your savings and investments, and eventually results in accumulation of wealth. Systematic method of investment is a discipline that has been tested over time for being an easy process of automatic investments. And SIP is the best example of systematic investments. It is also important to note that regular investments of small sums often results in better returns as compared to lump sum investments. SIP ensures your commitment to a fixed sum of investment every month, every quarter, etc. Also, since the fixed amount is automatically deducted from your account (in case of auto-debit facility) you do not need to worry about missing out on a payment.
- Tax benefit: SIP option is available with all kinds of balanced funds, equity funds, and debt funds. Since equity based long term capital gains are tax free, investments in an SIP means that such investors do not need to pay taxes for all the investments that are held for more than 1 year. However, in case of SIP investments that have been redeemed within the one year holding period, investors have to pay short term capital gains tax.