Systematic Investment Plan or SIP, in layman’s terms, is an investment plan in which one makes regular investments – mostly monthly, for some goal with the motive of wealth creation or management for the same. These systematic investments are also equal payments made by the investor towards mutual funds. Investments through mutual funds are perhaps the safest option for investment- shares or any other investment option is riskier. Further, you also get to benefit from rupee cost averaging.
Modes of Investment
The type of investment you opt for depends upon the cash availability: cash in hand, your income and number of dependents.
You can choose from a number of modes:
Regular Systematic Investments: If you are making regular investments in mutual funds Through or with the help of an advisor, you are into this plan. The basic structure of the plan remains same; the only difference is that expense ratio is a bit higher in case of regular investment. Expense ratio includes fund management fees, administrative and advertising fees. In case of regular investments, this expense ratio also includes broker’s fees.
Direct Systematic Investments: Direct Systematic Investments are for those who have quality knowledge about the market, funds in the market and can answer questions like how much to allocate and where to allocate depending upon goal cost. It is different only in terms of expense ratio- rest everything – the structure, the administration is the same.
Lump sum Investments: If you have cash in bulk in your hand or in your bank account, you can go for lump sum investment in any mutual fund scheme either direct or regular. This is a one-time investment. You can sell the units as and when you want.
Dividend Option: You can avail dividend option in selected mutual fund schemes. As per the scheme policy, a certain amount will be credited to your account periodically. However, remember, that the amount credited periodically will reduce your investment corpus.
Why should you go for Systematic Investments?
Investment through Systematic Investment Plan is not only convenient but it also makes sure that an investor does not have to face the adverse effects of risk. It will be clear from the following points:
- The best part of investing through Systematic Investment Plans (SIPs) is that you don’t have to allocate too much amount for your investment or at least in one specific fund. You can invest as low as Rs. 500.
- One of the popular misconceptions is that you should sell all your units when the market is low and buy when the market is doing well. Actually, you should do the opposite! The effects of market ups and downs are diminished to an extent because of rupee cost averaging. If the prices are low, Net Asset Value will be low, hence you can buy more units. However, if the NAV is high, you’ll buy fewer units in the same amount.
- Your wealth will grow exponentially over the years if you invest continuously. Reason? Power of compounding! For example; if you invest Rs. 15000 monthly for 15 years at the rate of 15%, then at the end of investment tenure, total value will be Rs. 100 lakhs. However, if you continue to invest for 15 more years, the total value will be Rs. 1038.49 lakhs. Hence, it is recommended to invest for a longer period of time.
Systematic Transfer Plan
You can also redeem few or all units of certain scheme monthly or quarterly, and reinvest in some other scheme of the same fund house. What most of the investors do is they invest in the liquid fund and apply for systematic transfer of certain amounts either monthly or quarterly in the targeted equity plan.
Advantages of Systematic Transfer Plan
You can easily switch your invested amount to the scheme you want, provided it is of the same fund house. Similar to the Systematic Investment Plan, Systematic Transfer Plan helps out in achieving maximum returns by averaging out the costs.
The best thing about this facility is it helps to rebalance the portfolio. For ex., if you realize at some point of time after you have started investing that there is more than the required portion of debt than equity, you can choose to transfer a certain amount from debt fund to equity fund and vice versa. However, make sure that the schemes are of the same fund house.
Systematic Withdrawal Plan
Systematic Withdrawal Plan, popularly called as SWP, is a facility with which you can choose to withdraw a certain amount at regular intervals from the mutual fund scheme you are already investing. This way you remain invested in that very particular scheme and keep generating returns and also it becomes your regular source of income a swell.
Advantages of Systematic Withdrawal Plan
Systematic Withdrawal Plans are a good investment strategy because of two reasons: one, the amount is withdrawn are basically redemption of the units invested. So they are not taxable. However, long term capital gains will be applicable. Second, you get to have regular income at a predetermined frequency. The problem with most of the other monthly income plans is that the frequency is not fixed.
If data is to be believed, systematic investments in mutual funds have not failed to attract youth as well as middle-aged people. Any day, it is better to start early. This way, you’ll be accumulating more wealth. Facilities such as the Systematic Withdrawal Plan and Systematic Transfer Plan, allow you to manage your wealth in a more convenient way.