We put in a lot of hours at work to achieve financial success in life. And it is only during these hours that we actively work towards our goal. However, with a systematic investment plan (SIP), your success is already underway. SIP allows you to invest a fixed amount in mutual funds over time in steps, either monthly or quarterly, averaging out your investment costs and benefiting from the power of compounding. Compounding works best when you stay invested, allowing your money to earn more money for you over time.

What do you mean by a systematic investment plan (SIP)?

A systematic investment plan, or SIP, enables investors to invest responsibly in mutual funds SIP invests a predetermined amount that is regularly withheld from the investor’s bank account into a mutual fund of their choice. Before we get into the benefits of SIPs, let’s first go over how they work.

SIP is a type of mutual fund investment. It allows a responsible investor to invest in a mutual fund scheme. SIPs give investors the opportunity to make relatively small individual investments starting at Rs. 500 per month in mutual fund schemes over a lengthy period of time, building up a sizable investment corpus over time.

SIP investments have grown in popularity in recent years because they allow mutual fund investors to make disciplined investments without having to worry about market conditions. SIP investing has made it easier for everyone to begin investing in mutual funds because it reduces the impact of market volatility and market timing.

Types of SIPs

There are four types of systematic investment plans in mutual funds. Let’s look at them in detail.

Top-Up SIP
You can use the top-up SIP facility to increase your SIP investments as your career develops and your income rises. Top-up SIP allows you to increase the existing SIP amount on a regular basis (for example, you could increase your existing SIP of Rs. 1,000 per month by Rs. 500 after every 6 months; this means that after 6 months, your monthly SIP will become Rs. 1,500; after another 6 months, it will rise to Rs. 2,000, and so on).

Perceptual SIP
The end date of your SIP is not specified when you start a perpetual SIP. Your periodic installments will continue to be invested unless you specify otherwise in writing.

Flexible SIP
Flexible SIPs allow you to adjust the amount of your periodic investment based on your cash flow. While a fixed investment amount is still specified when starting a flexible SIP, you can change it up to 7 days before the installment date. This is even simpler if you use SIP over the internet.

Trigger SIP

SIP through Trigger is an option for experienced investors. If the market becomes volatile, you can set a trigger to automatically redeem and/or switch from one scheme to another.

What are the benefits of mutual fund SIP?

Power of compounding

Compounding occurs when the returns on your investments begin to earn returns. In theory, this is a simple concept. However, the practical implications are significant.

Your returns are reinvested when you invest regularly through SIPs. This can have a snowball effect over time, increasing your potential returns dramatically. Investing for an extended period of time is an excellent way to maximize this gain. This also implies that you may benefit from investing as soon as possible.

Rupee cost averaging

Rupee cost averaging is a concept in which you buy more units when the fund’s Net Asset Value (NAV) is low and fewer units when the NAV is high. It essentially averages out your purchasing costs over the life of the investment. When you invest through a SIP, you don’t have to worry about market timing.

Convenience

SIP is a convenient way to invest because it is an automated process facilitated by standing auto-debit instructions provided to the bank. Furthermore, the automated process ensures that you never miss an opportunity to increase your investments.

Flexibility

Another significant advantage of SIPs is their adaptability. With few restrictions, investors can pause or cancel existing SIPs or start new SIPs. This flexibility ensures that the investor’s mutual fund investments can be increased, decreased, or even stopped based on his or her financial situation.

Low initial investment

SIPs allow you to invest in mutual funds for as little as Rs. 500 per month. This can be an inexpensive way to invest each month without breaking the bank. With the SIP step-up feature, you can increase your monthly investment amount as your income rises. Investors can top up their SIPs on a regular basis with mutual fund houses. So, even if you start with Rs. 500 or Rs. 1,000 per month, you can gradually increase your investment over time. This strategy can assist you in achieving your investment objectives more quickly.

What factors should you consider when investing in a mutual fund SIP?

Despite the fact that SIPs have many advantages, you should take the following things into account before starting a systematic investment plan to invest in mutual funds:

Determine your risk tolerance
Before making a mutual fund investment, a potential investor must evaluate their risk tolerance. For investors with moderate risk tolerance, a diversified large-cap equity fund or a hybrid fund may be a better choice via SIP than a small-cap or mid-cap fund.

Determine the goal and duration
You must precisely identify your investment goal before you can start a SIP. Make sure you have a specific investment goal in mind if you want to make the most of SIPs. This will make figuring out the kind of scheme, term, frequency, and quantity of SIPs necessary to achieve your investment goals much simpler.

Scheme Performance
Investors must evaluate the scheme’s performance in comparison to its benchmark and peers over various time periods, such as three years, five years, ten years, and since the scheme’s inception. This comparison can assist investors in selecting mutual funds that are consistent performers over time.

How does SIP work?

You should be familiar with SIP before you begin investing. A SIP operates under the tenet of consistent, recurring investments, much like a recurring bank deposit. The investment sum and the corresponding number of mutual fund units will be automatically deducted from your bank account in accordance with standing instructions. Unit distribution is determined by the Scheme’s current Net Asset Value (NAV).

A team of qualified fund managers oversees your investments in SIPs offered by SEBI-registered mutual funds in exchange for a small administration fee as described in the Scheme Information Document of the applicable Scheme.

CA Mukesh Gupta
CA Mukesh Gupta
Mukesh Gupta is the founder and director of Wealthcare. He is Fellow chartered accountant, Certified Financial Planner and Certified Public Financial advisor. He is in financial services industry since 1994. He conducts free money management sessions for corporates and associations on topics related to Personal finance. His previous engagement was with Birla Sunlife group. He regularly writes on topics related to Personal finance and occasionally appear on electronic media.

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