Systematic Investment Plan (SIP)

Posted By Amritesh
On April 23rd, 2017
Comments: 11 responses

Systematic Investment Plan (SIP) is an intelligent way to plan your investments in mutual funds in order to minimize risk and maximize your returns. SIP allows Individuals to make periodic investments at their convenience (i.e Weekly, Monthly, Quarterly). SIP enables regular contribution to the fund at specified intervals. Thus the savings may be translated into investments which leads to maximization of one’s wealth. Individuals may start with a minimum investment of Rs 500/-. Thereby, relieving individuals of the burden of making lump sum investment. Individuals may invest in SIP directly or via Demat account as per their choice, one may also invest through their respective Bank (Savings Account Holders) post completion of mandatory KYC formalities.

Read about different types of Mutual Fund Investment in the link provided below.

Types of Mutual Funds

How does it Systematic Investment Plan Work?

This is a very easy and flexible investment plan as one has the option to enable automated transfer to the SIP funds from the respective Bank account. This helps to auto deduct the specific amount to be allocated to the Fund on the assigned date and again auto transfer of the Investment at the time of redemption of the fund. The allocation of the units in your Fund is based on the prevailing market value which means the Net Asset Value (NAV). With the shifts in the market scenarios the NAV of the Funds is also impacted and thus the Unit allocation may also differ during the vesting period.

If the market is outperforming the NAV will rise, which impacts the quantum of units purchased and vice versa. However as the investment is spread out over a period of time and is diversified into various sectors, the fund generally averages out to provide decent returns. Thereby, it is able to make the most of under performing market by adding more units to the Folio whereas; while improved market scenarios provide better valuation.

Features of SIP which makes it attractive Investment option:

Ease of Investment: Since the minimum amount which can be invested is as low as Rs 500/- (no upper limit) it is easy for anyone to invest in this scheme and accumulate handsome return over a period of time.

Better Returns: Over the years it has been seen that the return on investment is one of the best in mutual funds and it is really a good investment option as far as wealth maximization is concerned. Since it is market linked it performs well over longer duration and return is better than other fixed return investment products which provide very modest returns.

Power of Compounding at Work: This is one of the most important features of any investment. The compounded rate of return is something which financially helps us to attain magical figures which otherwise would not have been possible.However, do remember that this is a market linked so your investment does not earn any compound interest.

Let’s understand Systematic Investment Plan (SIP) with an example:

Suppose you have started investing on your 30^th birthday with a sum of Rs 1000/- on a monthly basis and you continue with your investment till the age of 60 then it means your principal amount invested stands at Rs 3,60,000/-. Now suppose you earn an modest return @ 8% p.a on the Principal even then the investment will grow handsomely to Rs 15,00,000/- at the time of redemption.

Inculcate Saving Habit: Since you have to make periodic investments you will plan your finances better and develop the habit to save which would be very beneficial for future plans and management of personal funds.

Flexible Investment: SIP makes investment very flexible as there is no point of entry and no compulsion of exiting from the investment. You are also free to increase or decrease your investment as and when you feel the need to do so.

Systematic Investment Plan (SIP) is the ideal way to invest in Equity Oriented Mutual Funds and enjoy the appreciation of wealth.

This article is for informational purpose only. Readers are advised to research further to have more clarity on the topic. It is very important to do your own analysis and consult your Financial Advisor before making any investment based decision.

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