What is a Systematic Investment Plan?
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- believe you don’t have enough money to start investing?
- get scared by market volatility?
- think you don’t have enough knowledge to understand market movement and timing?
- want to invest but end up spending your savings on other stuff?
Well, if your answer is YES to any of the questions above then there is a perfect solution for you – Systematic Investment Plan or SIP.
What is SIP?
SIP is a mode of investment offered by mutual funds. You can invest a fixed amount of money (varies from fund house to fund house, but generally starts from ₹500 for a monthly plan and ₹1500 for a quarterly plan) in a mutual fund scheme of your choice on a regular interval (monthly or quarterly) and build your investment portfolio.
In other words, Systematic Investment Plans help you to start investing with a small amount of money regularly, instead of waiting to create a large corpus for investment. Also, it allows you to choose your preferred period of payment i.e. monthly or quarterly and invest according to your convenience.
How does it work?
For starting a SIP in your desired mutual fund scheme, firstly you have to decide the fixed amount that you want to invest periodically. Once the amount is decided you have to select the date on which you want to pay your SIP instalments. All fund houses offer multiple dates to choose from. This is to help you select the suitable date depending on your date of money inflows. For example, if your employer pays your salary on the 7th of every month it would be unwise to set your SIP instalment date before 7th. Choose a date carefully so that you don’t default on your SIP instalments.
Once the date and amount are finalized, all you have to do is fill the required SIP form with your decided amount, date, the period of payment (monthly, quarterly), tenure (for one year, two years & so on) and bank details. Submit the filled form accordingly.
That’s it, your money will start getting auto-debited from your bank account and invested in your mutual fund scheme. It takes around 30 days for a fund house to set up and start SIP and register a bank mandate.
Benefits of SIP
- Financial Discipline
Majority of people follow the wrong approach to earn, spend & then save instead of the correct approach to earn, save than spend. SIP allows you to follow this correct approach. In fact, it also makes it better by replacing save with invest. It puts your earnings into investments regularly.
It is advisable to set SIP instalment date near your inflow date so that you invest before spending. This planned way of investment builds discipline and helps in accumulating wealth.
- Remove emotions from investing
Many are governed by their emotions when investing. They start investing when there is an optimistic mood around them (bull market) and stop investing when there is a pessimistic view around them (bear market).
Investing via SIP means that a fixed amount will be invested regularly irrespective of your mood, hence emotions don’t overpower your investment decision.
- Power of Compounding
Since with SIP you start investing early with small amounts, instead of waiting for accumulating large amounts of money you gain from the power of compounding.
- Rupee Cost Averaging
It’s a known fact that markets are volatile and therefore risky. Timing the market is not possible. SIP helps in reducing the risk of investing in equity by making volatility of market work in favour of the investor by cost averaging.
Let’s say you bought tomatoes today for ₹60 per kg. The next week you found a great deal & bought them for ₹35 a kg. The next week, due to heavy rains & low supply, the price of tomatoes had gone up and you were able to buy them for ₹85 a kg. The week after that they got even more expensive at ₹100 a kg. At the end of the month you averaged out your spending and it came out to be ₹70 a week Not bad!
In SIP you invest a fixed amount of money periodically whether the market is up or down. So your money fetches more units when the market goes down (NAV will be less) & fewer units when the market goes up (NAV will be more). Thus, averaging out your cost of purchase.
Rupee cost averaging evens out market ups and down in long runs, which reduces the risk of investing in equity.
You can start or stop SIP any time you like. Also, you can increase or decrease your instalment amount as per your convenience.
It is advisable to increase your SIP amount annually (along with your salary increment) to gain most out of SIPs
Things to Keep in Mind :
- Don’t try to Time the Market
Don’t stop the SIP when the market goes down, otherwise, the whole purpose of SIP gets defeated. They are meant for long term so let them run for long.
- Link SIP with Your Goal
Calculate the cost of your goal (inflation-adjusted cost) and time required for the achievement of your goal, and start the SIP accordingly. Start separate SIPs for separate goals.
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