A Systematic Investment Plan (SIP) is a mode of investment for mutual funds in which investors make regular, automated contributions periodically. With SIPs, you can plan your investments to achieve your financial goals over the long term. You can do this by determining the target amount and the amount you’d like to invest at periodic intervals in a mutual fund scheme you’ve chosen.
For instance, say you’d like to invest ₹500 each month for five years. You can set up a SIP with a mutual fund and automate your contributions for the said period. You can also choose to contribute more or less frequently. Typically, SIP mutual funds allow investing weekly, monthly, quarterly, semi-annually and so on.
It’s also important to understand the SIP meaning in mutual fund because it’s not an asset in itself, but only a mode of investing in mutual funds. Any contributions you make towards your SIP will be invested in a mutual fund scheme that you choose.
- Rupee-cost averaging is one of the most prominent benefits of SIPs because it eliminates
the need to time the market. Investors try to time the market by investing money based on
momentary market movements and due to lack of expertise, can end up losing money in the
process. SIPs take out the guesswork since it involves investing a fixed amount at
predetermined intervals, regardless of the market’s position.
- When the markets, and consequently a mutual fund’s NAV, are low, you’re allotted a
greater number of units for the amount you invest, on the other hand, you’re
allotted fewer units when the markets are at a peak. Over the long term, this
reduces your average cost per allotted unit. For instance, say you’ve decided to
invest ₹5,000 via SIP each month for the next 5 months. Here’s how rupee-cost
averaging will work in your favor for this investment:
- Mutual funds are managed by experts that have a proven track experience as
portfolio managers. They also have a team of research analysts at their disposal that
monitor the markets and gauge investment opportunities.
- Since your SIP investments are investments in mutual funds, you benefit from the
fund manager’s expertise. This is especially important for someone who doesn’t
understand financial jargon or the markets.
- Instead of risking your capital, let an expert manage your money. In essence, SIPs
allow you to outsource investment expertise to a fund manager who manages the
mutual fund’s assets to optimize the returns for its investors. It’s a win-win.
- A growth in income may trigger some to spend on upgrading their lifestyle. The wiser
ones tend to do the reverse; they spend what’s left after investing. SIPs can help inculcate this discipline because you’re committing to investing a fixed amount each month.
- You don’t need to make an extra effort for monthly contributions either. The money
is automatically debited from your registered account each month. Over time, the
small contributions grow into a substantial amount because of compounding.
Power of compounding
- The returns on your SIP investment, just like other mutual funds, benefit from
compounding. To get some context on how powerful compounding can be, think of
the returns in absolute terms.