Introduction to Systematic Investment Plan (SIP)
Systematic Investment Plan (SIP) is an investment method in which one can invest a specified amount in a financial scheme (mutual funds for instance) at regular intervals in a systematic and scientific way. The funds are invested once a month or once a quarter, rather on a lump-sum basis. The installments are similar to a recurring deposit and could be as small as Rs. 500 per month.
SIPs are convenient since we can direct our bank to automatically deduct the specified amount from our account, each month. Investors, who choose to practice in SIP, make investments in a time-bound manner without worrying about market dynamics. They tend to gain profits from those investments over the long run as a result of average costing and compounding. The compounding effect makes sure that investors receive returns on both their principal (initial investment) amount and its gains, so that their money grows over time as their investments generate returns. The returns gradually increase over time as well.
Benefits of Systematics Investment Plan
- SIPs are systematic investments. Such investments are disciplined and regulated.
- SIPs are regular investments. It improves the investment behavior among individuals and promotes future security.
- SIP can be started even with a small amount.
- SIPs are a convenient investment i.e. you have to deposit the committed sum regularly, rest is done by fund managers.
How SIPs work
Before investing in SIPs, it’s important to know how SIPs work. The foundation of systematic investment is straightforward. It operates by making periodic and routine purchases of the shares or units of securities held by a fund or other investment. The invested amount is automatically deducted from the investor’s bank account based on standing instructions, and the matching number of mutual fund units are assigned accordingly.
The quantity of units received is determined by the current Net Asset Value (NAV) of the scheme. The investments are handled by a group of qualified fund managers for a small fee, as described in the Scheme Information Document, of the relevant scheme. They purchase shares in a variety of amounts at varying rates. However, there are certain plans that may permit investors to specify a specific number of shares to purchase. Generally, an investor ends up purchasing fewer shares when unit prices rise and more shares when prices fall since the amount invested is often fixed and does not vary based on unit or share prices.
How SIP is different from Mutual Funds
What are mutual funds ?
While mutual funds and Systematic Investment Plans may sound like a part of the same scheme, they have their differences which we will discuss further. A mutual fund is a collection of assets put together by an asset management company, where investors can acquire ownership of units in proportion to their investments. The investor has the option of investing in equity funds, debt funds, hybrid funds, etc. They choose these options based on their risk carrying capacity and financial goals. Mutual funds give investors the benefit of diversification since they allow them to spread their investments over a variety of asset categories in order to build a balanced portfolio. The risk of one asset category is offset by the risk of the other due to diversification. This helps in preventing investors from losing their entire investment if one of the assets experiences any fluctuations.
Fund managers, who have knowledge and experience of effectively managing mutual fund portfolios, purchase and sell shares based on market trends, and perform timely research. Investors have two options for mutual fund investments: lump sum and Systematic Investment Plan (SIP). A lump sum is an investment made only once, whereas a SIP is a series of fixed investments made at regular intervals over a certain period of time.
Systematic Investment Plan (SIP)
Systematic Investment Plan (SIP), on the other hand, is a method of buying mutual funds. It is just a method by which people can invest little but consistent sums of money over time in mutual funds to develop a healthy portfolio. It instills discipline in investors to make a set of investment every week, month, or three months. SIP enables investors to make installment investments while keeping track of and planning their monthly income and expenses. It can be done even in tiny denominations.
Mutual Funds Vs SIP
There are various contextual differences between mutual funds and SIPs.
- Mutual funds schemes are financial products whereas SIP is simply an investment technique.
- The ever changing market dynamics have a greater impact on mutual funds than on SIP due to the investment value of mutual funds.
- Mutual funds have more charges and transaction costs than SIP.
- Mutual funds are one time lump-sum investment
- SIP invests in diverse markets and across market cycles. This leads to less impact on investors due to market volatility.