June 18, 2024
New Delhi
Economy Finance

What is a Systematic Investment Plan (SIP)?

SIP is like a tool or an investment strategy. The abbreviation SIP means Systematic Investment Plan. SIP is a method to invest in mutual funds, whereas mutual funds are an investment product or vehicle. SIPs, or Systematic Investment Plans, are a type of mutual fund investment. That’s why a Systematic Investment Plan, known as a SIP, is known as an investment in a mutual fund. It is an investment option offered by Mutual Funds that enables investors to invest a specific amount in a Mutual Fund scheme on a regular basis, such as once per month or once every three months, rather than doing so all at once.

Read: What is TREPS in Mutual Funds?

Read: What is Financial Management?

In a mutual fund, using this technique, investors make a series of tiny investments at regular intervals. The monthly installment payment, which resembles a recurring deposit, might be as low as INR 500. Since you may instruct your bank to automatically deduct the specified amount each month, it’s practical. The SIP encourages you to invest regularly over time and helps you build up a large amount to support a variety of financial goals.

How Does The Systematic Investment Plan Work?

By requiring the client to make slow, regular contributions to a program of their choice. SIP motivates a disciplined investment with your own convenience of an amount to be invested regularly at fixed intervals.

For the purpose of creating a corpus, one can choose an investment frequency of daily, weekly, monthly, fortnightly, or yearly. Investments in mutual funds can be made using SIPs, or Systematic Investment Plans.

Here, careful long-term financial resource investment is the key point of emphasis. It serves no purpose as a thing or as a means of investing. An investment technique known as a systematic investment plan (SIP) allows you to make small, recurring investments for the purpose of amassing sizable corpus funds. This is a systematic investment plan, which actually means excellent long-term investing strategies as well.

Types of Systematic Investment Plans:

1- Top-Up

The Top-up SIP gives you the freedom to invest more when you have a greater income or more money available to invest by allowing you to periodically increase your investment amount.

Get the most out of your investments by continually investing in the best and highest-performing funds.

2- Flexible SIP

As the name implies, flexible SIP plans let you invest any amount you like. An investor may decide to increase or decrease the amount to be invested based on his individual needs or preferences for cash flow.

3- Perpetual SIP 

A perpetual SIP plan is different from the above SIPs in that you can continue investing after the maturity date of the SIP has passed. Every SIP has a maturity date, which means at the time of starting any SIP, you decide the period for which you will continue your Investment Plan. It can be for one year, three years, or five years. This allows the investor to withdraw money at any time or according to his financial objectives.

4- Trigger SIP

If you are familiar with changes in the stock market, you can choose to trigger a SIP. It enables you to choose the SIP start date, change your SIP, or redeem your SIP once the chosen event takes place. A fortunate stock market occurrence, a NAV (Net Asset Value), or an index level can all be specified as triggers. You should only choose the trigger SIP, though, if you are familiar with the ups and downs of the stock market.

How To Open a SIP Account

Preparation is as important in SIP as investing in SIP. We know that investing in a systematic investment plan (SIP) is a smart decision. Let’s continue with the procedures for setting up a Systematic Investment Plan.

To open a SIP account, you must first have an investment account with the fund firm of your choice. You must complete the KYC verification process before opening your SIP account. For the verification, you needed your PAN, proof of your address, and a photo in the right format. Once you have completed the KYC verification process, you can create a SIP account within your investment account by completing the “Start/Initiate a SIP” form.

There are four easy tips you must follow before you start investing in SIPs.

  • Set measurable objectives and a budget, then stick to them.
  • Determine when you will require the funds; this will determine how long you will invest.
  • Decide the amount you need to invest. Use a SIP calculator to calculate the amount you must continuously contribute in order to meet your financial goals. Decide the amount in which you want to invest.
  • Consult with your financial advisor and select a plan that appropriately satisfies your needs.

You are ready to leave now that you have followed these simple procedures. You can pay for the money with post-dated cheques or by using the Electronic Clearing Service (ECS), which enables you to tell your bank to automatically debit the investment amount from your account each month. Your monthly contributions to the chosen SIP are made to a mutual fund, where they are invested and used to produce income for you. On the company website, you can always check your portfolio.

Benefits of a Systematic Investment Plan

Because it encourages disciplined investment without regard for market volatility or market timing, SIP has gained favour among Indian MF investors. The ideal method to begin investing for the long term is, without a doubt, by utilizing one of the systematic investment strategies provided by mutual funds. 

A long-term investment is essential; therefore, you should start as soon as you can to optimize your eventual returns. Start early and invest regularly. This should be your credo if you want to get the most out of your possessions.

1- Creates a Disciplined Investor in You

If you lack extensive knowledge of how the market functions financially, SIP may be your best investment option. You are not required to spend time evaluating market trends or the best times to make investments.

2- Risk-Free Investment

With SIP, you can unwind because the funds are automatically taken from your account and invested in mutual funds. Additionally, due to its regularity, it assures that you are actively striving to increase your money, unlike lump-sum deposits.

3- Rupee Cost-Averaging 

Rupee cost averaging is a good advantage that comes with SIP. Rupee cost averaging allows you to benefit from market volatility with a SIP because your investment amount is constant over a longer period of time. The value of each unit is averaged out by the fixed amount you invest through a Systematic Investment Plan.

4- Profit Depends on the Market

When the market is weak and you can minimize your average cost per unit, you can buy more units, and when the market goes up, your profit will also go up.

5- Ability to compound

SIP is a methodical strategy to invest that makes sure you consistently work to increase the value of your holdings. As opposed to a lump sum, where you might forget to invest occasionally, automation ensures that your investment grows. Your tiny daily investments add up to a sizable corpus as a result of your contribution and the compounded returns over the years.

6- Flexible and Cost-Effective

In SIP investment, you are free to start with a small amount, and when your earnings improve over time, you can increase the SIP amount.

7- Free of Entrance or Exit Fees

If you invest in a SIP and find that it is not a good fit for you, you can stop making further investments and withdraw all of your money without paying any fees.

8- Saves time 

When you choose ECS, you can drive hands-free. While your finances take care of themselves, you may go about your own business.

9- Reduces your stress

You are not worried about the highs and lows of the market, unlike a mutual fund. You need not worry about market trends. Your invested money is handled by experts to make more and more profits.

How to Redeem Your SIP Mutual Fund Investment

By submitting a “Redeem SIP Form,” redeeming your SIP investments online, or signing into your fund house investment account, you can end your SIP. If you don’t cancel your SIP, you will purchase the fund units on the day of the subsequent SIP installment. You can instantly redeem the fund units you purchased via your SIP by submitting a redemption request if you don’t wish to cancel your SIP. Your transaction will be handled at the current NAV.

Conclusion

A method of investing in mutual funds is a systematic investment plan (SIP). The underlying stocks in the portfolio are wholly responsible for the security of your SIP investment. However, it is believed that investing in mutual funds through a SIP exposes you to lesser levels of risk because you stagger your investments over time, reducing your exposure to the market. Simply put, when you invest through a SIP, you don’t make a huge one-time gamble on the markets.

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