SIP, or systematic investment plan, is a way of investing in mutual funds. SIPs let you make small investments in various schemes for longer periods. For instance, you can start with as little as ₹500 a month to build an investment corpus over time. This blog post will discuss all aspects of SIPs, such as the advantages and different types. Let’s dig in.
SIP defined
It is a plan in which investors make equated payments into a mutual fund scheme. Installments can be weekly, monthly, or yearly.
How do SIPs work?
To understand how a systematic investment plan can benefit you, you should know how it works. When you invest your money in a mutual fund scheme through SIPs, you can invest little money at predetermined intervals.
The amount is deducted automatically from the investor’s bank account through instructions given to the bank. The money then goes to the mutual fund scheme. After that, the scheme units are allocated to the investor based on that day’s net asset value (NAV).
Rupee cost averaging
The systematic investment plan works on rupee cost averaging. Here, you keep investing a fixed sum at intervals of your choice, irrespective of the market’s direction. Thus, you can buy more units during market downturns and lesser units when the market trades higher. Essentially, it averages out your cost of buying mutual fund units.
Compounding
If you invest long-term, you will benefit from the SIP. The SIP enables you to begin investing smaller amounts for the long term. It ensures that your invested money gets sufficient time to grow through the power of compounding, helping you build a significant investment corpus.
Advantages of investing in SIP
Financial discipline
SIPs help in inculcating financial discipline. Many of us consider investing if there is any money left after meeting all our expenditures. Since the SIP amount is fixed and deducted on specific dates, it ensures that the amount gets invested come what may.
Flexibility
SIPs can offer you great flexibility. For instance, it helps you to avoid long-term commitments such as investing in instruments such as Public Provident Fund or unit-linked insurance plans. Open-ended mutual funds allow investors to enter and exit at their convenience.
Convenience
SIPs offer an easy-to-use mode of investing. They also provide the chance to increase or decrease the SIP amount.
Lower risk
Unlike directly investing in stocks, SIPs enable you to reduce your market risks considerably. Of course, mutual fund investments are subject to market risks like any other financial product. You may see losses on paper during market downturns, but if you stay invested through market cycles, you can benefit when the market rebounds.
Type of SIP and when to choose
Regular SIP
These are the plan’s plain-vanilla versions. Here, investors need to select the amount and the date/dates, and the plan takes care of the rest. Remember to ensure sufficient balance in your bank account.
Flexible SIP
In flexi SIP plans, investors can modify the investment amount according to the financial conditions and the market circumstances. If you wish to, you can reduce your SIP amount. It is also possible to increase the money you invest in this plan.
Top-up SIP
If you are an investor who is willing to boost the investment periodically, you can choose top-up SIPs. A great example of this plan is when your income increases yearly. Suppose you invest ₹20,000 a month, and your income increases every year by 10%. Here, you could boost your SIP amount by 10%.
Trigger SIP
This plan includes a trigger option for SIP investments. Investors use different trigger options like specific dates or price levels of indices.
Perpetual SIP
After registration, money gets debited from your bank account unless you don’t want to withdraw money. People who don’t want to limit their investments to specific years can opt for this mode, as you don’t have to renew the mandate repeatedly.
Conclusion
In this article, we have covered the advantages of SIP and various types. Starting a systematic investment plan is probably a good way to begin your investment journey. While it can offer flexibility, it can help reduce the effort you need to manage the investments. Happy investing!
FAQ
What is SIP and types of SIP investment?
SIP (Systematic Investment Plan) is an investment strategy where you regularly invest a fixed amount in mutual funds. Types include Equity SIP (in stocks), Debt SIP (in bonds), and Hybrid SIP (mix of both). It promotes disciplined, gradual investment to potentially reap benefits over time.
What is SIP and its benefits?
SIP is systematic mutual fund investing. Benefits: discipline, affordability, averaging costs, compounding, flexibility, convenience, and potential long-term growth for financial goals.
Which type of SIP is best for three years?
Generally, debt funds and their variants, including liquid funds, are the best SIPs for 3 years.
Which type of SIP is best for one year?
You can choose any short-term liquid fund with a low expense ratio for investment.
Which is the best type of SIP?
You could consider the following schemes for investment. But this should not be construed as investment advice. Do proper research before you invest in any of these schemes.
– Nippon India Large Cap Fund
– HDFC Top 100 Fund (Large Cap)
– Quant Mid Cap Fund
– SBI Magnum Midcap Fund
– Kotak Small Cap Fund
Which SIP is best for beginners?
These are some of the plans that are good for beginners.
– Axis Bluechip Fund – Direct Plan-Growth (Large-cap Equity)
– ICICI Prudential Regular Savings – Direct Plan-Growth (Hybrid)
– Quant Infrastructure Fund (Equity)
– HDFC Credit Debt Risk Debt Fund-Direct-Growth
