SIP

SIP (Systematic Investment Plan)

SIPs are an advanced form of regular investing. The predecessor of SIP was RD or recurring deposit, where you will fix a specific amount to be deposited every month in an RD account. The account will operate for a longer period and offer higher returns to investors.

SIP refers to the systematic investment plan, and like RD, you can decide a fixed sum to be invested regularly in an investment instrument. Now, SIPs offer more customization than RD, as you can decide the frequency and the allocation of the investment.

You can direct your SIP to equity funds, debt funds, balanced funds, liquid funds, gold ETFs or even in a unit-linked insurance plan(ULIP).

For example, you can save Rs. 50,000 every month and you want to create a diversified portfolio. You can start a SIP of Rs. 10,000 each in an equity growth fund, a debt fund, a ULIP, a Gold ETF and a pension plan.

Advantages of SIP

Here are some of the key advantages of SIP:

Allows You to Start Small

When you start earning, income is low, expenses are high, and the most common excuse to postpone saving is, ‘my income is too low’. Well, not when you can SIP your way to any mutual fund and many investment schemes.

SIPs give you that edge if you want to start with just Rs. 100 you can. For long-term wealth, this is what matters – develop a habit of saving.

Flexibility

SIP’s are one of the most flexible investing solutions available. You can tailor make the monthly amount, risk level and even the automated annual step up to your unique goals You can even pause and restart your SIP’s if needed. This flexibility helps you customize your SIP’s to your unique goals.

Leverage the Power of Compounding

SIP allows the capital appreciation of securities. Returns generated by a mutual fund are re-invested. The value of the portfolio will increase with time, and you will enjoy compounded returns. You can also select a top-up SIP to ensure future growth.

Investment Discipline

SIPs encourage a disciplined approach to invest by requiring you to set aside a fixed amount of money at a fixed interval. This helps you build a disciplined habit of saving and investing, which is critical for long-term financial success. Investing discipline also enables you to reap the benefits of wealth-compounding over decades better than the benefits you would get through lump sum investing.

Rupee Cost Averaging

Investment in SIP can help reduce the average cost of purchasing mutual fund units. Cost averaging allows you to make investments based on market conditions. Since you are investing a fixed amount with SIP, lesser units will be purchased when prices are high. On the other hand, more units will be bought when the market rates are low.

Types of SIP

Now that a lot of ground has been covered on what SIP is, how SIP works, and the benefits of SIP, let’s talk about the types of SIPs you can opt for.

Fixed SIP

Fixed SIPs are the plain-vanilla version of SIPs. You choose an amount, and a date till which you wish to contribute, and the rest of the process is automated.

Top-up SIP

Top-up SIPs are great for investors who want to increase their SIP contributions periodically. An example of where top-up SIPs make a lot of sense is when your income continues to increase every year.

Perpetual SIP

Perpetual SIPs are just fixed SIPs sans tenure. Once registered, your bank account will be debited with the amount of the SIP contribution unless you instruct the fund house to stop withdrawals.

Flexible SIP

It offers you the flexibility to change the amount per contribution or skip a few contributions if you so choose. There are two possible reasons an investor may want to change the contribution amount or skip a contribution. First, your contributions through SIP are adjusted based on the market’s overall outlook. If the market is valued higher, your monthly contributions through SIP would be reduced and increased again once markets are correct and valuations look attractive. Fund houses do this based on a predecided valuation matrix.