In simple words, an SIP or Systematic Investment Plan is a scheme in which a pre-decided amount is invested in a mutual fund of your choice for a specific duration at regular intervals. You decide the amount that you would wish to invest at specific intervals along with the scheme you prefer. Although mutual fund investments are subject to market risks, a well-structured SIP ensures that despite market turbulences, you are able to average out your investment returns.
How does SIP work?
SIP is a basic investment plan. Your SIP is either amount-based or quantity-based. In the first plan your investment amount is fixed whereas in the latter, the number of units to be purchased is fixed. Once you have decided your SIP scheme, the money for the SIP is debited automatically at a fixed interval decided from your bank account. The debited amount is then invested in the mutual fund that you have chosen. Based on your pre-decided investment amount and the market rate of the mutual fund, the proportionate number of units of the fund are allocated to you. As the lump-sum amount is a one-time investment, the market ups and downs make it a high-risk investment. However, in SIP, due to compounding of both - the principal and return amount over the entire investment period, the risk factor goes down marginally. In the amount based SIP, due to cost averaging, lesser units are bought at a higher market rate and more units are bought at a lower market rate.
For an SIP, you have to register online and submit the required information about yourself. You must confirm the availability of the required funds to begin with the plan and the rest of the process is automatically completed for every cycle of investment.
Benefits of SIP
While SIP is not a high risk investment opportunity, you can be assured of better investment returns over a longer period which is why it is favored by many investors. Following benefits are associated with a SIP:
SIP gives you steady returns, since the investment approach is disciplined and does not differ marginally as per the market rates.
Due to Rupee cost averaging, the market volatility doesn’t affect your investment significantly. You are able to purchase more units when the market is not performing well, without changing your pre-decided investment amount.
SIP works on a simple system, the earlier you start investing, the more returns you get over the longer period. Hence the duration in which you can avail the benefits of compounding on your investment, increases.
You can diversify your portfolio by investing in mutual fund schemes of companies in various sectors like IT, NBFC, pharmacy, real estate, banking, infrastructure and automobiles. Investors can invest in various mutual funds like balanced funds, small cap funds, debt funds, equity funds, growth funds, fixed income funds and hybrid funds through SIP.
You can also avail tax benefits by investing in some of these mutual fund schemes through SIP. For tax-saving mutual funds, under Section 80C investors can get a tax exemption of up to INR 1.5 lac with just a 3-year lock in period when saving in Equity Linked Saving Scheme (ELSS).
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