- What is a systematic investment plan?
- How does systematic investment plan (SIP) work
- How can you customise your SIP investment?
- What are the benefits of systematic investment plans?
So, what is a systematic investment plan?
Systematic investment plan is a tool to invest in mutual fund schemes regularly in a disciplined manner. Systematic investment plan allows you to invest a fixed amount of money every month on a date chosen by you into your preferred mutual fund scheme for a predefined period.
You can choose the convenient day for you to make payment at the time of buying mutual funds. Monthly investment amount will be directly debited from your account on the date chosen through ECS (Electronic Clearing System) facility.
Typically for equity mutual fund investors, systematic investment plan is an effective tool to save for long-term financial goals.
Read more about mutual funds and how does it work
How does systematic investment plan (SIP) work?
When you choose a systematic investment plan as a tool to invest in mutual funds, your fund savings will be done through periodic instalments.
Every month when the investment amount is paid, fund units are allocated based on that day’s prevailing net asset value of the scheme. Every instalment of SIP is considered as a fresh purchase. Many mutual fund houses allow monthly, fortnightly and bi-monthly instalments in SIP.
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How can you customize your SIP investment?
There are various types of SIP options with which you can customize. Following are the types available –
1) Top-up SIP
In this, you can enhance your SIP contribution during regular intervals. For example, you have started a SIP of INR 1,000 into a mutual fund scheme when you just started your career. Let’s say you have received a pay increment after your probationary period, you can increase your SIP amount to 1,500 under top-up SIP facility.
2) Flexible SIP
Flexible SIP allows you to change the SIP amount based on your financial position. If you receive a bonus you can divert the amount to your SIP account. In case of a cash crunch, you can even reduce your SIP amount.
3) Perpetual SIP
This is a systematic investment plan with no end date. If you have to stop them anytime, you need to give a written request. This is an ideal option for investors who need continuity in investment into the scheme.
Read what are the different types of Mutual Fund schemes in India
What are the benefits of systematic investment plans?
Investing in mutual funds through SIP mode is a smart choice for a variety of reasons. There are various benefits offered by systematic investment plans. Following are the benefits of systematic investment plans –
1) Disciplined investment practice
Discipline is an essence of investing success. As a systematic investment plan allows you to invest regularly in periodic instalments as per your monthly savings capacity, it inculcates a regular savings habit in you. SIP is based on the principle of disciplined savings which helps you continuously save for your future goals without being impacted by market emotions.
Investing in a phased manner also helps you conveniently save on a regular basis.
2) Offers diversification
As investing through a systematic investment plan helps you buy units of mutual funds at different phases of the market, your risk in the investment gets diversified. SIP helps you reach your long-term goals by earning a good amount of return at reduced risk.
3) Rupee cost averaging
As you make periodic investments through systematic investment plans, you would be buying mutual fund units at different costs each month. You buy more units when the market falls and the NAV reduces. This brings down the average cost over the long-term. Rupee cost averaging of systematic investment plans helps you take the advantage of market volatility.
4) Power of compounding
Investing regularly in a disciplined manner through systematic investment plans over a longer period of time helps you magnify your investment by compounding effect. As the gains in your portfolio gets reinvested and the compounding growth will lead to wealth maximisation over the long-run.
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Systematic investment plan routes of investing in mutual funds allow you to make even smaller amounts of savings on a regular basis. As low as INR 500 is allowed to invest in systematic investment plans.
With this convenience offered by SIP, you can start investing at the early age of your life. Power of starting early helps you build significant wealth over the long-term.
As a systematic investment plan does not strain your daily finances, helps you do disciplined savings, minimizes risk with diversification and gives you advantage of market volatility, it would be a smart choice for your long-term mutual fund investments.