SIP or Systematic Investment Plan is one of the methods of investing in
mutual funds. This is where regular investment with a fixed and small sum of
money is made in a disciplined manner.
Systematic Investment Plan (SIP) helps you invest a fixed sum of money
regularly in mutual fund schemes. Using SIP one can invest small amount periodically
(for example, weekly, monthly, quarterly). SIP offers disciplined and passive
approach to investing to create wealth in the long term.
How SIP Works?
The
systematic investment plan has three stages:
SIP Mandate:
In the first stage, Investors need to give a mandate (authorization) to
invest in mutual fund schemes.
Auto Debit / ECS:
After first stage, after you give a mandate; fund house auto-debits your
bank account for the SIP amount through standing instruction.
Allotment of Mutual
Fund Units:
Once first
two stages are set, the SIP amount debited from your bank account is utilized
for purchasing mutual fund units which are allotted to you.
Features of
Systematic Investment Plan (SIP)
Small Investment Amount:
SIP helps
you start a mutual fund investment with a smaller amount. You can start SIP for
an amount as small as Rupees 100.
Regular Investment
Intervals:
Systematic
Investment Plan allows investment at regular intervals which can be weekly,
monthly or quarterly.
No Cap on Maximum Amount of SIP:
The minimum amount of SIP investment is Rupees 100.
On the other hand, there is no restriction for the maximum amount for SIP
investment.
Option to Pause
Investment:
You can Pause
SIP investment for a temporary period which is useful in financial crisis
situation. However, it cannot be paused for very long time.
Cancel SIP:
Systematic
Investment Plan (SIP) investment comes with the option to cancel.
Benefits of SIP
Investment
Brings Financial Discipline:
With SIP
you have to invest a sum of money at regular intervals. SIP instils discipline
as it is the route which helps you invest a particular amount on a regular
basis. Being disciplined helps you make logical decisions and make prudent
investments.
Simple and
Convenient:
You can
start small and there is no need to have a lot of money to start a SIP. Systematic
Investment Plan brings convenience while investing; you can choose any amount
depending on your cash flows. Additionally, the SIP investment process is
automated.
Investing across
market cycles:
When the
markets are low the same SIP amount can purchase a higher number of units. In
higher market cycles you get lower units. SIP allows the cost to be spread over
a period and you get an average purchase price for the units. So, With SIP, you
don’t need to worry about timing the markets. Just stay invested irrespective
of the market conditions.
Phased Investment:
Using SIP
you are purchasing a smaller number of mutual fund units every month, helping
you to invest in a phased manner over a period of time.
SIP Frequency:
The
frequency of SIP investment is usually weekly, monthly or quarterly. Systematic
Investment Plan frequency selection depends entirely on you.
Enjoy the power of
compounding:
With SIP, you
can stay invested for a longer period of time. Over time as your investment
generates returns, the returns get added to the principal amount and this in
turn generates more returns.
Illustration with
Example
Monthly
Investment: ₹ 5000
Investment
Tenure: 15 Years
Total
Amount Invested: ₹ 900000
Expected
Annual Returns (%):10%
Expected Total
Amount: ₹ 2100000
|
Years
|
Monthly
SIP Amount (₹)
|
Expected
Final Amount (₹) @ Annual Return of 10%
|
|
10 years
|
5000
|
10 Lakhs
|
|
15 years
|
5000
|
21 Lakhs
|
|
20 years
|
5000
|
38 Lakhs
|
|
25 years
|
5000
|
67 Lakhs
|
|
30 years
|
5000
|
1.1
Crores
|
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