SIP in Mutual funds

Systematic Investment Plan (SIP) is the buzzword among investors who are pouring in close to Rs 8,000 crore into equity mutual funds through the SIP route every month. Experts say an SIP is the most effective way of investing, especially for retail investors.

What is an SIP?

An SIP is a specific amount, invested for a continuous period at regular intervals, generally on a monthly basis. Using this method, an investor buys units of a scheme at a pre-decided frequency. SIPs, which help investors take part in the stock market, obviate the need to time the market, and also bring a discipline to their investment methodology.

 Features of Systematic Investment Plan (SIP)

1. Small Investment Amount

Systematic Investment Plan helps you start a mutual fund investment with a smaller amount in comparison to a lump-sum where you need a larger sum of money for investment.

You can start an SIP for an amount as small as Rs. 500 per month. As your income grows , you can increase the SIP amount.

2. Regular Investment Intervals

Systematic Investment Plan allows investment is at regular intervals. You have the flexibility to choose the investment cycle, be it, weekly, monthly or quarterly. A regular investment approach  makes you disciplined in savings and investments.

The regular investment is a better option for investors as compared to a one-time single investment. Your investment is spread over time and you benefit from rupee cost averaging.

3. Fixed Investment Amount

The investment amount is fixed when starting a SIP. However, you can use the “SIP-Top Up option” offered by various mutual fund houses to make an additional contribution.

SIP amount cannot be decreased. You need to cancel the existing SIP and start afresh if you want SIP investment for a lower amount.

4. Option to Pause Investment

You can ‘pause’ the SIP investment for a temporary period of one month to three months. Which is useful if you face financial crunch.

The SIP does not stop during ‘pause’. It starts automatically at the end of the pause period. You need to check with your mutual fund house for the pause facility.

5. Flexibility to Shorten or Extend the SIP Interval

Systematic Investment Plan provides you the flexibility in changing your investment intervals into weekly, monthly, or quarterly SIPs.

You can make an online or a written request to change your existing SIP interval.

6. No Cap on Maximum Amount of SIP

SIP gives you the benefit of investing a smaller amount. On the other side, there is no restriction for the maximum amount for SIP investment. You can choose to invest Rs. 1000, ten thousand, lakhs or even a higher amount using SIP.

But make sure that you have the fixed SIP amount on a regular basis for the period of the SIP.

Benefits of SIP Investment

1. Brings Financial Discipline

With Systematic Investment Plan you have to invest a particular sum of money at regular intervals. That brings financial discipline where you first allocate money for savings and investing for future expenses.

This means that you are getting financially disciplined and are consciously planning for the financial needs for the coming days. Being disciplined, helps you make logical decisions and make prudent investments.

2. Simple and Convenient

Systematic Investment Plan brings convenience while investing, in a sense, you can choose any amount of Rs. 500 or more  depending on your cash flows. 

Additionally, the SIP investment process is automated. Once set, you do not require to worry at every investment interval.

A fixed amount gets deducted from your bank account. This fixed amount gets deposited to the mutual fund house for purchasing units. The mutual fund units get credited in your mutual fund’s account.

3. 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.

Overall, the investor is least affected by the market using SIP as compared to a lump-sum investment. Because lump-sum investment could be at a high or low price but in SIP allows the cost to be spread over a period and you get an average purchase price.

4. Phased Investment

Using SIP you are purchasing a smaller number of mutual fund units every month. Thus helping you to invest in a phased manner over a period of time.