The number of investment plans present in the market is immense. Unlike olden days, the masses are now empowered to invest in a range of plans and schemes like mutual funds, fixed deposits, monthly income plans, public provident funds, and systematic investment plans, all in a matter of clicks. Systematic Investment Plan (SIP), having said that, remains the most common pick for multiple reasons. But if you are new to the investment vertical, it may very much be possible for you to be wondering what is SIP, in the first place?
In this article below, we shall explore what is a mutual fund, what is an SIP, how SIP works, the benefits of, and everything you need to know about a Systematic Investment Plan (SIP).
What Is A Systematic Investment Plan (SIP)?
To understand what a SIP is and how it works, let’s first establish the basics of a mutual fund.
Mutual Fund
A mutual fund is a form of financial vehicle that invests in securities such as stocks, bonds, money market instruments, and other assets by collecting money from multiple investors. A mutual fund is a shared pool of money into which investors invest their money in its most basic form. The total amount is then invested following the fund’s investment goal.
Systematic Investment Plan
A systematic Investment Plan or a SIP, on those lines, is a form of mutual fund investment in which an investor selects a mutual fund scheme to invest a predetermined amount at predetermined intervals. SIP investment plans operate on the principle of compounding effects and include investing a minimal amount of money over time instead of a large amount of money all at once to yield large returns.
How Does A Systematic Investment Plan (SIP) Work?
When you sign up for a SIP plan, the money is automatically deducted from your account and invested in the mutual funds you’ve chosen at a specified interval. You will be given mutual fund units based on the NAV at the end of the day. There are three steps to signing up for SIPs-
Step 1- SIP Approval
To invest in mutual funds through SIPs, investors must first request approval or authorization on a banking platform.
- You can either do it online on your banking/investment app or fill a permission form and send it with the application form to the mutual fund office if you choose the offline approach
- On your form, you will need to also mention your preference for the investment date and the amount
Step 2- Set Up a Debit Date
When issued an authority, the fund house uses a standing instruction to automatically debit your bank account for the specified SIP amount. If you are not comfortable with auto-debits, you can also opt for a predefined manual debit date. The assets are subsequently transferred by Electronic Clearing System (ECS) to a mutual fund scheme for investment.
Similarly, the future investment amounts will be debited at the SIP period you select, for example, Rs. 2,500 on the 18th of each month. A predefined date brings a system and habit in order.
Step 3 – Distribution Of Mutual Fund Units
The amount deducted from your bank account as part of your SIP is used to purchase mutual fund units. You are also given mutual fund units based on the closing NAV on the day of the money transfer or check realization.
Let’s see an example to understand how SIP works –
- Let’s say you start an Rs. 2000 SIP on the 10th of every month
- On the 10th of every month, Rs. 2000 will be auto-debited from your selected bank account and used to purchase Mutual fund units.
- The Mutual fund units will also be acquired at the closing Net Asset Value (NAV) of the day
- You will get units of the specific Mutual fund scheme with each payment, which will be deposited to your mutual fund account.
When Should You Invest In Systematic Investment Plans (SIP)?
SIP investments may be started at any moment while ensuring that the investor is taking the least amount of risk possible by selecting the most appropriate scheme plan. An investor needs to select a plan that is appropriate for his long-term objectives. As a result, there is no ideal moment for an individual to begin a SIP investment plan; nevertheless, the earlier the better.
Benefits Of Investing In Systematic Investment Plans
You may start investing with a little amount of money and earn large returns over time if you follow a systematic investment plan. It’s the most straightforward way to invest in mutual funds. It also promotes financial responsibility. Mentioned below are some of the benefits of investing in SIP.
1. Convenience
A SIP allows you to invest in a method that is both disciplined and gradual. It allows you to start investing with as little as Rs 500 every month, which is convenient even for students or those who are just starting off a career and do not have a lot of extra liquid money for investment purposes. Besides, SIP investment is a fully automated procedure that frees the investor from having to manually invest at regular intervals.
2. Power Of Compounding
With SIPs, if you invest for a long time, you’ll be able to take advantage of the power of compounding. When compared to a lump-sum investment, the rupee cost averaging phenomenon will guarantee you higher returns.
3. Financial Discipline
SIP essentially translates to the investment of a set amount of money at regular periods. When you know you need to put in a certain amount each month, you’d automatically establish a financial discipline by prioritizing savings and investment for future expenditures. It is a win-win!
Closing Thoughts
A Systematic Investment Plan (SIP), often known as a SIP, is a mutual fund tool that allows investors to invest in a structured manner. The SIP option allows an investor to invest a certain amount of money in a mutual fund scheme at predetermined periods. Once you sign up for a SIP, you allow for a predefined sum to be deducted from your savings account and sent to your mutual fund account every month on a certain date each month. SIPs not only help prioritize saving but also build financial discipline!
FAQs
- What is the minimum amount that needs to be invested in SIP?
You may start investing in a SIP an amount as small as Rs 500 per month. Once you’ve gained experience with mutual funds, you can raise your investment amount.
- What are the documents required to invest in SIP?
Basic documents such as a PAN card, address proof documents such as a driving license or utility bill, a passport-size photograph, and a cheque leaf are required to invest in a SIP. The cheque leaf is needed when you are required to submit your bank account information.
- Why should you invest through a systematic investment plan?
You should invest in a SIP if you don’t have enough money to make a lump-sum investment or if you wish to limit your risks. A SIP would also provide financial discipline, allowing you to make rational judgments.
What did we learn?
