In the volatile stock market, the Systematic Investment Plan (SIP) stands out as a reliable choice. SIP allows investors to profit from market ups and downs without the stress of timing. This disciplined approach involves investing fixed sums at regular intervals, offering a shield from market volatility. Embraced by Indian Mutual Fund investors, SIP is positioned as the optimal entry point for long-term investments.
What is SIP?
Systematic Investment Plan (SIP) is a method of investing in Mutual Funds allowing investors to contribute a fixed sum regularly, like monthly or quarterly, rather than a lump sum. This, starting from as low as Rs. 100 per month, is same as a recurring deposit and is hassle-free with automated monthly deductions. Popular among Indian Mutual Fund investors, SIP ensures disciplined investing. It is an ideal long-term investment strategy, emphasising the importance of starting early and consistent contributions for optimal returns. In essence, the mantra is to "Start Early, Invest Regularly" for the best outcomes in long-term investments.
How do SIPs work?
Understanding the functioning of a Systematic Investment Plan (SIP) is crucial for maximising returns with minimal investment. Follow the steps below to comprehend the workings of an SIP investment plan:
- Thoroughly research the best SIP plans you intend to invest in.
- Select a fund which aligned with your financial goals and risk profile.
- Determine the frequency and amount of your SIP investments.
- Carefully complete your KYC authentication and provide bank account details with auto-debit activation for uninterrupted SIP investments.
- Once activated, the SIP amount is allocated to the chosen mutual fund scheme.
- The fund manager invests the accumulated amount in various assets based on the scheme's investment objective.
- On the SIP date, the deducted amount from your bank account is used to purchase units at the prevailing Net Asset Value (NAV).
- Enjoy the flexibility to adjust your SIP contributions as needed.
- Utilize online tools like the Bajaj Finserv SIP calculator to estimate returns based on your SIP investment plan.
Understand Systematic Investment Plan (SIP) with an example
Let us assume that you want to start an SIP for Rs. 5,000 every month to invest in a mutual fund ‘A”. The present value (NAV) of the mutual fund is Rs. 50 per unit, so you will get 100 units of the fund.
| Month | Investment amount | Present value | Units allocated | Total units |
| 0 | Rs. 5,000 | Rs. 50 | 100 | 100 |
| 1 | Rs. 5,000 | Rs. 40 | 125 | 125+100 = 225 |
| 2 | Rs. 5,000 | Rs. 52.6 | 90 | 225+90 = 315 |
| 3 | Rs. 5,000 | Rs. 100 | 50 | 315+50= 365 |
Similarly based on the NAV of the mutual fund, the units allocated will change each month, and get added to your portfolio. This change in NAV also impacts your investment amount. Thus, an SIP helps mitigate the risk of market volatility and achieve the investor's long-term financial goals.
Features of SIP investment plans
- Rupee cost averaging: SIP uses the strategy of rupee cost averaging, helping investors benefit from market fluctuations. During market downturns, the fixed investment buys more units, and during upswings, it buys fewer units. This approach helps mitigate the impact of market volatility over time.
- Disciplined and consistent investing: SIP promotes financial discipline by allowing investors to commit to regular contributions regardless of market conditions. This disciplined approach encourages consistency in investing, fostering a habit of regular savings and wealth creation.
- Flexibility in investment amount: Investors have the flexibility to choose the amount they want to invest in SIP, making it accessible for a wide range of investors with varying budget sizes. This feature accommodates both small and large investors, enabling them to start with an amount that suits their financial capacity.
- Professional fund management: SIP investments are managed by professional fund managers who make informed investment decisions based on market conditions and the fund's objectives. This professional management aims to optimise returns and effectively manage risks, providing investors with the expertise needed for successful mutual fund investments.
- Long-term wealth creation: SIP is designed for long-term wealth creation. Through consistent and disciplined contributions, coupled with the power of compounding, investors can potentially achieve significant returns over an extended period. This long-term approach aligns well with financial goals such as retirement planning or building a corpus for major life events.
- Option to temporarily halt investments: SIP provides the convenience of temporarily suspending investments, offering valuable flexibility, especially during financial challenges. The SIP automatically resumes at the end of the pause period. It is recommended to verify the availability of this pause feature with your Mutual Fund provider.
- Unrestricted investment ceiling: With a minimum SIP investment of Rs. 100 and no strict upper limit, investors can contribute any amount of their choice through the SIP. Ensuring the ongoing consistency of SIP investments throughout the plan's duration is essential for optimal results.
