Do you know what is sip or Systematic Investment Plan Is? Nowadays, every person wants to earn money through savings. There are also many options available to earn as interest with savings in the market, such as depositing money in a bank, fixed deposits, etc.
Today we will tell you about another such option “SIP i.e. Systematic Investment Plan“.
If you are an investor, then you will definitely have basic information about SIP. But, there are many people who do not know about SIP i.e. Systematic Investment Plan. Through this article we will share all the information related to systematic investment plans to you.
In this article, you will understand about SIP, How to Invest in SIP along with Advantages and Disadvantages etc.
Let’s understand SIP (Systematic investment plan) from the beginning.
What is Systematic Investment Plan (SIP)?
Often you get nervous thinking about investing that you will have to invest a large amount of money. But that’s not the case with SIP, it’s not necessarily the case with SIP to burden your economic situation in the process of investing.
Investing in SIP with less risk is a good option to get better returns. This means that you have to invest at a certain amount of money every month or at regular intervals. Through SIP you have to invest a certain amount of money in the stock market or mutual fund over a certain period of time.
In SIP investment plan, instead of investing a large amount at a time, a small amount is invested, the result of which is high returns.
Usually, this is for equity mutual funds. However, investing in SIP has to pay special attention to discipline. You have to maintain the investment at fixed intervals as opposed to a slump or boom in the stock market.
How does SIP work?
Once you apply for one or more SIP plans, that amount is automatically debited from your bank account. After this, you invest in mutual funds you have purchased at a pre-decided time interval. At the end of the day, you will be allotted units of mutual funds based on the net assets value (NAV) of the mutual fund. With every investment in SIP plan in India, additional units are added to your account based on the market rate.
With every investment, the amount that is reinvested becomes higher than before and therefore the return on those investments is also higher. Finally, it is at the discretion of the investor whether he wants to take the return from the SIP in the middle or at the end of the SIP period.
Let’s understand this with an example.
Let’s say you have to invest in mutual funds. You have saved ₹1 lakh separately for investment. Now you will have two options to invest. First, you will invest ₹1 lakh in a mutual fund at a time. Or else, you will opt for a Systematic Investment Plan or SIP.
You need to set an amount to start investing in SIP. Let’s say you want to invest ₹500. Then, on a certain date every month, ₹500 will be debited from your account for the mutual fund you want to invest in. This will continue throughout the SIP period.
When should I invest in SIP?
An investor can start investing with the minimum risk and the best SIP plan ever. It is very important for the investor to choose the scheme that suits his long-term goal well. Therefore, there is no suitable time frame to start a SIP investment plan. An investor should start investing as soon as he can.
Types of Systematic Investment Plan (SIP)
The following are the types of SIPs
- Top-up SIP
This SIP allows you to increase your investment amount from time to time. Thus, when you have more amount available, you can also increase your investment amount accordingly.
It provides the opportunity to invest in the best and high performing fund at regular intervals.
- Flexible SIP
As the name suggests, in this plan, the investor gets the flexibility to invest.
An investor can increase or decrease the amount of investment, according to his investment capacity.
- Perpetual SIP
This SIP plan allows you to invest without a mandated date.
Generally, a SIP plan lasts for 1 year, 3 years or 5 years.
Therefore, the investor can withdraw the amount invested as per his wish or according to his financial goals.
Benefits of SIP
There are many benefits to investing in SIP. Some of them are as follows
- It’s makes you a disciplined investor
If you don’t have good financial information like when the market is up and down, then sip investment plan can prove to be a better option for you.
You won’t need to analyze to find out the time to invest at the right time.
Since, in SIP, the money from the account is automatically debited and goes to mutual funds, then you do not need to worry.
- Rupee Cost Increasing Factor
With SIP comes the benefit of rupee cost averaging.
Since, your investment amount is stable for a long period of time, you can take advantage of the volatility of the market with the average cost of rupees since SIP.
The fixed amount you invest through SIP averages the value of each unit.
Thus, when the market goes down you can buy more units and when the market is high then buy fewer units, which will reduce the unit at average cost.
- Power of Compounding
It is important to stay in discipline to invest in SIP which helps you to make continuous investment growth.
Its automatic process ensures that your investment also grows as opposed to a lump sum investment where you may sometimes forget to invest.
Disadvantages of SIP
There are some drawbacks as well as the advantages of investing in SIP, which are as follows
- The long-term return from SIP is less than the return from a lump sum investment in the long run.
- After this, you should have a certain amount in your bank.
- Its biggest disadvantage is that if your bank does not have enough amount, the bank can also charge a penalty.
- Apart from this, if you do not fill the installation 3 times, your SIP will be cancelled.
- SIP investment through mutual funds has grown rapidly. It has emerged as a popular segment for investors.
- It is a systematic plan through which investors invest a fixed amount every month in a mutual fund of their choice.
- The advantage of investing in SIP is that you don’t have to be afraid of the ups and downs in the stock market.
- The biggest advantage of this is the compounding return where you get the return on the return you get above it.
- You can also start investing with a minimum amount of ₹500 for SIP.
If you are thinking of investing in SIP then it is mandatory that you have a Demat account. So Open a Demat account now, to invest in SIP.