A five-minute guide to SIP or Systematic Investment Plan

You must have across AMFI’s (Association of Mutual Funds in India)‘Mutual Fund Sahi Hai’ campaign that has led to the rise of popularity of Systematic Investment Plan or SIP schemes in India. However, a lot of people are still confused about investing in mutual funds via SIP. This article will provide a 5-minute guide to SIP for investors.

What is an SIP?

A lot of people confuse SIP as a product. However, SIP is a mere tool to invest regularly in mutual fund investments. Under the SIP scheme, an investor invests regularly a specified amount in their preferred schemes at regular intervals. The amount can be as low as Rs500 per month. The periodicity of investments can be daily, weekly, monthly, quarterly, bi-annually, or annually.

Why SIP?

SIP inculcates the habit of investing regularly among investors, this instilling financial discipline. SIP investments also offer the benefits of compounding to its investors. When you invest for a long time, you earn returns on your returns and your money starts compounding. The power of compounding is also referred to as the eighth wonder of the world by some. Also, SIP investments aids to average your purchase cost of each unit and thus maximizing your overall returns. When you invest regularly irrespective of the market conditions, you end up buying more units when the market is low and vice-versa, thus averaging the cost unit of your mutual fund units.

Types of SIP

There are 4 types of SIP available to an individual. These are:

  1. Top-up SIP – Under this SIP, an individual is offered the flexibility to increase or decrease their investment amount by a fixed amount at regular intervals. This facility augments the flexibility of the investor to invest substantial amounts during the tenure of SIP investment such an increase in salary.
  2. Flexible SIP –Under Flexible SIP, an individual can invest in their desired mutual fund schemes, the first investment is fixed by the investor while subsequent intervals are determined as per a formula based on investing more when the market is low and investing less when the markets are high
  3. Perpetual SIP –In Perpetual SIP, there is no end date of SIP investments. However, one can redeem the fund at any time according to their needs.
  4. Trigger SIP –To invest in trigger SIP, an individual must set Net Asset Value (NAV), a fixed date to start the SIPs, and index levels. This is beneficial for investors who have good knowledge about the markets and aware of the market fluctuations.

Investors are asked to stick to their SIP investments. They can increase or decrease their SIP investments according to their needs. Though discounting your SIP investments is often a frowned-upon practice by fund experts, you can stop your SIP investments if you feel they are not going to generate wealth for you.You can also calculate the true value of your investment upon maturity by availing an SIP calculator. Happy investing!

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Written by Michael Curry

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