What is SIP? Its Types, Benefits & Drawbacks explained

Detailed article on Systematic Investment Plan

What is a SIP?

A Systematic Investment Plan (SIP), often known as a SIP, is a service provided by mutual funds that allow investors to invest in a disciplined manner. A SIP allows an investor to invest a set amount of money in a mutual fund scheme and such at predetermined intervals.

It’s where you buy units of a Mutual Fund, index funds, or even an ETF via periodic intervals as per your time comfort and financial capability. 

For example, Investing in a Mutual Fund on the 15th date every month for the next 15 years. If you invest Rs.15,000 per month the fund could give you a 15% Return on Investment each year. In 15 years, out of your total contribution of Rs.27 lakh, you’ll have a little over Rs. 1 crore in total value.

Not satisfied? Well, listen to this…

Instead of 15 years, if you continue your investment for 5 more years, you’ll have over Rs.2.25 crores in total value. And, if you continue your investment of Rs.15,000 every month for the next 30 years instead of 15 years, you’ll have a whopping Rs.10.5 crores in total value!

In order to invest and earn a return as said in the example, the best option is to go for β€œETF Investing”. To learn more about ETF Investing, CLICK HERE!

How does SIP work?

The fundamental tenet of systematic investing is straightforward. It is based on the acquisition of shares or units of securities in a fund or other investment on a regular and recurring basis. 

Rupee-cost averaging is the practice of purchasing the same set rupee amount of a security at each periodic interval regardless of its price. As a result, shares are purchased at varied prices and in varying quantities through some programs that allow you to choose a certain number of shares to purchase. 

Due to the fact that the amount invested is often set and unrelated to unit or share prices, an investor purchases fewer shares when unit prices rise and more shares when prices fall.

SIPs are often passive investments, as once you contribute, you continue to invest regardless of how the fund performs. That is why it is critical to monitor the amount of wealth you accumulate in your SIP. 

Once you reach a particular amount or approach retirement age, you may wish to reevaluate your investing strategy. By switching to an actively managed strategy or investment, you may be able to increase the growth of your money even more. 

However, it is always prudent to consult a financial advisor or other specialists to identify the best course of action for you.

SIP or Lumpsum Investing?

Lumpsum investing as the word says is investing a large chunk of money at a time, say, Rs.1,00,000. If you have a decent income or sizable savings and a high-risk tolerance, you may like to make a lump-sum investment.

SIP on the other hand is to Invest in a timely interval. With SIP, you need not look at the market constantly but can invest during all or at least most of the market’s ups and downs. And, with SIP, you get to do rupees cost averaging. 

SIP instead of lumpsum investing is ideal for new and budding investors who have access to limited capital and are risk-averse in nature.

Reinvesting your Dividend is necessary!

Along with SIPs, many investors use the earnings generated by their holdings to acquire additional shares of the same security through a dividend reinvestment plan (DRIP). 

Dividend reinvestment allows owners to acquire additional shares or fractions of shares in publicly listed firms. Rather than paying dividends to investors quarterly, the company, transfer agent, or brokerage firm uses the funds to acquire new shares in the investor’s name. 

Dividend reinvestment plans are likewise automatic the investor specifies how dividends will be treated when they open an account or initially purchase the stock and they enable shareholders to invest a variable amount in a firm over a lengthy period of time.

DRIPs maintained by companies are commission-free. This is because no broker is required to execute the deal. Certain DRIPs allow participants to acquire additional shares directly from the firm at a 1% to 10% discount without incurring any costs. 

Due to the flexibility of DRIPs, investors can contribute small or large sums of money, depending on their financial circumstances.

Various Types of SIP:

Flexible SIP

This SIP type allows you to adjust your investment amount based on your cash flow. In fact, you can skip one or more payments if you run into financial difficulties for whatever reason. Similarly, if you earn a bonus or increase income, you can increase your contribution to your SIP account.

Top-up SIP 

This SIP type enables you to gradually raise your investment amount. This also means that you may maximize the performance of your SIP mutual fund investment by making periodic contributions to high-performing mutual fund schemes. When your income improves, you can raise your investment amount.

Trigger SIP

This SIP is suited for investors with minimal financial market understanding. You may configure NAV, index level, SIP start date or event, and so forth. Due to the fact that this sort of SIP mutual fund encourages speculation, it is neither desirable nor highly recommended.

Perpetual SIP

SIP investments are often made for a specified term of one year, three years, or five years. If no end date is specified in the mandate date, a SIP mutual fund is referred to as a Perpetual SIP. 

This SIP type enables you to redeem your assets anytime you like or, more specifically, when you have met your financial objectives. However, it is prudent to establish an end date for your SIP contribution in order to develop a disciplined, goal-oriented investing strategy.

What is SIP Its Types, Benefits & Drawbacks explained

Benefits of Investing via SIP:

  1. Low Investment – You can start with as little as Rs.100 per month.
  2. Rupee Cost averaging – Buy more when the marks drop. Thus, you get more units.
  3. Easy and Reliable – Investing in a well-known Mutual Fund via SIP is easier now than ever before.
  4. Convenient – Let professionals with a good track record manage your money. You need not do anything else.
  5. Wonders of Compounding – It is said to be the 8th wonder of the world. Its work will surprise you!

For example, Mr. Warren Buffett made 99% of his wealth post his 50th birthday!

That tells you more about why doing SIP and sticking with your investment for the long term could be beneficial. Discipline and consistency will give you better results than any other investments out there!

Drawbacks of Investing via SIP:

  1. Commitment is a must! – Every Investor needs to have a long term perspective and must stay invested without diverting.
  2. Timing market – Investing via SIP will in some cases make an investor miss out from truly timing the market. Such as not picking stocks at the sheer drop instead, waiting until the right date for SIP.

How to choose the best Mutual Fund to do SIP?

Reputation

It is critical to research the fund house’s reputation before selecting a plan. The fund house’s performance will provide investors with an indication of how successfully the fund house will be able to weather market lows and highs without causing investors to feel the effects.

SIP Duration

The term of a SIP mutual fund investment is critical to evaluate from a risk, return, and tax perspective. While investing via SIP, investors should keep at least a 5-year reference point in mind and compare the fund’s performance to the market.

Asset Under Management

A sizable AUM will tell more about the Fund. The larger the AUM, the better are its ability to invest and diversify. When selecting a fund, see if the AUM is at least Rs. 1,000 crores. The size of the asset might be used as a benchmark. 

This is not to say that funds with less than this asset amount are bad; it simply means that they may not perform as well as funds with more than this asset size.

Top-performing Large-cap funds with 5 Years return:

  1. Canara Robeco Bluechip Equity Fund – Gave 77.38% return.
  2. Axis Bluechip Fund – Gave 73.15% return.
  3. UTI Master share Unit Scheme – Gave 71.55% return.
  4. IDBI India Top 100 Equity Funds – Gave 70.88% return.
  5. Invesco India Largecap Fund – Gave 70.73% return.

Conclusion:

Mutual funds and other investment businesses offer a range of investment alternatives to investors, including systematic investment strategies. 

SIPs enable investors to invest little amounts of money over time rather than in huge lump sums all at once. The majority of SIPs demand steady contributions on a weekly, monthly, or quarterly basis.

Investing via SIP is considered to be one of the finest and safest methods of investing. It offers something that no other method could offer! SIP offers you to invest at each interval, track your investments easily, automate your Investments. 

Not sure where to Invest in? Not sure what to do SIP on? Well, my suggestion for you is to get on with the β€œIndex funds”. To know more about Index Investing, CLICK HERE!

For more Information, Check this Video:

Disclaimer: All the information on this website is published in good faith and for general information purposes only.

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