A five-minute guide to SIP or Systematic Investment Plan

As written on 18^th Feb 2021

Whether you are new to mutual funds or have already invested, there is always some confusion regarding SIP among investors. The term SIP has become so synonymous with mutual funds these days that some believe that SIP and mutual funds to be one and the same thing. Before you get any more confused and derive further assumptions of SIP and its role in mutual fund investments, here is a quick guide to help clarify all your SIP related doubts and queries.

What is SIP?

SIP stands for Systematic Investment Plan. SIP isn’t a synonym or a by-product of a mutual fund scheme. It is simply a tool or method of investing in mutual funds. If you only invest in mutual funds by making a one time investment, you may end up exposing your entire investment amount to the dangers of mistiming of the market. Thanks to the introduction of Systematic Investment Plan, it has become possible to invest and earn capital appreciation by starting a monthly mutual fund SIP. SIP gives investors an opportunity to invest small amounts at regular intervals (generally every month) instead of making a lump sum investment. It is a method of systematic investing and building a corpus over the long term through investments in mutual fund schemes. Investors can start a SIP in almost all mutual funds including equity and debt.

Features and Benefits of SIP investment

First and foremost, the important thing about SIP is that investors get to choose the monthly investment amount. However, this monthly investment amount cannot be lesser than the minimum investment amount mentioned in the offer document. SIP is an ideal tool especially for those seeking investments in equity mutual funds. You may be well aware that equity markets are highly volatile in nature. These are unpredictable markets and their performance directly affects the performance of an equity scheme. With SIP, investors can now invest small amounts in equity funds instead of making a lump sum investment and exposing their entire investment amount to market vagaries. There are some fund houses who offer investors the option of starting a SIP with an amount as low as Rs. 500 every month.

One investment technique which can help your small SIP amounts multiply and grow over the long term is through the power of compounding. In mutual funds, compounding refers to the profits earned on the profits reinvested in the SIP app. However, compounding is only known to work well if you continue investing in mutual funds via SIP for the long term. Investors can actually target their life’s long term financial goals through SIP investments. The beauty of SIP investments is that SIP in most schemes do not come with a lock in period. Individuals can continue investing till their investment objective is achieved. Also, SIP is flexible in several ways. Investors have the liberty of skipping a month’s SIP in case they do not have sufficient funds for investment. They can even modify the monthly SIP amount based on their changing income goals and financial needs. If you do not wish to continue investing in mutual funds via SIP for whatsoever reason, you can stop your SIP investments right away. There are no fines or penalties involved for stopping or skipping your monthly SIP. This gives the investor complete control over their mutual fund investments.

Another unique technique which SIP investors can benefit from is rupee cost averaging. When the NAV (net asset value) of a mutual fund is low, more units are allotted in quantum with the SIP investment amount. Similarly, when the NAV of a fund is high, lesser units are allotted. This is referred to as rupee cost averaging which minimizes the risk associated with market volatility.

Currently there are four types of SIPs available for investment. Let’s understand them in brief

Top up SIP: Top up SIP is a type of SIP investment where investors can gradually increase their SIP amount depending on the performance of the mutual fund.

Perpetual SIP: Perpetual SIP do not have a fixed or pre-determined investment tenure. This means that investors may continue investing in mutual funds via perpetual SIP till they are able to achieve their financial goals.

Trigger SIP: A trigger SIP is generally considered by seasoned investors who have a good understanding about mutual fund investment and market volatility.

Flexible SIP: A flexible SIP is ideal for investors who face irregular cash flow. Investors who opt for flexible SIP can increase or decrease the monthly investment amount depending on the availability of funds.

Individuals who are new to mutual fund should seek professional consultation before investing.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.