Section 11 – SIP (Systematic Investment Plan)

Table of Contents

What is SIP

SIP, a short name of Systematic Investment Plan, is a mode of investment in Mutual Funds. Investors can invest a predetermined amount in Mutual Fund schemes at regular intervals instead of making a lump-sum investment. It is considered as an alternative of traditional investment practices like RD investments in bank or lump sum investment.

SIP investment in mutual fund is a way to become a disciplined investor by cultivating a habit of regular investment. It is an easy and investor friendly approach of investment to achieve the future financial goals.

Mutual Fund offers various SIP schemes keeping in view the different needs of different category of investors. A small investor can also invest in a SIP of mutual fund. It allows investor to buy in a volatile market over time at an average price without predicting market movements.

SIP investment in Mutual Fund is very popular among the mutual fund investor. Indian Mutual Funds have currently around 3.88 crore SIP accounts and the trend is increasing very fast. A big number of First-time investors are participating every day in SIP investments.

How it works (with illustrated example)

SIP investment is generally done on monthly basis but options for weekly or quarterly payment mode can also be selected by the investors. SIP allows investors to buy units of the scheme with fixed periodicity of subscription. The number of units allotted depends on the scheme’s prevailing Net Asset Value (NAV)at the time of subscription.

Illustrated Example

An investor started investing Rs 10000 per month in SIP. How many units allotted to him per month is shown below. 

Month of SIP investment on - 1st day ofAmount investedNAVNo. of units allotted
2019-07-01 00:00:0010000100100
2019-08-01 00:00:001000010595.23
2019-09-01 00:00:001000011090.9
2019-10-01 00:00:001000012083.33
2019-11-01 00:00:0010000100100
2019-12-01 00:00:001000010298.03
2020-01-01 00:00:001000010199
2020-02-01 00:00:001000090111.11
2020-03-01 00:00:001000080125
2020-04-01 00:00:001000050200
2020-05-01 00:00:001000015066.66
2020-06-01 00:00:001000016062.5

Main Features of SIP

  • Easy and user-friendly investment:
  • SIP investment can be started easily with minimum documentation through Online /Offline mode. Periodical payments of the investment can be linked with the bank account.
  • It can be paused for certain duration and after that further continued also. An investor can partially or fully redeem the SIP investment after the lock in period (if any) without any penalty.
  • Suitable for every earning class of investors:

It is suitable for all class of investors having different earning status. A person who just started earning and don’t have any big savings also can start SIP investment. They can save and invest a part of their salary or income periodically in a suitable SIP scheme.

  • Benefit of compounding

With passage of time SIP investment converts in a significant amount.  Regular periodic investment and Compounding of Return-on-Investment makes the SIP investment big in terms of wealth.

  • Small investment can avail the multiple benefits of diversification & professional care:

People can invest depending on the kind of fund and investment amount they choose. An investor may not have enough money to create a diversified investment portfolio and unable to investment in a very large number of different stocks and bonds.  Simultaneously they may not have resources to take the services of profession investment experts.

In SIP investment, even the small periodical investment of 500 will become a part of diversified investment nurtured by the skill fund managers. 

  • Less effected by the market movement:

Volatility is a feature of the market. SIP investment has a benefit of rupee cost averaging. Rupee cost averaging reduces the impact of ups and downs of the market on SIP investors. In fact, Fund managers of SIP schemes purchases more SIP units when the price is low and fewer units when the price goes higher. 

  • To achieve future financial goals

Regular investments convert into big corpus which can be utilized in achieving the future financial goals. We all have some plans and goals like buying a house, children’s education, or retirement. This requires big amount of money at different stages. SIP investment acts as an effective tool to accumulate the required amount at a pre specified time to fulfill the life goals.

You can invest any amount or can conduct more than one SIP to meet your short term or long-term future goals. You can invest amount as per your convenience and can withdraw or stop as per your requirements.

  • It develops a habit of saving

The best way to develop a habit of saving is by investing in SIPs. This will not only help you save regularly but the corpus that will be accumulated over time will be rewarding. Also, you can withdraw the amount from SIP anytime, whenever you want it, so there is no blockage of your saving as it happens in RDs or FDs.

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