Systematic Investment Plan, commonly known as SIP, means an investment strategy in which an investor needs to invest a pre-determined amount of money in a pre-defined mutual fund at every stipulated time period. SIP investment is the concept of bit-wise investment, which spans over a long time period rather than directly investing lump sum amount of capital at once. An investor, with the help of Systematic Investment Plan, has an advantage of investing in small amounts of capital. Investor can invest on a monthly basis or quarterly basis or half-yearly basis for a long duration of time. Thus, this strategy is beneficial in the long run. SIP investment is a smart and structured way of investing, enabling an investor to invest from small amount of money to considerable amount of capital. Investment can be done as per the choice, requirement, and financial goals of an investor.
Although SIP investment is surrounded by the market and event-driven short-term risks, yet this investment plan rewards the investors’ patience and perseverance.
Functioning of SIP Investment
After applying for single or multiple SIP investments, equivalent amount of investment gets transferred automatically from investors’ bank account. That amount gets invested in the selected MF. By the day’s end, that investor gets the units of mutual funds assigned on the basis of net asset value (NAV).
Types of SIP Investment
Although there are variety of SIP Investments available across the market, but some popular types of SIP Investments are preferred by the investors. Some of those are:
Flexible SIP Investments Alternatively known as Flexi SIP, this type of investment allows the investors to modify investment amount according to individual’s financial conditions and market circumstances.
Step up SIP Investments This SIP Investment type is also known as Top up SIP as it permits the investors to increase the investment amount in SIP at fixed intervals of time.
Trigger SIP Investments Trigger SIP Investment type allows the use of trigger option for the investor. For example, some investors set the trigger for a particular amount to be withdrawn from the bank account to be used for buying units of the selected mutual fund scheme only if scheme’s NAV falls below the trigger level set by the investor.
Benefits of SIP Investment
Ease of investment is the best and well-known advantage of Systematic Investment Plan. Investors can choose to initiate their investment in a decisive and disciplined manner.
SIP Investment provides an investor with the opportunity to participate in capital markets without actively timing the stock market. Benefits of SIP Investment can be availed as an investor can purchase more units when NAV declines. This style helps the investors to reduce their average cost per unit of investment through the process called as rupee cost averaging.
The eighth wonder of the world, power of compounding, is seen in the SIP Investment over a long term. When investment amount gets invested in a disciplined way, the compounding effect takes charge.
Against one-time lump sum investments that can lead to significant losses during market crash, SIP Investment has the potential to protect capital whenever there is a decline in the market. This is because of the rupee cost averaging.