Understanding SIPs (Systematic Investment Plans) and Their Benefits

SIPs have become one of the most popular investment options amongst Indian investors in recent years. SIP allows investors to invest small, regular amounts in mutual funds or other financial instruments. With an SIP, you can reap the benefits of rupee cost averaging and the power of compounding over time. Let’s understand how SIP works and why they make for smart investments.

What is SIP Investment?

The SIP full form is “Systematic Investment Plan.” It refers to periodically investing a fixed sum in a mutual fund scheme. SIPs allow investors to invest small amounts regularly, such as monthly or quarterly, to build a large corpus over time.

The key features of SIP are:

• Fixed investment amount at regular intervals
• Flexible investment tenure and intervals
• Automatic debits from the bank account

How SIP Works?

An SIP allows you to invest a fixed amount at a regular frequency. For instance, you can opt to invest ₹5,000 every month in an equity fund for 5 years. The SIP process works as follows:

• You select a mutual fund scheme you want to invest in
• You decide the monthly/quarterly investment amount
• You choose the SIP date and tenure
• The fixed SIP amount gets automatically deducted from your bank account on the scheduled dates and invested into the mutual fund scheme.

The SIP investment keeps purchasing fund units at different NAVs (net asset values). Over time, units are accumulated based on the invested amounts.

SIP Investment Benefits

SIP investing comes with numerous advantages that make it ideal for retail investors. The following are the most prominent SIP investment benefits you should consider: 

1. Power of Compounding

By investing at regular intervals over the long term, the power of compounding works in your favour. As the investment keeps growing, the returns start earning returns. Over 10-15 years, this creates a large corpus.

2. Rupee Cost Averaging

Since the market fluctuates daily, an SIP allows you to invest a fixed amount irrespective of the NAV. Investing the same amount through highs and lows means the average unit cost per unit is lower than for a lump sum investment.

3. Investor Discipline

SIP helps instil financial discipline by enforcing regular investing. As the amounts are smaller and automated, investors are less likely to postpone or skip investments. This ensures investing continuity and reaping the rewards over the long term.

4. Flexible and Convenient

You can choose SIP amounts and schedules that are convenient for you. Most funds allow SIP investments starting as low as ₹500 per month. SIP schedules can be monthly, quarterly, weekly, or daily. Investors can start, stop, or change an SIP anytime.

5. Diversification

One of the most important SIP investment benefits is that it allows you to diversify across asset classes and fund categories based on your financial goals, risk profile and investment horizon. Equity, debt, gold and international funds can all be purchased through SIP.

6. Lower Risk

As an SIP invests a fixed amount regularly, you don’t have to worry about market timing. During volatile markets, your SIP keeps purchasing units at lower values, lowering the average purchase cost. This reduces risk compared to lump sum investments.

How to Invest in an SIP Plan? 

Starting a SIP is easy. Here’s how to invest in SIP plan in a few simple steps: 

• Choose a fund: Based on your investment objective, risk appetite, and investment horizon, select an appropriate mutual fund scheme to invest in.
  
• SIP amount: Based on your financial capability, decide the monthly/quarterly amount you wish to invest. SIP installments can be as low as ₹500.
  
• SIP date: Choose a convenient date. Most funds allow SIPs on any date that you prefer.
  
• Tenure: Select the SIP tenure or period. Recommended is at least 5 years to benefit from compounding.
  
• Submit form: Complete the SIP registration form, either online or in person, and submit it along with your KYC documents.
  
• Track SIP: Login online to track your SIP performance and investments. Use this to monitor your investment progress.

Conclusion 

SIP investing is ideal for new investors as it inculcates disciplined investing and helps build long-term wealth. By making small investments regularly, SIP allows your money to grow steadily over time. 

Once your SIP investment corpus grows substantially over the years, innovative products like Fibe Loan Against Mutual Funds can help unlock its value. You can avail loans against your SIP investments through quick and paperless processing, without breaking your SIPs or liquidating the funds. This provides easy access to cash for varied needs while retaining the SIP’s benefits.

So, start harnessing the power of SIP investment to build long-term wealth! 

FAQs

Is SIP better than FD?

Yes, SIPs are better than fixed deposits (FDs) in the long run. SIPs generate higher inflation-adjusted returns compared to FDs because they invest in equity mutual funds. However, SIPs carry market risk, while FD returns are fixed.

Can I withdraw SIP anytime?

Yes, you can withdraw or discontinue your SIP investment at any time by filling out an SIP cancellation form. The redemption amount will be credited to your bank account within 10 working days.

Can SIP go in loss?

Yes, SIP returns are not guaranteed. Your SIP can face losses due to market downturns. However, over the long term, SIPs have been proven to generate positive inflation-beating returns.

What is the 8:4:3 rule in SIP?

The 8:4:3 rule states that SIP should be invested for at least 8 years, for at least 4 years, and then start evaluating performance once every 3 years. This prevents investors from stopping SIPs too early based on short-term underperformance.

Can I skip a SIP instalment?

Yes, you can pause your SIP temporarily if you cannot pay any month’s instalment. However, skipping several instalments frequently can impact your investment discipline and compounding benefits.

Are SIP returns guaranteed?

No, SIP returns are not guaranteed as they depend on market performance. SIP only guarantees the discipline aspect of regular investing, not assured returns or profitability.