Systematic Investment Plan (SIP)?
SIPs are an advanced form of regular investing. The predecessor of SIP was RD or recurring deposit, where you will fix a specific amount to be deposited every month in an RD account. The account will operate for a longer period and offer higher returns to investors.
SIP refers to the systematic investment plan, and like RD, you can decide a fixed sum to be invested regularly in an investment instrument. Now, SIPs offer more customization than RD, as you can decide the frequency and the allocation of the investment.
You can direct your SIP to equity funds, debt funds, balanced funds, liquid funds, gold ETFs or even a unit-linked insurance plan(ULIP).
For example, you can save Rs. 50,000 every month and you want to create a diversified portfolio. You can start a SIP of Rs. 10,000 each in an equity growth fund, a debt fund, a ULIP, a Gold ETF and a pension plan.
Advantages of SIP:
You may have guessed a few advantages of SIPs for yourself from the definition.
But here’s a complete list of advantages SIPs can offer you:
- You can start small: When you start earning, income is low, expenses are high, and the most common excuse to postpone saving is, ‘my income is too low’. Well, not when you can SIP your way to any mutual fund and many investment schemes.
SIPs give you that edge. If you want to start with just Rs. 1000, you can do so. This is what matters for long-term wealth- develop a habit of saving.
- Start Investing Early: Do you know? “You have a better chance of getting Rs. 1.5 lakhs 10 years later by investing Rs. 850 a month, than starting in the 10th year and investing Rs. 10,000 a month.”
If you want to achieve bigger financial goals. Don’t wait to start saving great amounts. Start with whatever you have. SIPs help you take advantage of an early start.
Your earliest savings get the higher benefit of compounding, and as shown in the example above can grow quite a lot over a longer time.
- Convenient to Continue: With SIPs, you can choose your frequency. You can invest monthly or even weekly if your income permits. The best part is that you can customize SIPs to match your income frequency. So, you don’t have to think about your savings all the time.
- Automate your investments: One of the biggest advantages of SIP is that you can automate your savings to investment transactions. As the thumb rule of saving goes, ‘save before you spend’. You can use the auto-debit mandate to automatically transfer money from your salary account to various investments every month.
So regardless of whether you feel like investing or not, the money will keep flowing to your investments and towards your financial goals.
- Benefits from Rupee Cost Averaging: Rupee cost averaging is an interesting development from the SIP mode of investing. As you invest your average cost of investment goes down and your returns stabilise. The longer you keep investing, the better it becomes.
See ‘How Does SIP Work?’ below, to understand the effect of SIP on your portfolio.
