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Systematic Investment Plan (SIP) - A Habit for Regular Saving

Updated: Jan 26


A systematic Investment Plan is an investment method wherein an investor chooses a mutual fund scheme and invests at fixed or regular intervals (weekly/ monthly/ quarterly/ semi-annually/ annually) in the scheme.


Features of Systematic Investment Plan:


  1. Flexibility: Certain systematic investment plans provide flexibility:

a)Investment amount (i.e. small amount which can be increased or decreased at periodic intervals) to the investor.

b) Start, pause or cancel existing SIP with minimal restrictions.

  1. Diversification: As systematic investment plans is an investment method provided mutual funds, investors can diversify their investment, even if the investment amount is small.

  2. Financial Burden: System Investment Plans allow the investor to invest periodically in small amounts which protects the investor from all financial or cash burden at once.

  3. Convenience: As systematic Investment Plan is an automated process, it provides convenience of making investment to the investor.

  4. Duration: Duration of systematic investment plans varies as per the mutual fund scheme. Generally, Systematic Investment Plans offers better returns in long run.

Types of Systematic Investment Plans

There are different types of systematic investment plans that are offered by mutual fund schemes.

  1. 1. Top-Up SIP: This SIP allows an investor in increase the investment amount periodically which provides the flexibility to invest more if the investor is able to do so. It also helps in deriving the most out of the investments by investing in high perfoming funds.

  2. 2. Flexible SIP: This SIP provides the maximum facility regarding the investment amount as the investor can increase or decrease the amount as per financial position and preferences.

  3. 3. Perpetual SIP: Perpetual SIP facilitates to carry on investment without an end to mandate date. Hence, the investor can withdraw investment regardless of the tenure.


Systematic Investment Plan is a smart investment approach in the following manner:

  1. Rupee Cost Averaging Factor: In a SIP, investment amount is constant for a long period of time which allows an investor to take advantage of market volatility. The fixed amount averages out the value of each unit. Simply put, investor can buy more units when the market is low and fewer units when the markets are high which ultimately lower down average cost per unit.

  2. Power of Compounding: With the help of SIP, small and continuous investment grows into a large corpus as the investment and returns compound over time.

  3. Discipline Investor: When an investor invests in a SIP, investment money is auto-deducted from bank account and the investment is made in the mutual fund scheme which helps the investor to be disciplined in making investment.

How to choose Investment strategy?

An investor can choose right investment strategy by considering these factors:

  1. Financial Position: If the investor is financially strong and capable to make significant amount of investment in one-time, then it is advised to invest in lump sum as lump sum is cost effective and can provide better returns depending on the market timing and volatility.

  2. Risk Appetite: If the investor has low risk tolerance, then it is advised to invest via systematic investment plan as SIP is relatively less risky than lumpsum.

  3. Type of Investors: If the investor is someone who has just started investing or commenced professional career in this area, then it is advised to start with systematic investment plan as it will help gain exposure with a nominal amount. However, if the investor is experience or expert professional, then lump sum can be considered.

  4. Market Volatility: If the market is highly volatile at the time of making investment, then lump sum is not an advisable method of investment. However, if the market is considered to be bottoming out then investing via lump sum can yield better returns for the investor.

  5. Investment Horizon: If the investment horizon is short-term, then it is advised to invest via lump sum else SIP can be considered for long term.

  6. Flexible: If the investor aims for a flexible investment (in terms of duration, investment amount and so on) then it is advised to invest via SIP as it offers different features so as to provide flexibility to investors.

Lump Sum VS Systematic Investment Plan

Basis of Difference

Lump Sum

Systematic Investment Plan

Meaning

Lump Sum investment is a one-time investment made into a mutual funds.

SIP is an investment made in mutual funds at regular intervals.

Type of Investment

One time

Systematic ( Generally Monthly)

Investment Amount

High (as it is a one-time investment)

Low (As low as Rs 500 per month)

Risk

High as it depends on the market timing and volatility

Moderate as it averages the cost over a period of time

Cost

Relatively low due to lower management fee involved (as there is only one transaction involved).

Relatively high due to higher management fee involved.

SIP is not any form of investment scheme but an approach or method of investing into different mutual funds regularly as your monthly saving habit as per your risk appetite , investment goal and future needs.



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To Know about different types of mutual funds – their risk , returns and when to invest can read below articles:






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