What is a SIP and what are its benefits?

Ajit Narasimhan July 24, 2019 0 Comments

A Systematic Investment Plan (SIP) is a small, regular investment in mutual funds for a fixed time period.

Suppose you want to have 5,00,000 in 5 years for a car. Just like you’d save little by little to build a corpus to purchase it, you can start a SIP in a mutual fund for it. There are several advantages a SIP gives you over regular savings, the potential to earn higher returns being the foremost.

What are the benefits of a SIP?

  1. SIPs make sure you invest regularly – With a SIP, you set your investing on auto-pilot I.e. a predetermined sum of money is invested on a fixed date for the time frame and period you’ve selected. SIPs on a monthly basis are the most common.
  2. Start small with a SIP– You can start investing with as little as 500. There is no limit on the maximum you can invest. Every small instalment will contribute to your overall corpus.
  3. SIPs give you flexibility– You can choose your SIP amount, date of debit, frequency of SIP and the period until which your SIP should run.
  4. SIPs allow you to average out investment costs– When you purchase units of a mutual fund, you get each unit at the NAV (price per unit). This NAV depends on the performance of the scheme and is subject to change. So, when you invest periodically through a SIP, for the same amount you could be purchasing units at different NAVs, thus averaging out investment costs. When the NAV is low, you’ll get more units for the same amount, and vice versa. Here’s an example:
SIP Date SIP Amount NAV per unit Number of units (SIP amount/ NAV)
1st Oct 2018 1000 10 100
1st Nov 2018 1000 10.5 (increased) 95.238 (lesser units)
1st Dec 2018 1000 9.5 (decreased) 105.26 (more units)
Total 3000 300.49
Average cost per unit (Total amount/total number of units) 9.98
  1. Variety of SIPs– Investors have several options when it comes to setting up SIPs. Apart from the regular SIPs, they can choose from Flexi-SIPs and Step-up SIPs too. A Step-up SIP increases your SIP by an amount you fixed at an interval you fix – say if your current SIP is 1000, you can choose to step this up by another 1000 annually. So, from year two, your SIP amount is 2000, year 3 it is 3000 and so on. With a Flexi-SIP, you invest a fixed amount regularly like a SIP, but can invest more when the markets are falling subject to a maximum limit you choose, lesser when markets are rising subject to the minimum investment value of the fund.

Reaching your financial goals is so much easier with a SIP. Start one today, and march one step at a time to wealth.

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