Explore the Systematic Investment Plan (SIP) - From its full form and meaning to the incredible benefits it offers. Learn how SIP works.
EXPLORE FUNDS
What is SIP
EXPLORE FUNDS
5 mins
28 February 2024
In the volatile stock market, the Systematic Investment Plan (SIP) stands out as a reliable choice. SIP allows investors to profit from market ups and downs without the stress of timing. This disciplined approach involves investing fixed sums at regular intervals, offering a shield from market volatility. Embraced by Indian Mutual Fund investors, SIP is positioned as the optimal entry point for long-term investments.
What is SIP?
Systematic Investment Plan (SIP) is a method of investing in Mutual Funds allowing investors to contribute a fixed sum regularly, like monthly or quarterly, rather than a lump sum. This, starting from as low as Rs. 100 per month, is same as a recurring deposit and is hassle-free with automated monthly deductions. Popular among Indian Mutual Fund investors, SIP ensures disciplined investing. It is an ideal long-term investment strategy, emphasising the importance of starting early and consistent contributions for optimal returns. In essence, the mantra is to "Start Early, Invest Regularly" for the best outcomes in long-term investments.
How do SIPs work?
Understanding the functioning of a Systematic Investment Plan (SIP) is crucial for maximising returns with minimal investment. Follow the steps below to comprehend the workings of an SIP investment plan:
- Thoroughly research the best SIP plans you intend to invest in.
- Select a fund which aligned with your financial goals and risk profile.
- Determine the frequency and amount of your SIP investments.
- Carefully complete your KYC authentication and provide bank account details with auto-debit activation for uninterrupted SIP investments.
- Once activated, the SIP amount is allocated to the chosen mutual fund scheme.
- The fund manager invests the accumulated amount in various assets based on the scheme's investment objective.
- On the SIP date, the deducted amount from your bank account is used to purchase units at the prevailing Net Asset Value (NAV).
- Enjoy the flexibility to adjust your SIP contributions as needed.
- Utilize online tools like the Bajaj Finserv SIP calculator to estimate returns based on your SIP investment plan.
While SIP returns depend on fund performance, long-term SIP investments are proven to be an excellent avenue for wealth growth.
Understand Systematic Investment Plan (SIP) with an example
Let us assume that you want to start an SIP for Rs. 5,000 every month to invest in a mutual fund ‘A”. The present value (NAV) of the mutual fund is Rs. 50 per unit, so you will get 100 units of the fund.
| Month | Investment amount | Present value | Units allocated | Total units |
| 0 | Rs. 5,000 | Rs. 50 | 100 | 100 |
| 1 | Rs. 5,000 | Rs. 40 | 125 | 125+100 = 225 |
| 2 | Rs. 5,000 | Rs. 52.6 | 90 | 225+90 = 315 |
| 3 | Rs. 5,000 | Rs. 100 | 50 | 315+50= 365 |
Similarly based on the NAV of the mutual fund, the units allocated will change each month, and get added to your portfolio. This change in NAV also impacts your investment amount. Thus, an SIP helps mitigate the risk of market volatility and achieve the investor's long-term financial goals.
Features of SIP investment plans
- Rupee cost averaging: SIP uses the strategy of rupee cost averaging, helping investors benefit from market fluctuations. During market downturns, the fixed investment buys more units, and during upswings, it buys fewer units. This approach helps mitigate the impact of market volatility over time.
- Disciplined and consistent investing: SIP promotes financial discipline by allowing investors to commit to regular contributions regardless of market conditions. This disciplined approach encourages consistency in investing, fostering a habit of regular savings and wealth creation.
- Flexibility in investment amount: Investors have the flexibility to choose the amount they want to invest in SIP, making it accessible for a wide range of investors with varying budget sizes. This feature accommodates both small and large investors, enabling them to start with an amount that suits their financial capacity.
- Professional fund management: SIP investments are managed by professional fund managers who make informed investment decisions based on market conditions and the fund's objectives. This professional management aims to optimise returns and effectively manage risks, providing investors with the expertise needed for successful mutual fund investments.
- Long-term wealth creation: SIP is designed for long-term wealth creation. Through consistent and disciplined contributions, coupled with the power of compounding, investors can potentially achieve significant returns over an extended period. This long-term approach aligns well with financial goals such as retirement planning or building a corpus for major life events.
- Option to temporarily halt investments: SIP provides the convenience of temporarily suspending investments, offering valuable flexibility, especially during financial challenges. The SIP automatically resumes at the end of the pause period. It is recommended to verify the availability of this pause feature with your Mutual Fund provider.
- Unrestricted investment ceiling: With a minimum SIP investment of Rs. 100 and no strict upper limit, investors can contribute any amount of their choice through the SIP. Ensuring the ongoing consistency of SIP investments throughout the plan's duration is essential for optimal results.
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Benefits of investing in SIP
SIP (Systematic Investment Plan) is a popular investment method that allows investors to invest in mutual funds in a disciplined and regular manner. Here are some benefits of investing in SIP.
- Disciplined investment:SIP helps investors to invest in a disciplined manner as it involves investing a fixed amount at regular intervals. This helps investors to avoid the temptation of timing the market and investing a lump sum amount. Without analysing the market movements, it helps to create a habit of disciplined saving and investing, which is essential for long-term wealth creation.
- Cost-effective: SIP allows investors to invest in mutual funds with a small amount of money. As the investment amount is divided into small portions, the impact of market volatility on the investment is reduced. Moreover, the cost of investing in mutual funds through SIP is also low compared to other investment methods.
- Power of compounding:SIP investment allows investors to take advantage of the power of compounding. As the investment is made regularly over a long period, the returns generated on the investment also generate returns, resulting in a higher return on investment.
- Flexibility: SIP offers flexibility to investors as they can start, stop, or increase/ decrease their investments at any time based on their financial goals and circ*mstances.
- Lower Risk: The rupee cost averaging strategy employed by SIPs helps mitigate the impact of market volatility. During market downturns, fixed investments acquire more units, and during upswings, fewer units are bought. This strategy lowers the average cost of acquisition, reducing the overall risk and providing a more stable investment journey.
Who should invest in SIP?
SIP or Systematic Investment Plan caters to those who prefer a disciplined and systematic approach to investing, making it suitable for both seasoned investors and beginners. For beginners, SIP offers a convenient entry point into the world of investments, allowing them to start with modest amounts and gradually increase their investment as they become more comfortable. Seasoned investors, on the other hand, appreciate SIP's ability to navigate market volatility effectively, enabling them to capitalise on both bullish and bearish market trends. Regardless of one's risk appetite or investment experience, SIP provides a flexible and accessible investment avenue that aligns with various financial goals and timelines.
What are types of SIP?
Systematic Investment Plan (SIP) is an investment tool that allows investors to invest a fixed amount of money at regular intervals. Here are some different types of SIP:
- Fixed SIP: In this type of SIP, the investor invests a fixed amount of money at regular intervals.
- Flexible SIP: Here the investor has the option to vary the amount invested in each instalment.
- Perpetual SIP: It is one where the investor does not specify an end date for the SIP.
- Trigger SIP: A type of SIP where the investor can set certain trigger points. When the market reaches those trigger points, the investment is automatically made.
- Top-up SIP: The investor has the option to increase the amount invested periodically.
- Step-up SIP:The amount of investment is increased at regular intervals.
- Value averaging SIP: The investor invests a variable amount of money based on the current value of the investment.
- Multiple SIP: In a multiple SIP, the investor can invest in more than one scheme at the same time using a single SIP mandate.
How to choose right SIP to invest in India
Choosing the right SIP in India involves considering factors like duration, fund house performance, asset size, investment goals, plan selection, portfolio diversification, and periodic reviews for optimal outcomes.
- Duration of SIP: Invest with a reference point of at least 5 years to gauge fund performance across market conditions, aligning with long-term investment goals.
- Fund house performance: Evaluate the reputation and past performance of the fund house to gauge the ability of fund managers in handling market fluctuations.
- Asset under management: Consider the asset under management, especially for first-time investors, ensuring a substantial and well-managed fund portfolio.
- Set investment goal: Align your SIP plan with specific goals, choosing funds that match your financial objectives and risk tolerance.
- Select the right plan: Analyse the past performance of available SIP plans, ensuring alignment with your investment strategy and risk appetite.
- Diversify your portfolio: Mitigate market fluctuations by investing in multiple fund units, ensuring a diversified portfolio for maximum returns.
- Periodically review your investments: Regularly review your SIP strategy, making adjustments to align with changing financial goals and market conditions for sustained success.
Things to consider while starting SIP
Before starting SIP mutual fund, an individual should consider the following things:
- Financial goals:You should have a clear understanding of your financial goals and the investment horizon.
- Risk appetite:You should assess your risk appetite and choose a SIP plan accordingly.
- Investment amount:An individual should choose an investment amount that is comfortable and affordable.
- Investment duration:An individual should choose an investment duration based on their financial goals and investment horizon.
How to invest in SIP through Bajaj Finance?
Discover how to invest in SIP effortlessly by following the below steps.
Step 1:Determine the investment amount: You need to decide the amount that you want to invest periodically through the SIP. This amount can be as low as Rs. 100 per month for many mutual funds. The minimum investment amount varies for each scheme.
Step 2:Choose the investment product: Select the investment product or mutual fund in which you want to invest the money. The choice of mutual fund is based on your financial goals and risk appetite.
Step 3:Select the SIP tenure: Decide the tenure of the SIP, which can range from a few months to several years.
Step 4:Decide the SIP date: Choose the date on which the SIP investmentamount will be debited from their bank account.
Step 5:Set up the SIP: Once you have determined the investment amount, chosen the investment product, decided the SIP tenure, and set the SIP date, set up the SIP with Bajaj Finance.
After setting up the SIP, the investment amount will be deducted from your bank account on the chosen date and invested in the chosenmutual fund. This process repeats at regular intervals as per the chosen tenure.
Conclusion
In conclusion, SIP or Systematic Investment Plan is a simple and disciplined approach to investing in mutual funds that helps individuals to build wealth over the long term. SIP mutual funds are a good investment option for individuals who want to create long-term wealth through disciplined and regular investing.
SIP has grown in popularity among Indian MF investors because it encourages disciplined investing without concern for market volatility or market timing. The ideal method to enter the world of investing for the long term is unquestionably through Systematic Investment Plan provided by mutual funds. It is crucial to invest for the long term, which means you should get started as soon as possible to optimise your results. To get the most out of your assets, your motto should be to start early, invest regularly.
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Frequently asked questions
What is SIP and how it works?
Systematic Investment Plan (SIP) is a method of investing in mutual funds where you contribute a fixed amount regularly. It works by allowing you to invest smaller sums at regular intervals, harnessing the power of compounding and rupee cost averaging.
Is SIP better than FD?
SIP and Fixed Deposit (FD) serve different purposes. SIP offers market-linked returns with potential for higher growth, while FD provides fixed returns with lower risk. The choice depends on individual financial goals and risk tolerance.
Can I invest Rs. 1,000 per month in SIP?
Yes, many SIPs have a low entry point, allowing investors to start with amounts as low as Rs. 1,000 per month, making it accessible for a wide range of investors.
Is SIP 100% safe?
While SIPs are relatively safer than some investment options, they are not completely risk-free. The risk is associated with market fluctuations, and returns are subject to the performance of the underlying funds.
What is SIP Rs. 5,000 per month for 20 years?
If you invest Rs. 5,000 per month through SIP for 20 years, assuming 12% return. The estimate total returns will be Rs. 37,95,740 and the estimate future value of your investment will beRs. 49,95,740.
Can I withdraw SIP anytime?
Yes, SIP investments offer flexibility, allowing you to withdraw your funds at any time. However, it's essential to check if there are any exit loads or charges associated with early withdrawals.
How much is Rs. 50,000 monthly SIP for 5 years?
If you invest Rs. 50,000 per month through SIP for 5 years, assuming 12% return. The estimate total returns will be Rs. 11,24,318 and the estimate future value of your investment will beRs. 41,24,318.
Is SIP risk-free?
SIPs are not entirely risk-free as returns are linked to market fluctuations. However, they are considered relatively safer due to the rupee cost averaging strategy and the ability to withstand market volatility over time.
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Bajaj Finance Limited (“BFL”) is a Non-Banking Financial Company carrying the business of acceptance of deposits, providing lending solutions to Retail & Corporate customers, and is a Corporate agent of various insurance Companies. BFL is also registeredwith the Association of Mutual Funds in India (“AMFI”) as a distributor of third party Mutual Funds (shortly referred as ‘Mutual Funds’).
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