EXPLAINED: Understanding The Anatomy Of Systematic Investment Plan

The idea behind SIP is to invest small amounts of money over a long period of time rather than put in a lumpsum amount in one go, like in mutual funds.

The golden rule for investing in SIP is to never miss out on your payments and start as early as possible. ( Image Source :Getty )

If you are a salaried employee or a young entrepreneur, you might have plans to buy a house in some years or build a commercial property in the future. To do that, you can try saving money by putting it in a savings account or a piggy bank, but it won’t really help you achieve your target. The bitter truth is that simply putting aside some money won’t help you create wealth because, over the years, inflation will nullify the collected savings. To create wealth, not just saving, but investing your money is an important step. 

If you are new to investing and find the technicalities of stock markets and real estate really overwhelming, you don't need to worry. There is a simpler method of investing available for individuals, with average to high returns but at a lower risk. 

What Is SIP?

SIP or Systematic Investment Plan is just what the name suggests. It is a method to invest in mutual funds where an individual chooses a fixed amount of money to be invested in the fund at regular intervals of time. The investor opts to buy the units of mutual funds at pre-decided intervals based on their Net Asset Value (NAV), which keeps fluctuating throughout the investment time period. 

The idea behind SIP is to invest small amounts of money over a long period of time rather than put in a lumpsum amount in one go, like in mutual funds. The investment amount can be as low as Rs 500 and can be paid on a weekly, monthly, bi-monthly or quarterly basis. 

Types Of SIP

There are primarily three types of SIPs an investor can opt for. 

Top-up SIP: This SIP gives the investor the freedom to increase the investment amount when it is convenient for the investor. 

Flexible SIP: This SIP allows the investor to increase or decrease the investment amount as per their convenience. 

Perpetual SIP: This SIP lets the investor continue the investments without a fixed end.

When To Invest?

What makes SIPs so attractive to an average investor is the simplicity behind it. An individual doesn’t need to worry about understanding the market trends or the economy conditions before investing in a SIP. Unlike mutual funds, SIP investments can be made any time irrespective of the market volatility. This is because SIP gives returns on a large amount of money collected over a larger period of time. Therefore, the returns on the investment get balanced since an average cost of the asset is considered. The only thing to keep in mind is to plan a SIP for the long run and not lose patience with it. 

Advantages Of SIP

Rupee Cost Averaging Factor

SIP allows you to invest a fixed amount of money over a long period of time, and the rupee cost averaging nullifies the impact of market volatility on your returns. This is because you invest in the asset when the market is high and low, making the average cost of the asset your money is buying almost negligible and your returns remain unaffected to a large degree.

Compounding Effect

Compounding basically allows an investor to earn great returns on even small amounts of money, as long as they keep investing it in regular intervals for a longer period of time. Compounding lets you use your investment returns as a principal amount and earn interest on them, eventually adding exponentially to your final interest earned on the initial investment. Compound interest can have a snowball effect on the earnings of an investor. This is one of the major reasons why SIP is such a lucrative offer for investors. 

Discipline

When you are aware that a fixed amount of money will be deducted from your account towards the SIP, it helps develop financial discipline. When you apply for a SIP, you commit to maintaining a fixed amount for investment at regular intervals and this helps build a financially responsible attitude towards life and expenses.  

Stress-Free Investments

The fact that SIPs are relatively unaffected by market volatility makes them a relaxed investment option. Unlike stocks or mutual funds, you don't have to keep track of the market’s every movement and feel insecure about your money. This helps develop a positive attitude towards investing as well. 

Affordable 

SIPs can be started with even Rs 500 on a monthly basis. This flexibility allows every investor to consider SIP without worrying about their affordability. It makes wealth generation possible without being concerned about maintaining liquidity. 

The idea behind SIP is to make investing an easy, affordable, and inclusive process for all kinds of investors. The main thing you should keep in mind is to plan ahead and for a longer period of time as SIPs are actually beneficial only when you are willing to commit for at least 5 to 7 years, if not longer. The golden rule for investing in SIP is to never miss out on your payments and start as early as possible. So, seek out professional opinions and find the best SIP options suitable to your needs.