All about Systematic Investment Plan (SIP)

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A Systematic Investment Plan (SIP) is a smart and hassle free mode for investing money regularly in mutual funds. SIP allows you to invest a certain pre-determined amount of money at a regular interval such as weekly, monthly, quarterly, etc. SIP helps you inculcate the habit of saving and create wealth for the future. It also helps the investors to invest in a disciplined manner.

The SIP is the preferred route for investing in stocks and Mutual Funds because it allows you to participate in the stock market while managing the risk better. It allows mutual fund investment by making smaller periodic investments in place of a heavy one-time investment.

How does it work?

A SIP is an easy and flexible investment plan. By activating SIP, a fixed amount is auto-debited from your bank account at the specified interval and invested into the selected mutual fund scheme. Certain number of units are allocated based on the ongoing market rate (NAV) for the day. Every time you invest money, additional units of the scheme are purchased at the NAV and added to your account.

When can you start a SIP?

Investor can start an SIP any time they want. Just fill the application form along with the SIP NACH mandate and submit it to the point of acceptance. You can also start an SIP online with mastertrust by submitting necessary documents and providing the basic information to become KYC compliant and opening a mutual fund account. After that you can choose a mutual fund in which you want to start a SIP online. All the transactions can be performed online once a mutual fund account is open. It generally takes 21 to 30 days for the bank to register SIP mandate and start it. You can choose the date of the month on which you want to run your SIPs based on the dates provided by the fund houses.

What happens when you miss an SIP installment?

The fund house does not penalize for missing an SIP installment but if it happens continuously for three times, your SIP would be cancelled. You can stop the SIP to avoid bank charges, if you are aware of the insufficient balance in your bank account. Request submitted through online channel takes around 10 days, and if you prefer the old paper form format it takes around 30 days. When you think you are financially comfortable, you have to re-start your SIP again.

Alternatively, there is also an option to pause your SIP by submitting a request with the fund house. This will stop your installments temporarily for a short period and will automatically start it after that.

For how long can you run an SIP?

A minimum of six months is stipulated for an SIP by most fund houses. Investors can choose any tenure they want or they may even opt for the 'perpetual option'. This means that the SIP will continue till the investor gives an instruction to the fund house to close it. Financial planners suggest investors to link each SIP to a goal and continue it till you achieve the goal.

Benefits of investing in SIP

  • Rupee-Cost Averaging

The equity market is volatile, most investors remain confused about the best time to invest and try to 'time' their entry into the market. When you invest via an SIP, you will buy more units when the market is low and lesser units when the market is high. As a result, this minimizes your risk and ensures you acquire investments at a lower average cost per unit. The need to time the market is eliminated by Rupee Cost Averaging.

  • Power of compounding

Compounding refers to earning interest by reinvesting the interest earned. The power of compounding can turn a small amount invested regularly into a very large corpus. In order to make most out of the compounding, it is always better to start investing early with a small amount and stay invested for a long time than waiting for a large sum to start investments.

  • Convenience

SIP is a hassle-free mode of investing. All an investor needs to do is to instruct the bank to enable auto-debits of the investment amount each month from his or her savings bank account or you can easily do it online also by sending one time instruction of their bank. This way the investor doesn’t need to go manually and pay his/her installment amount, allowing systematic investments without worrying about missing out on any monthly investment.

  • Discipline

SIP trains you to become disciplined in terms of managing your finances. Every month you have to contribute certain amount in mutual fund once you begin SIP and that habit is cultivated. The one basic rule of investing in SIP is to maintain a focused and dedicated approach towards investment.  Investing in SIP allows users to maintain a regularity in your investment approach which is far easier to maintain in the long run rather than investing a lump sum amount each year.