Systematic Investment Plan (SIP): Meaning, Benefits & How To Start SIP

Mutual funds

Investing in mutual fund schemes via a Systematic Investment Plan (SIP) can be an ideal way to fulfil financial goals. There are many benefits of investing in mutual funds through SIPs too. In fact, you can start investing in SIPs at just Rs. 500 per month. 

If you are a new investor, here’s your complete guide to SIPs, how to start investing, benefits, how to choose SIP mutual funds and more. Read on!

What Is SIP?

A Systematic Investment Plan (SIP) is an investment route through which an individual can invest in mutual fund schemes at regular intervals. In other words, it is a systematic procedure of investing a fixed amount periodically (yearly, semi-annually, quarterly or monthly). Thus, if individuals are not willing to invest their funds in one go, opting for an SIP is the perfect alternative. 

How do SIPs Work?

As noted above, SIP investment involves investing a fixed sum at regular intervals. This sum lets an investor purchase a particular number of units periodically. The number of units one gets depends upon the NAV on the instalment date. If individuals continue investing via SIP mutual fund for a long time, they get to invest in the scheme during the market highs and lows. This means that an investor need not time the market to make financial gains. 

Market timing is a risky aspect as people can end up investing at the wrong time. A SIP mutual fund tries to eliminate this sort of unpredictability. After deciding the investment frequency and amount, investors can automate their investments. 

For instance, investors can instruct their banks to transfer a particular amount from their bank accounts into the mutual fund scheme on a specific date every month. Now let’s see how compounding happens in a systematic investment plan!

Also read: 8 Best SIP mutual funds to Invest in 2022

What is Top-Up SIP?

A top-up SIP is a facility a SIP investor can have to increase the SIP amount at a pre-determined frequency. This flexible plan helps investors increase their investment amount until the maturity period. 

How Does the Power of Compounding Work?

When an individual regularly invests via SIPs, the returns get reinvested. This is a snowball effect that increases potential returns. To maximise this yield, an individual can invest for an extended tenure. Go through the hypothetical example below to understand the concept.       

Example

Manish invests Rs. 6000 per month in a mutual fund. The rate of interest is 12%. By the end of a year, the return is Rs. 4856. This sum gets added to the initial principal amount of Rs. 72,000 (Rs. 6000 × 12), making the new principal amount Rs. 76856. This procedure continues, thereby creating a value of Rs. 4.9 lakh (approx.) after 5 years, Rs. 13.9 lakh (approx.) after 10 years and Rs. 59.9 lakh (approx.)  after 20 years. 

The example highlights the exponential nature of the returns of SIP. Hence, if a person starts investing at an early age, the chance of growing the corpus increases. 

Systematic Investment Plan Benefits   

The benefits of SIP are as follows:

Affordable initial investment

You can start investing in mutual fund schemes, such as Navi Nifty 50 Index Fund, with an amount as low as Rs. 500 via a systematic investment plan. This scheme invests in the best 50 companies of India without charging any exit load.

Individuals can increase their monthly investments with a rise in their earnings through the SIP step-up feature. So, even if an investor starts with Rs. 600 or Rs. 1,000 each month, he can raise the investment amount over the years. 

Convenience 

Many investors don’t have the time to research and analyse the market for adjusting their portfolios. To combat this issue, they can pick mutual fund schemes and invest via SIP. They do not have to worry about making investment decisions. The amount gets auto-debited from their savings account and gets invested in the particular fund. 

Rupee cost averaging  

Rupee cost averaging refers to an approach in which an individual buys more units when the fund’s Net Asset Value (NAV) is falling and lesser units when the NAV rises. It essentially averages out the purchasing expenses over the investment horizon. 

Also read: Know the difference between a mutual fund and SIP

Who Should Invest in SIPs

First time investors can start investing in mutual funds through SIPs. It is ideal for salaried individuals as it helps in save and invest thereby securing their future. It also instils a sense of financial discipline. However, seasoned investors may also invest in mutual funds through SIPs.

How to Start an SIP Investment?     

To start a SIP in mutual funds you can visit Navi Mutual Fund and invest in any of the different mutual fund schemes offered by Navi. 

*Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.

Keep the following points in mind before investing in SIPs:

Investment goals  

An investor needs to identify what he/she wishes to accomplish via SIP schemes. This is crucial as every mutual fund scheme carries a specific objective. An individual has to figure out his financial goals and look for schemes that can fulfil these goals. 

SIP details

After selecting a scheme, an investor chooses the plan parameters. An individual should provide the following details:

• Amount of investment
• Frequency of investment (semi-annually, quarterly, monthly etc.) 

Benefits of Starting to Invest in SIPs Early

Starting to invest in mutual funds through SIPs early helps harness the power of compounding to generate a considerable amount of wealth over a period of time. The longer the duration of SIP investment, the better the returns. It also helps understand how mutual funds work and creates financial discipline.

How Is SIP Different from Lump Sum?

There are two routes of investing in mutual funds: lump-sum and SIP. The following parameters explain the difference between the two modes:

Amount 

In a lump-sum mode, an individual invests a considerable amount of money in a fund scheme at once. SIP is a suitable option if an individual has limited money to invest. 

Risks 

A lump sum route enables investing the entire amount available to an individual in one go. Hence, it becomes essential to invest at the right time to maximise the returns. 

Accordingly, a lump sum investment is suitable for well-informed individuals with a large sum of money. That said, a new investor looking to start with a small amount can opt for a SIP to benefit from rupee cost averaging. 

Investment procedure

The SIP mode takes better care of an investor’s finances in the long run. The progress might look slow, but the investor can get access to a considerable amount a few years down the line owing to the power of compounding. A lump sum investment doesn’t involve this sort of discipline as an individual might not be able to invest a large amount consistently. 

So, depending on the experience, risk appetite and investment amount, a person can choose between lump sum and SIP.    

How to Customise a SIP?

Many salaried people choose monthly plans because they can use their monthly salaries to invest in a scheme via SIP. However, there are different ways in which you can customise your systematic investment plan. 

Frequency of SIP

Fund houses enable individuals to invest semi-annually, quarterly, fortnightly or weekly via SIP. 

Step-up SIP

This option allows an individual to raise their SIP investments periodically. For example, Rohit registers for a SIP with Rs. 500 per month. He can instruct the fund house to step up the plan by a fixed percentage or a fixed amount. 

Let’s say he chooses to increase his investment by Rs. 500 every year. So, he will be investing Rs. 500 per month during the first year, Rs. 1,000 per month during the second year, Rs. 1,500 per month during the third year and so on.   

Perpetual SIP     

Under this option, an investor can transfer a specific amount into the fund scheme on a regular basis for as long as he wishes. This avenue is ideal for investors who wish to fulfil their long-term financial goals, for example, financing children’s education, and building a retirement fund. 

Also read: Calculate your mutual fund returns with an online SIP calculator

How to Choose Best SIPs to Invest In?

Here’s a checklist to help choose the best SIP:

Investor’s Risk Tolerance

Are you someone who does not want to take risks with investments? Then opt for mutual funds that are low-risk and safer compared to other mutual funds. 

Investor’s Financial Goal

You can invest in various types of mutual funds through SIP plans. The question to ask yourself is what are your short-term and long-term financial goals. Do you want high returns quickly or over a period of time, do you want to be able to liquidate your investments, etc. These questions will help you get clarity on which mutual funds to invest in – short-term, long-term, gold mutual funds, real estate mutual funds, etc. 

Final Word 

SIP is a hassle-free mode of investing in mutual fund schemes. It can generate high returns if an investor maintains financial discipline. That said, before investing in a mutual fund scheme via SIP or lump sum make sure to assess your risk profile. 

FAQs on Systematic Investment Plan

Before you go…

Want to put your savings into action and kick-start your investment journey 💸 But don’t have time to do research? Invest now with Navi Nifty 50 Index Fund, sit back, and earn from the top 50 companies.

Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.

This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.