SIP - Systematic Investment Plans

A systematic investment plan, commonly known as SIP, is an investment strategy where you as an investor can put a fixed amount of money in your preferred mutual fund at regular intervals. It enables you to participate in the stock markets without actually timing them.

In simple terms, SIP is a smart and hassle-free mode of investment where you can contribute a pre-determined sum on a weekly, monthly, quarterly basis. They are flexible in nature, and thus an investor can choose to increase or decrease the investment amount or even stop investing in SIP whenever they want

Systematic Investment Plan is one of the effective options available for beginners and for people who do not know much about how the financial market operates.

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A systematic investment plan requires periodic and consistent investments and works pretty much like a recurring deposit. Under a SIP plan, the investment amount is automatically debited from your bank account as per your standing instructions. After that, the corresponding amount of mutual funds is allocated to you. The number of units you receive will depend on the scheme’s current Net Asset Value (NAV).

NAV of a mutual fund is basically the price you pay per unit of the scheme. To fully understand this, let us look at an example. Suppose that the NAV for a mutual fund is Rs. 10. If you invest Rs. 2000 in this mutual fund, you will receive 200 units of the scheme. With the increase in NAV, your investments will also grow. So, assuming that the NAV rises to Rs. 20 next year, the 200 units you bought for Rs. 2000 would be worth Rs. 4000.

There is a total of four types of systematic investment plans. Let us talk about each of them briefly: -

If you are a first-time mutual fund investor, you can consider starting your journey by investing through a systematic investment plan. SIPs are ideal for people who have a regular source of income, such as a salary. This way, investors can easily divert a small portion of their income towards mutual funds through a SIP plan.

SIPs instill financial discipline in the long run as you have to set aside a fixed amount of money at regular intervals.

First-time investors usually get confused about whether they should go for a systematic investment plan or a one-time investment. In the case of one-time investments, you only need to make a one-time payment of a significant amount of money. On the other hand, you need to invest a fixed amount at regular intervals in a mutual fund scheme.

One-time investments can be beneficial if you have a large sum of money at hand that can be invested immediately. However, if that is not the case, you should go for SIPs, under which you are only expected to set aside a small amount at regular intervals.

Here are some of the key differences between a one-time investment and a SIP investment –

Most investors, especially the salaried ones, prefer the monthly SIP investment plan. SIPs help them directly transfer the investment amount to the fund when they receive their monthly income. However, there are some ways you can customize your systematic investment plan through its types: -