Systematic Investment Plan (SIP)

This page provides all the details you need to know about Systematic Investment Plan (SIP).

Before you read this page, please check Mutual Funds Overview to learn about the basics of Mutual Funds.

 

Table of Contents

 

What is SIP?

SIP stands for Systematic Investment Plan.

SIP is a systematic method of investing your money in Mutual Funds.

A SIP is a planned approach towards investments and it helps you to develop the habit of saving and building wealth for the future.

 

How does SIP work?

  • Choose a mutual fund scheme that you want to invest

  • Decide the investment amount and the term

  • Decide the investment frequency (monthly, quarterly, half-yearly or yearly)

  • As you invest, units are allocated as per ongoing market rate (called NAV or Net Asset Value)

  • You will get more units when the price is low and less units when the price is high

  • At the end of the term, you can redeem the units and get the accumulated amount

  • You also have the option to redeem partially and extend the investment further

 

Is SIP a financial product?

No. SIP is not a financial product.

It is just a method to invest your money in Mutual Funds schemes.

 

Features

  • one of the best ways to enter equity market

  • helps you to invest as little as Rs. 500 every month

  • helps you to develop the habit of discipline and regular investments

  • no need to time the share market

  • rupee-cost averaging

  • compounding returns - small investments every month can create a big corpus over time

  • flexibility in investing. You can increase or decrease your SIP amount

  • some funds offer income tax benefits

 

Drawbacks of SIP

SIP returns is not guaranteed and it may vary based on market conditions.

SIP doesn't work well in the rising markets as you get less and lesser units with every installment. So, the "rupee cost average" concept may not work on rising markets. It means less returns to the investor.

If you opt for SIP in tax saving funds like ELSS, then each installment will be locked for 3 years.

 

Rupee Cost Averaging

In volatile markets, investors are worried about whether to invest their money or not.

SIP helps you to invest without timing the Share market or worrying about the volatile nature of the Share market.

Investors get more units when the price is low and less units when the price is high.

Thus, it averages out your accumulated units and this concept is known as "Rupee Cost Averaging".

 

Power of Compounding

Albert Einstein once told "Compound Interest is the 8th wonder of the World. Those who understand will become rich. Those who don't understand will remain poor".

If you start to invest early, then you will have more time for your money to grow.

Small amount invested today will become a big corpus over time.

 

Mode of SIP

You can opt for one of the following modes to invest in SIP schemes. 

  • Monthly

  • Quarterly

  • Half-yearly

  • Yearly

 

Duration of SIP

Minimum investment duration is 6 months.

Maximum investment duration is as long as you want to invest. There is no maximum limit on duration.

 

SIP in Tax Saving Funds (ELSS)

You can opt for SIP in Tax savings mutual funds like ELSS (Equity Linked Savings Scheme).

But, note that every installment amount of SIP will be locked for 3 years.

For example, if you opt to invest Rs. 1,000 for 6 months, then every investment of Rs. 1,000 will be locked for 3 years.