What is SIP? What are the benefits of investing through SIP?

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SIP,this is a common word you often tend to hear these days.But,still many of us are either not aware or don’t have much time to bother about it.What exactly does a SIP mean?

Just narrating you a short and funny story relating to SIP : Few days back,my little niece came running towards me and said uncle is putting money in SHIP …..SHIP… “Its so easy he said ,I also want to put it there”. I went dumb struck and went there to clarify and look what I found …aww…my 3 year old sweet little niece who said SHHH instead of SSSS….was trying to say SIP.

For a little child,the unawareness is fine but for we mature people,it is really necessary to make ourselves aware and well equipped with all the methods of good financial planning.

So, feeling the importance and need to discuss about this topic,I have just tried to highlight the importance and benefits of SIP.

What is SIP or Systematic Investment Plan ?

SIP or Systematic Investment Plan is a method of investment where a fixed amount is invested into mutual funds at regular intervals. SIPs usually reap higher returns if investment is done for a longer duration.

Here,you should be aware that SIP is just a method or way of investing.

People generally get confused and consider SIP as some Investment product.But,it is not a product, fund nor any investment option.It is just a simple process or the way to invest your money in Mutual Funds.

Remember,the piggy bank where you used to put small amounts in your childhood days and get a lumpsum when required.Similarly,you can build a good investment portfolio by making small but regular contributions out of your monthly savings.

Remember,you can invest in mutual funds through the lump sum mode also,but here we shall be highlighting on SIP or Systematic Investment Plan and How to invest in mutual funds through the SIP route.

MAIN FEATURES OF SYSTEMATIC INVESTMENT PLAN (SIP) :

  1. You contribute in the form of small amounts weekly,fortnightly,monthly or quarterly as per your convenience.e.g.You can invest Rs.500 per month also or Rs.2000 on quarterly basis.
  2. You can choose from variety of financial instruments like mutual funds i.e.debt or equity.
  3. These are best suited for long term wealth creation and fulfilling your long term goals.
  4. The returns are based on how the funds have performed over the SIP period.
  5. The Investment amount is fixed throughout the SIP period.You cannot change the regular SIP amount during its tenure.
  6. You can open a SIP for say 5 years,10 years or 15 years period.
  7. Post dated cheques or Bank ECS Mandate can also be given to Mutual Fund Companies in order to process your requests.
  8. There is no lockin period in SIP which is a favourable point for the investors who don’t want to park their money in investments having long lockin periods like Public Provident Fund or National Pension Scheme.You can initiate as well as exit from SIP at any time.But,in case of money invested in ELSS minimum lockin period is 3 years.
  9. You can also open SIP online through mutual fund companies websites.But,do check the authenticity and reliability of such sites.
  10. You can also start SIP in ELSS. For details you can refer ELSS or Equity Linked Saving Scheme !

The procedure for investment in mutual funds has become much simpler than it used to be few years back.You get to explore higher returns while investing small and regular amounts based on market fluctuations.

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BENEFITS OF SYSTEMATIC INVESTMENT PLAN (SIP) :

1. Discipline :

You attain investment discipline as a fixed amount needs to be invested regularly.This helps in maintaining a focused approach and building a good corpus for yourself.Moreover,parting from a small amount like anything ranging from Rs.500 to Rs.1500 monthly does not seem to be a difficult task.It just inculcates the habit of saving.

e.g.If you are a salaried person getting a monthly salary,its is a very good option to have monthly investments of say Rs.500 or Rs.1000 in the form of SIP.

2. Convenience : 

All the processes have been made online for the convenience of investors.You just need to set aside small amounts for investment.With the facility of ECS mandate you can even instruct the bank to allow auto debit from your savings account towards SIP.This will save you from the hassle of signing cheques or making payments yourself. Also,there shall be no chance of missing the monthly or quarterly investment as the case may be.

3. Cost Averaging :

Investors buy more units when the market is low i.e.NAV (Net Asset Value) is low and buy less units when market tends to rise.This leads to reduction in the average cost of purchasing the financial assets.This can be seen if investment is done for long periods where the investor gains maximum benefits due to better cost averaging.

4. Power of Compounding : 

If you invest small amounts today ,you can build a good corpus for your retirement.This is possible with the power of compounding.

In simple terms,Compounding refers to when  Interest of first year  is added to principal amount of next year and in the next year you earn interest on both Principal +Interest(For Yr 1).This means you earn not only on the amount invested but on the closing balance including interest earned.

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So,the earlier you start investing,the less amount you need to invest over a longer period and the maximum returns you can enjoy.The magic of compounding helps you set a big corpus for your after retirement life.

You can make way for sound financial planning by investing at a young age.These small investments done now,will grow your money and you can enjoy higher returns in the years to come.

To get additional details on Financial planning,you must go through 10 Financial Planning Tips to Follow in Your 20s !

5. Big Corpus on Maturity : 

With the help of cost averaging,you tend to yield high returns over a long period of time especially in an equity SIP.But,investing in equity is meant for risk takers since it does not guarantee assured returns.So,debt funds are a good investment option for the safe players who don’t like taking much risk.

Hence,SIP is considered as best suited for those having long term financial objectives.At maturity,you will have a huge corpus to meet your needs.

Example : If your child is 2-3 years old and you start your monthly SIP today at an amount of say Rs.3000. You will get a lumpsum amount of Rs.25 lakhs approximately after 20 years when your child will pursue higher education.This is just an example based on an the average rate of return of 10%-11% over the period.In reality, you are likely to earn a bit of lower or higher return over the SIP period.

You can invest through the lumpsum mode as well.But,in the present financial scenario,where the markets are highly volatile, SIP is considered as the safest mode of investing your money for long term. Hence,SIP is often referred to as one of the best methods of investing money to plan your Long Term Investments.

SIP can be started by Individuals of any age.But,the earlier you start,the better financial portfolio you can build to reach your goals.Early birds usually win, so be an early bird and plan your finance goals well in advance to reap higher benefits.

Hope you found the information useful !

You are most welcome to give your valuable feedback in the Comments section below.Do Share your experiences on the same, that might help someone in his investment planning.

And yes,if you liked it , don’t forget to share it with your family and friends…

Enjoy Your SIP Journey !

 

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15 thoughts on “What is SIP? What are the benefits of investing through SIP?”

  1. Thanks for such a good knowledge.
    I am Abhinash, 37 yrs old with a monthly gross salary of 45K/month. I am investing 7k/month in SIP and thinking to increase my SIP amount by Rs.1000/year till my retirement i.e.2041. I want to make a huge amount at the end of my service but don’t know how to grab it. Will it be possible through my above mentioned investment plan? Currently I had taken 3 funds i.e.
    1. Aditya Birla Sunlife Large cap equity fund: Rs.2000/month
    2. Black rock mid cap fund: Rs.2000/ month
    3. Reliance small cap fund: Rs.3000/month
    I started investing in mutual funds from August 2017.
    Currently I am a bit confused due to market fluctuations and think that in the age of 60 if such fluctuations then it will not be easy for me. Then what to do please suggest. Should I stop SIP and go for safe mode investments giving fixed returns like my company provides me the opportunity to invest in VPF (Voluntary PF) giving interest rate same as PF.

    Thanks

    Reply
  2. Hi, I am not very good at understanding finance. I would like you to help me if you can. I am earning 35k a month and want to know what are the best investment plans (long and short and less risk factor involved). Also, is SIP taken from any bank and does the rate of interest vary from bank to bank? If yes, then from where should I get it done? I can invest 1-2k a month easily as I am already investing in Gold by buying it regularly. Thanks in advance!

    Reply
  3. I have recently started a SIP of Rs.5k per month.This seems to be an interesting way to invest and enjoy good returns after certain years.This is a great way to automate your investments without missing any important date of transferring funds.The amount is automatically debited from my account and invested as per my goals.Pretty cool for busy people like me 🙂

    Reply
  4. Hi, Thank you for your Positive and Great Article.
    What is the amount of risk factor in Investing in Debt funds through SIP? What could be the minimum amount of ROI that I might receive say for 15 years tenure.Say if I will invest 3000 per month for 15 years then what minimum returns can I expect to receive.

    Reply
    • Hi Karunakar, Thanks for your appreciation ! You can calculate the estimated returns through https://bodhik.com/sip-calculator by putting in your desired figures. We cannot define a specific risk amount, but there is some risk factor involved. However,debt funds are considered safer than equity funds and more suitable for the ones who want to play a bit safe and also explore better returns. While equity funds are associated to equity so they have a higher risk factor but the returns can also be higher in that case subject to market fluctuations.

      Reply
    • Hi,There is no single best investment.It usually depends on individual needs,preferences and the risk that you can afford to take.For safe investors who don’t want to take any risk and earn fixed returns: FD and PPF seem good. But,for investors looking to explore higher returns and the ones who can expand their risk horizon: Mutual funds and stocks might be the way.

      Reply
  5. U have done a great work in explaining all these things,thaniks for ur effort!

    and i am having some doubts can u please answer them

    1)What is the main reason behind getting lumpsum of money by investing an small amount?

    2)will they invest our money in the shares?

    and
    3)lastly in your example by investing 7,20,000 how can we get an amount of 25 lakhs ?
    AND

    at present my age is 21 and i am earning 25000 per month what will be the best platform for investing to get good outcomes
    i would be very thankful if you provide me an answer.

    Reply
    • Thanks for your appreciation…Now coming to the point let me clarify you :

      1.The reason for getting lumpsum of money by investing small amounts is :
      (i)the high rate of return over a longer period.
      (ii)The power of compounding – where you earn interest on the Principal of previous year + Interest of p.y. i.e. you earn interest on your earnings also. Read more about XIRR on investopedia.

      2.When you invest money through SIP, your money is invested in mutual funds.Mutual fund further invests your money in Debt instruments(Debt Funds) or equity(Equity Mutual Funds)
      Debt funds are considered a safer option because of their underlying asset is debt. But,based on historical data,Equity funds perform well if money is invested for a longer duration.

      3.Returns are normally based on performance of funds in which you invest.You can easily calculate your return on Investment by putting your exact details at some SIP Planner app like Bodhik ..
      https://play.google.com/store/apps/details?id=com.bodhik&hl=en
      This app takes into consideration ROI@14%.

      You can invest some money in Long term Investments like PPF,NSC etc.that will give you fixed returns.

      You are young so can afford to take some risk as well so investing through SIP will also be a very good option for you.To be safe,Start with Debt funds initially and slowly and gradually you can increase your investment and risk horizon both.You can opt for SIP in ELSS as well. More about ELSS here .. http://fintrakk.com/elss-or-equity-linked-saving-scheme/

      Just remember,Diversification and long term investments are the keys to getting high returns. I hope this helps .. 🙂

      Reply

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