What are Systematic Investment Plan (SIPs) in Mutual Funds? Introduction and Benefits

The term SIP has become a buzzword today. The most common searches on internet today regarding mutual funds are "what are sips in mutual funds" and "what is Systematic Investment Plan and how it works?". 

The number of investors investing thru SIP has been increasing in leaps and bounds from last 2-3 years. However not many including those who have invested in SIP truly understand the concept and therefore we read news like, more than 40% mutual fund investors quit within 2 years from investing etc. Therefore it’s important to understand the concept first before taking leap.

One of the greatest minds of all time, Albert Einstein once said that Compound interest is the eighth wonder of the world. He, who understands it, earns it... he who doesn't, pays it.” This same principle is applicable in SIP as well. How let’s illustrate this with one simple calculation

Consider Mr. Ajay who starts investing in a mutual fund through SIP of Rs 5000 per month at age 21 years. Considering 12% returns which is long term average for Indian markets. If he continues investing for 20 years then his investment will grow to Rs 50 lakhs on an investment (principle) of Rs 12 lakhs only.  This is real power of regular investing harness true power of compounding.

So what’s a Systematic Investment Plan (SIP)

Systematic Investment Plan, (SIP), allows investor to invest a fixed sum regularly in mutual funds. The money is auto debited from your saving account each month on a predetermined date. Thus SIP represents a hassle free and convenient mode of investment. Also since there is fixed deduction (both time and amount wise), SIP inculcates “Saving Habit” automatically.   

SIP Investment	One-time Investment
Regular Investment throughout the tenure	One-time or Lump-sum investment
Perform better during market lows / volatility	Perform better during market highs
SIPs can protect investments from potential market crash to great extent	Can lead to major loss during market crash

What is the benefit of SIP in mutual fund

No need to time the markets    
Its said that rather than timing the markets, Time in the market is crucial for long term gains. This adage proves to be correct in SIPs.  Timing the market is a time-consuming task which often leads to losses for retail investors. Through regular investments, you can stop worrying about when and how much to invest.

Rupee cost averaging  
Since your investments are spread evenly over a period of time, buying fewer units during rising markets and buying more units during falling markets reduces the average cost per unit of your investments - this concept is known as Rupee Cost Averaging.

Power of compounding

As already shown in example above, SIP can really lead to huge capital growth over period of time due to power of compounding

Hassle Free

There is auto deduction from your saving account each month (or as per frequency set). Therefore one need not worry about any formalities of investment each month. Even when investor is on leave, SIP will continue to work for him.

Customization

Many mutual fund houses offer many customization options such as periodicity of investment (fortnightly, monthly, quarterly etc). This allows investor to match investment with his cash flows. Also investor can increase his SIP each year (or time set) by certain %. This allows increase in investment commensurate with growth in investor’s income. Another option is of perpetual SIPs. In this there is no end date. So once the financial goal is reached, investor can stop SIP accordingly.

Disciplined Saving 
When you invest through SIP, you commit yourself to save regularly. Every monthly SIP investment is a step towards attaining your financial objectives.

Flexibility 
Investors can discontinue the plan at any time. Also he can also increase/ decrease the amount being invested at will / need. Today SIP of as low as Rs 500 per month can be started. This provides great flexibility as investors can continue SIP even in period of some financial turbulence.

What is the disadvantages of SIP in mutual fund

Although SIPs can help an investor maintain a steady savings cum investment program, systematic investment plans require a long-term commitment. This can be anywhere from 05 to 20-25 years. While you can quit the SIPs before the end date, you may require paying exit charges

Concept of Top UP SIP

Top-up SIP is a facility that lets investor increase SIP by a fixed amount or percentage (say 7-8%) every year or at pre-defined intervals. You may aligned this increase to expected growth in your income levels

This Top -Up in your SIP allows investments to be in line with the increase in the cost of living or inflation and helps investor plan for his/her financial goals correctly. It can also help in reaching financial goals earlier or create a larger corpus for the set goal.

In Summary, SIP is one of the best ways to invest in markets (through mutual funds) and should be primary mode of investment for retail investors. Multiple SIPs can be made in variety of mutual funds as per the financial goals and need. 

Refer our articles on mutual funds (What is Mutual Funds: http://www.growwealthadvisors.com/2018/05/what-is-mutual-fund.html) and Types of Mutual Funds (http://www.growwealthadvisors.com/2018/05/what-are-types-of-mutual-fund.html) to know more on Mutual Funds. 

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