SIP is one of the most common terms people use when talking about investments. You might have heard that it is somehow associated with mutual funds. If so, you heard it right!
SIP’s full form is Systematic Investment Plan. It is the most preferred and flexible way to invest in mutual funds. It is an especially handy tool for individuals who do not have a large lump sum amount to invest. But that is just the basics. To fully understand SIP meaning, you must know its working, its benefits, and the risks involved.
Speaking of risks, you must be aware that the terms mutual funds and risk are very much related. Since mutual funds are subject to market performance, there is always some level of risk involved. So, why invest in an instrument that is risky? Simply because—With great risk comes great reward.
Mark Zuckerberg, CEO of Facebook, once said—The biggest risk is not taking any risk. Mark couldn’t be more right! If you have a low to moderate risk appetite, SIP investment can help you create a significant corpus over time.
This article will shed some light on ‘what is SIP investment?’ as well as how it works. We will also look at the benefits you can enjoy with a SIP investment and how to set up SIP goals.
- SIP is like putting away some amount of your money from your paycheck every month and watching it grow over time.
- You can automate your SIP by deciding your tenure and frequency of investment.
- The investments made towards the Systematic Investment Plan or SIP are eligible for tax deductions.
- You can start with an amount of as little as Rs. 500.
What is SIP Investment?
Investing in SIP is like putting away some amount of your money from your paycheck every month and watching your account balance grow over time. Just put it on autopilot and forget it.
A systematic investment plan or SIP is a great way to generate returns from the stock market without any hassles. You just need to pay a fixed amount of money periodically. This can be monthly, quarterly, half-yearly, or yearly. SIP investment is a safe and efficient way to achieve your financial objectives.
The most significant advantage of investing in SIPs is not having to learn how the financial markets work. All of your funds under SIP investment will be managed by stock market experts and fund managers.
Decoding SIP Investment and How it Works
Now that we understand SIP meaning, it is time we take a look at how it works. SIPs work pretty much like recurring deposits. The investments made toward SIP are automatically debited from your bank account as per the standing instructions. Then, the corresponding amount of mutual funds will be allocated to you. The number of units you receive will depend on the fund’s Net Asset Value (NAV).
If you don’t know what NAV means—the NAV of a mutual fund is the price you pay per unit of the fund. To better understand this, let us quickly go through an example. Let’s say that the NAV for a mutual fund is Rs. 20. If you invest Rs. 3000 in this mutual fund, you will receive 150 units of the fund. SIP investments grow with the increase in NAV. Assuming the NAV of the fund rises to Rs. 30 next year, the 150 units bought for Rs. 3000 would be worth Rs. 4500.
Due to the inherent framework of SIP, automating SIP investment is very easy. Just decide your tenure and frequency, and you are good to go. You can even give standing instructions to your bank to transfer your money directly from your bank account into a mutual fund of your choice at regular intervals. All of this makes SIP a great financial instrument for building long-term gains.
Did You Know?
Indian Mutual Funds have currently about 5.28 crore (52.8 million) SIP accounts through which investors regularly invest in Indian Mutual Fund schemes.
Benefits You Can Enjoy with SIP Investment
The principle of SIP investment is analogous to the popular saying—Drop by drop fills the bucket. Fixed regular SIP investments made by you will grow into a significant corpus over time.
Now that we know SIP meaning, it is time to look at the various benefits it offers to the investors.
Power of Compounding
Wouldn’t it be great to watch your investments grow exponentially? Well, SIPs do just that with their power of compounding. In simple terms, the returns generated from your regular SIP investment get reinvested again. With this, your potential returns will increase substantially. The ideal strategy for SIP investment is to invest for an extended period.
Low Initial Investment
SIPs have made investing in mutual funds easier than ever. You can start with an amount of as little as Rs. 500. This is an affordable way to invest without burning a hole in your pocket. It is possible to increase the investment amount via the SIP step-up feature.
Rupee Cost Averaging
After understanding SIP meaning, and how it works, the next thing is to look at its most significant benefit—Rupee Cost Averaging. It is a strategy where you purchase more units when the Net Asset Value (NAV) of the fund is low, and lesser units when the NAV is high. This basically averages out the purchasing costs over the SIP investment tenure.
What’s better than an investment option where your money grows itself while you sit back and relax? Nothing, right? Experienced investors will tell you that SIP is one of the best forms of disciplined investment. Like most working professionals, you may not have the time to research and analyze the financial markets to adjust your portfolio. That is why SIPs make for a convenient investment option.
The investments made towards the Systematic Investment Plan or SIP are eligible for tax deductions up to Rs. 1.5 lakh under section 80C of the Income Tax Act of India, 1961.
What is SIP Plan and How Can You set SIP Goals?
A systematic investment plan or SIP is an affordable and comfortable way to invest in stocks and mutual funds. With SIPs, one can start small and gradually build a corpus in a systematic, planned, and disciplined manner.
We have already discussed SIP meaning, how it works, and its benefits. The next thing is to understand how you can start your SIP investment and set up SIP goals.
Set Your Goals
Do you know what you wish to accomplish through SIP investments? If not, then you better figure it out ASAP. Make a list of your financial goals. It is a necessary step as every mutual fund is designed with a specific objective. Pen down your goals and start looking for the funds that can help achieve them.
Complete Your KYC
Every fund house will ask you to complete your KYC documentation process before you start investing. You will be required to submit your identity proof, address proof, and photographs. These days, you can do your e-KYC online without visiting the Asset Management Company (AMC).
Choose the SIP
Once you select the fund of your choice, set the SIP parameters. You will be asked to fill in the detail for the following: –
- Tenure of Investment
- Frequency of Investment ( monthly, quarterly, half-yearly, or yearly)
- Your Investment Amount
- Relevant information regarding your goals and financial situation.
Word to Remember
Rupee Cost Averaging
It is a strategy where you purchase more units when the NAV of the fund is low and lesser units when the NAV is high. This basically averages out the purchasing costs over the SIP investment tenure.
In cricket, there is always a risk of getting out or injured. Still, people play the sport. Because playing safe is not good enough to achieve something new and big. Similarly, there is always some level of risk involved with SIP investment, but the rewards are bigger.
With financial experts handling your money, there is no need to worry at all. SIPs power of compounding and the strategy of rupee cost averaging makes it a pretty safe investment. You don’t need to have a lot of money to make a SIP investment. You do not have to go through the headache of analyzing the markets before investing. You can build a large corpus over time. What more do you need?
We have discussed SIP meaning, how it works, its benefits, and how to set up SIP goals. At this point, you should have enough knowledge to get started in your SIP investment journey. Invest early to create more wealth.
If you know SIP meaning, you know that it is a simple and cost-effective way to grow your savings. Investing regularly in SIP minimizes the risk.
In truth, there is no ‘best’ time to invest through SIPs. The important thing here is that you do not need to wait for the opportunity to invest in market-linked securities.
Yes, you can miss SIP payments. Doing that does not deactivate your account. Mutual fund houses offer an option to pause the payments for a specific period. This is a useful feature you can use in case you face any financial difficulties.
We already know SIP meaning. But is it safe? SIP is the safest way to invest as it allows you as an investor to invest fixed amounts regularly. SIPs are a planned approach toward investment that acts as a financial cushion by developing a habit of saving.
You can start investing in SIPs by selecting a fund of your choice. But before that, you need to complete the necessary formalities and provide your KYC details to the Asset Management Company (AMC).