What is SIP: Meaning, Benefits, Factors & How it Works

SIPs have emerged as among the most beneficial investments over time. The full form of SIP is Systematic Investment Plan (SIP). It is a popular investment option giving investors the opportunity to invest in mutual funds regularly. It is a disciplined approach towards investing that helps investors develop and foster the habit of regular saving and investing.

This blog post will discuss the relevant aspects you need to know about SIP, including its meaning, benefits, how it works, and factors to consider before investing in an SIP.

Meaning of SIP

An SIP investment is a plan that allows investors to invest a fixed amount of money in a mutual fund scheme at regular intervals, such as monthly, quarterly, or annually. The investment amount can be as low as Rs. 500, making it an accessible option for people with various income levels.

The investor can choose the amount, interval, and mutual fund scheme they want to invest in. An SIP helps investors develop and foster the habit of investing regularly, irrespective of market conditions.

How does an SIP work?

An SIP works on the principle of rupee-cost averaging. Under this principle, investors buy more units when the market is low and fewer units when the demand is high. This helps reduce the average purchase cost and mitigate the market volatility risk. 

For instance, if an investor invests Rs. 5,000 per month in a mutual fund scheme, they will buy more units when the market is low and fewer units when it is high. Over time, the average purchase cost will be lower than the market price, resulting in better returns.

Benefits of an SIP

Disciplined approach

An SIP helps develop and foster the habit of investing regularly, irrespective of the market conditions. It gives investors the opportunity to stay disciplined and avoid any potential “impulsive” decisions that may adversely affect their investment portfolio.

Rupee-cost averaging

An SIP helps mitigate the market volatility risk by averaging out the purchase cost. Investors buy more units when the market is low and fewer units when the demand is high, resulting in a lower average purchase price.

Affordable investment option

An SIP allows investors to invest a small amount of money regularly, making it an affordable option for people with different income levels.

Long-term wealth creation

An SIP is a long-term investment option that helps in creating wealth over time. As the investment grows, the power of compounding helps in generating higher returns.

Diversification

An SIP allows investors to diversify their investment portfolio by investing in different mutual fund schemes across other asset classes.

Factors to consider before investing in an SIP

Investment objective

Investors should have a clear investment objective before investing in an SIP. They should define their investment horizon, risk tolerance and expected returns.

Asset allocation

Investors should choose the mutual fund scheme based on their asset allocation strategy. They may consider diversifying their investment portfolio across different asset classes, such as equity, debt and gold, for example.

Fund performance

Investors should evaluate the past performance of the mutual fund scheme before investing in an SIP. They should consider the fund's track record, returns and risk profile.

Expense ratio

Investors should consider the expense ratio of the mutual fund scheme before investing in an SIP. The expense ratio is the fee charged by the fund house for managing the mutual fund scheme.

Fund manager

Investors should evaluate the fund manager's track record before investing in SIP. They should consider the fund manager's experience, expertise and investment philosophy.

Is an SIP safe? 

Investing in an SIP is considered a safe investment option as it helps investors mitigate the risk of market volatility through rupee-cost averaging. By regularly investing a fixed amount of money, investors can buy more units when the market is low and fewer units when the demand is high. 

This results in a lower average purchase cost and helps generate better returns over the long term. However, it is essential to note that, like any other investment option, an SIP is also associated with a certain degree of risk. 

The returns on an SIP are subject to market risks, and investors should be prepared to stay invested for the long term to generate substantial returns. Therefore, investors should evaluate their investment objective, risk tolerance, and expected returns before investing in an SIP and diversify their investment portfolio across different asset classes to minimise risk.

Can you increase or decrease the amount in an SIP?

Yes, the SIP amount can be increased or decreased based on the investor's financial situation and investment goals. Investors can modify their SIP amount at any time during the investment tenure. 

For instance, if an investor's income increases, they can improve their SIP amount to invest more in the mutual fund scheme. Similarly, if an investor faces financial constraints, they can decrease their SIP amount to match their cash flows. 

Investors can modify their SIP amount by submitting a written request to the fund house or through the online investment portal. It is important to note that the fund house may have a minimum investment amount, and investors should check the scheme's investment guidelines before modifying their SIP amount.

Does the SIP have an exit load?

Yes, SIP investments in mutual funds may have an exit load. An exit load is a fee the mutual fund house charges when an investor exits the scheme before a specified period. The exit load is generally a percentage of the redemption value and is used to discourage investors from redeeming their investment before the specified period. 

Investors should check the mutual fund scheme's exit load before investing in an SIP. Generally, SIP investments in mutual funds have a lower exit load than lump-sum investments, making it a preferred investment option for long-term wealth creation.

Conclusion

An SIP is a disciplined approach towards investing that helps investors inculcate the habit of saving and investing regularly. It is an affordable investment option that gives investors the opportunity to invest a small amount of money regularly. 

An SIP helps mitigate the market volatility risk by averaging out the purchase cost. Investors should consider their investment objective, asset allocation, fund performance, expense ratio, and fund managers' track record before investing.

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Disclaimer

The investment options and stocks mentioned here are not recommendations. Please go through your own due diligence and conduct thorough research before investing. Investment in the securities market is subject to market risks. Please read the Risk Disclosure documents carefully before investing. Past performance of instruments/securities does not indicate their future performance. Due to the price fluctuation risk and the market risk, there is no guarantee that your personal investment objectives will be achieved.