logo

Here’s all you should know about Systematic Investment Plan

By Nivesh Gyan   9 February

Category: Build Wealth

You dream of a secured financial future but cannot commit a large sum of money, SIP or Systematic Investment Plan is an answer.
 
As the name suggests, Systematic Investment Plan is a smart and planned investment approach wherein you invest a small pre-fixed amount at regular intervals into specific mutual fund/funds.

What should you do start Systematic Investment Plan?

First you need to choose the fund in line with your investment objective. The available mutual fund schemes can be broadly divided into equity funds, debt funds, gold funds, and hybrid funds. You can choose any depending on your investment horizon and risk profile. If you are looking for higher returns, you can invest in equity funds while if the safety of investment is your prime objective, then debt funds can be your choice as they invest in a range of low-risk securities such as government bonds, corporate deposits, commercial papers, treasury bills, etc.

How does Systematic Investment Plan work?

It’s quite simple. You need to decide the regular amount of saving and time horizon. For longer time horizon (more than 3 years), you can select Wealth Builder on nivesh.com and for shorter horizon, you can select Better than RD option. After completing your transaction, you can make first payment through internet banking, cheque or already registered bank mandate. Subsequent transactions will automatically get debited from your linked bank account. You get a certain number of units based on the ongoing market rate called NAV or net asset value for the day. Every time you invest money, additional units of the scheme are purchased at the market rate and added to your account.

Why should you invest in Systematic Investment Plan?

Baby steps towards right investment can ensure promising financial future.

  • SIP can be started with as low as Rs 500 or Rs 1000 per month.
  • Investing in an SIP brings financial discipline.
  • It is a convenient and hassle-free investment as your one-time instruction ensures auto debit from your account at pre-defined intervals.
  • SIP can be started with low amounts, which means you can stay committed for long term without affecting your finances. If you stay invested for long term, the wealth builds at an accelerated pace because of compounding effect.
  • Since a fixed amount is invested at regular intervals, you get to purchase more units when the prices are lower and vice versa. This gives you the benefit of Rupee Cost Averaging (RCA), which basically balances out the volatility of the market in the long term.

What is Rupee Cost Averaging and how does it benefit an investor?

We understand that via an SIP route, an investor invests a fixed sum say every month. This approach eliminates the need to time the market as the money is invested periodically irrespective of the levels of the market. This means that over a period of time your cost of acquisition of the unit comes down to be much lower than what you would have otherwise paid. This is called rupee cost averaging.
 
Let’s understand this with an example: Say Mr. X invests Rs 3,000 every month in an SIP

Month Amount invested every month (Rs.) NAV (Rs.) Number of units (#)
January 3000 20 150
February 3000 10 300
March 3000 15 200
April 3000 20 150

 

If Mr. X had invested the entire Rs 12000 in lumpsum in January, he would have got 600 units, while by investing in a monthly SIP, he accumulated 800 units by the end of April. And his average cost at the end of April works out to Rs. 15, which gives him return of 33% on NAV of Rs. 20, while investing in lumpsum in January would have given him no return.
 
Moreover, SIPs provide flexibility and liquidity, as there is no lock-in period and full and partial withdrawal is possible during or after the SIP tenure. The amount of SIP amount can be increased or decreased too. However, early redemption is not advisable as the longer you stay invested, the more wealth you accumulate.