Systematic investment plan is also known as (SIP) became very popular in the year 2021. After the recent fall of March 2020 in stock market and crypto market. People have started taking more and more interest in systematic investment plans commonly referred to as SIP than ever before. SIP allows you to invest a small sum of amount on a monthly or quarterly basis in Mutual funds, RD, Stocks, etc.
When you start a systematic investment plan (SIP) a pre-fixed amount gets deducted from your bank account on a monthly or quarterly basis which gets invested in the funds/stocks of your choice. Which eventually gives a start to small investors.
How does SIP work?
To understand systematic investment plan (SIP) we are going to take an example of a mutual fund whose NAV is at 100. A NAV is the net asset value of any fund. For example, you start a sip of rupees 1000 every month for 12 months. For the first month, you will get 10 qty of NAV of the fund. Based on the Calculation of SIP amount divide by unit NAV eg: 1000/100 = 10. If the fund performed well and unit NAV increased to 125 then you will not get 10 qty as previous month now you will get only 8. But your previous investment is now at 1250.
Similarly, if the performance of your invested fund decreases and now the net asset value is at 90 then you will get11.11 Qty. It doesn’t even matter where the market is going you just keep buying it. If the market is rising then you purchase fewer units and if the market is down you purchase more units of the same fund.
This goes on and on till you withdraw your funds. This may seem a bit complicated but that’s the beauty of a systematic investment plan (SIP). You don’t have to think after you selected the fund.
What are the Benefits of SIP?
SIP is one of the strongest investment plans for any middle-class person. In the starting, it may look like a burden. But when you have a long horizon of 5 years 10 years. It works like a charm.
One of the biggest benefits of a systematic investment plan (SIP) can be the convenience for a regular investor. Because you just have to research for the first time in which fund you are going to invest. After the initial research, you do not have to worry about the ups and downs of the stock market. You just keep investing in your preferred fund for the preferred amount.
Rupee cost averaging is a term when you purchase more units of the fund when it is at lower levels. And you purchase lesser units when the fund is at higher levels. With that systematic approach, you do not have to worry about where the current price is. And averaging may give better results.
Low initial investment
When starting a systematic investment plan it gives you free hand with how much you want to start. Because in India you can start SIP with rupee 500 per month. And you can always rise your investment as your income in the future. Other than that you can start investing in two different funds without any hustle.
Power of compounding
Compounding is one of the greatest tools how to become a wealthy person. And systematic investment plan does that for you very easily. For example, if you buy units of a fund at 10 NVA. And over the 10 years, it becomes 20 NAV. And now it’s gaining 5% every year for you that 5% will be 10%. Because you have Units of the fund at very low levels.
Disadvantages of SIP
Like every other thing of this world systematic investment plans (SIP) also have disadvantages. But it all depends on the person who is going to invest how he or she is going to see it.
Long term commitment
Systematic investment plan (SIP) is not an overtime success idea. You cannot get rich in a month or two after investing in SIP. Because it is a long-term commitment where you have to invest and stay invested for at least 10 years to see better results. Because it is a long-term commitment some people who are looking for a shortcut to wealth, may not find it interesting.
Can have early exit charge
Few funds may charge a little fee from the investor. If they try to do an early exit then they disclosed at the starting of the systematic investment plan SIP. As few people may find it difficult to exit from funds in the emergency need of funds.
Because you do a systematic investment, which is a fixed money every month. You may miss few buying opportunities when the fund is performing on the lower side. Which is a good thing for the investors because they can buy more NAV units. This can be the biggest drawdown for the SIP.
Lumpsum vs SIP which is better?
Now let’s talk about the biggest debate of all time which one is better to lump-sum investment or a systematic investment plan (SIP). Because both of them have different pros and cons. It is important for us to have a conversation about it.
As you know that SIP does have few perks like easy to start, easy to stay invested, and keep investing the biggest benefit is averaging. How many small investors get attracted towards the systematic investment plan (SIP). But you do miss a few buying the fund is performing at the lower side.
For the lump sum, it all depends on when you are going to invest in the fund or stock market. Because when you invest in a lump sum you do not have any more fun averaging it out. And if the price of your stock or NAV goes down. You cannot do anything other than just waiting for it to come up. Because you have already exhausted your investment in the first place.
On the other hand, if you invest at the right time you may get exceptional results with the lump sum investment. Because you buy the low and sell at high. So lump sum is all about your timing in the investment. To be honest lump sum is all about having experience in investments.
Who should start SIP?
If You are a job-holding person without any huge funds in the first place then a systematic investment plan (SIP) is the best choice for you. Because you do not have huge funds in the first place and SIP allows you to invest small amounts every month it becomes the perfect choice.
Who should select Lump sum
Lump-sum is the best mode of investment for those who have a fair amount of budget to invest in the first place. Other than that you have to have little knowledge about the timing because your Lump sum investment depends on the timing you are going to invest in. Because bad timing for buying at the higher price may take a lot of time to give you the results that you were hoping for.
How to start SIP?
There are few modes in which you can start your systematic investment plan (SIP). You can select any mode at your convince.
Fund house office
As you may know, there are many fund houses that allow you to invest in their funds in a systematic investment plan approach. UTI, Kotak, Axis, ICICI etc. You can directly go to their office and ask for the SIP. Due to Digitalization, you may find this approach difficult as you may have to go again and again to deposit your monthly installment.
Most of the mutual fund houses allow you to start and systematic investment plan from their website. It is one of the easiest ways you can start SIP. Because everything is digital and you do not have to go anywhere to deposit your monthly Installment. That is the preferred mode.
Most of the Demat accounts brokers allow you to invest in mutual funds via the escape from their platform. If you have a Demat account you can directly invest in any mutual fund and you can track progress on that platform. UPSTOX is one of the few brokers which allows you to invest in a SIP along with the benefits of having a trading and Demat account.
There are other modes to start a systematic investment plan (SIP) like mobile apps which allow you to invest in funds such as phonepe, freecharge, etc. You can select the mode of investment at your convenience.
Documents you need for SIP
You need basic documents like identity proof, address proof, and passport size photographs to do the KYC. These days E KYC is also acceptable so you can use any mode to start your systematic investment plan (SIP).
If you are going with your Demat broker then you may not need any KYC as you do KYC with your Demat and trading account opening.
Things you need to know before starting SIP
Before you start systematic investment plan (SIP) you have to have a few things in mind. Because different funds have a different set of rules on which they invest the money they receive further.
Your Risk Appetite
As you may know that all investments are subject to market risk. Which is a true thing because all of the mutual funds where you are going to start your systematic investment plan (SIP) will invest that money somewhere. Some Mutual funds invest that money in small-cap shares, some do in mid-cap shares or large-cap. As these are the stock market instruments your money is always at risk.
It is also possible that you start investing when the market was at the higher levels and even after 1-year market is still in a range-bound or on the lower side. In that scenario, you may get no benefit or even face loss.
There are few points that may have a few years of locking period before you can redeem your investment so always check for that. Because if the fund has a locking period then you may be obligated to pay a fee to cash out your investment.
Type of the Fund
It is very important for the safety of your investment that you do research before you invest. Because there are many different types of funds. Some invest in the stock market, some invest in Government bonds, some invest in corporate bonds, some are mixed funds while some also invest in gold silver, and other commodities. They all have different types of Pros and cons. For the thumb rule funds which further invest in the stock market are riskier and may give high returns. While other funds aren’t much risky and may not give big returns.
Can I increase my SIP?
Yes, you may increase your SIP as many funds allow you to increase your sip in the future.
Can I SIP in the stock market?
Yes, you can start a systematic investment plan (SIP) if you are above the age of 18.
Can I stop my SIP?
If your systematic investment plan does not have any lock-in period. Then you can stop your investment as per the rules of the fund anytime you want.
How to count the NAV?
To count NAV you should use formula of Fair Value of securities + Net Current assets ÷ Number of units outstanding of the fund.
How to start SIP online?
To start SIP Online you can use the platform Upstox which provides the Mutual fund’s service at low to no cost.
How to redeem SIP funds?
If the fund you are investing in does not have a lock-in period then you can exit or redeem your funds before 11 AM on working days. Timings may vary as per the rules of the Securities and Exchange Board of India (SEBI).
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