Complete Guide on SIP

Any investment made by us is intended to help us wade through the critical times. There can be situations like medical emergencies when investments are your ray of hope. The unpredictable global economy makes it even more necessary to look forward to diverse investment options provided by banks and other focused mediums. Systematic Investment Plan (SIP) is one such means by which you can invest a specific amount every month for a set tenure in Mutual Funds. For instance, if you decide to make a SIP of Rs 2,000 for a year, you will have to pay Rs 2,000 each month for the next twelve months.  It should be noticed that SIP is a kind of investment means, and not a financial tool like PPF, Mutual funds, NSC etc.

Complete Guide on SIP

Principle behind SIP

A financial transaction should pave way for big returns. Similarly, any transaction undertaken as a part of an investment plan is aimed to deliver huge returns. Though the conditions for different plans may vary, the important factors that govern the nature of an investment are the amount deposited, the duration of investment, expected returns and accessibility. For investors expecting to make a regular investment of fixed sum of capital, systematic investment scheme is the choice to make. The scheme can be accessed through banks, stock market and post office. A SIP investor is permitted to invest a specific sum that may be a small as hundred rupees on a regular basis such as quarterly, monthly, or bi-monthly.

Power of SIP

Systematic investment plan is extremely beneficial if share markets are volatile or drop once you invested. This scheme can help you benefit from the fluctuating stock market without letting you get trapped in the guessing game. So, if the value of shares falls, you can buy more units with your corpus. Accordingly, as the prices of shares rise you can utilize the opportunity by reducing your purchase. Again as the share market recovers, you can sell out your units and make profit.

Advantages of SIP

SIP is a simple yet powerful concept. Here are some reasons why it is useful to invest through SIP:

  • Easy on pocket:

It is easier for an investor to put away a small sum each month, instead of making a lump sum investment. It is simpler to shell out Rs 2,000 every month for a year, in place of investing 24,000 in one go.

  • Lowers the average cost per unit

The concept of rupee-cost averaging comes into play in SIP. Here, you purchase less when the stock market goes up and you buy more units when the market drops. In this way, the average cost per unit comes down. 

  • Disciplined investment

An important advantage of SIP is that you become a well-organized investor. You develop the habit of contributing fixed money towards mutual fund once you begin SIP.

  • Investor friendly

Systematic Investment Plan helps hammer out money over an extended time frame. Considering long term investment goals, the scheme helps you reap greater returns. Even if you are an average investor who looks forward to a steady expansion of investment base, this plan is always better than investing a lump sum figure. This facility allows you to benefit from the share market despite your inability to deal in big sums. Now, if you belong to the cash rich bracket, investing a huge sum at the same time may not be a wise deal. In this case, you can bank upon SIP for methodically aligning your investment.

  • Reducing risks associated with stock market

Assume that you invested a big amount in a certain stock, and the stock crashed. You would lose the whole lot that you invested and are expected to hang on till the market recovers. However, with Systematic Investment Plan you can purchase units of various shares through little investments. Thus, your risk is branched out and even when the market collapses, you can steer clear of anxiety.

Disadvantages of SIP

Having talked about the benefits of SIP, we now gaze at the few disadvantages attached with SIP:

  • Futile in bullish markets

When the stock market leaps and continues to grow in due course, the cost of units purchased will always be at a higher price than the earlier one. This will eventually increase the average cost per unit in contrast to the case with an initial lump sum investment.

  • Extended lock in period for tax saving fund

Tax saving fund locks your capital for 3 years. With SIP, each investment will be locked for 3 years beginning with the date of investment. For instance, if you make your first SIP payment on April 2016, it will be locked till April 2019. Similarly, each of your payment will be locked for an extended period of one month.

Looking at the unpredictable stock market, Systematic Investment Plan is a strong means for investing in mutual funds. Nothing can be more precious than drawing a regular sum in volatile market situation. So, build your cash flow over a long term by minimizing the risks of market fluctuations by investing through SIP.