What is a Systematic Investment Plan?

Systematic Investment Plan (SIP) is a method of investing in mutual funds wherein an investor chooses a mutual fund scheme and invests a fixed amount, though small overtime of his choice at fixed intervals. 

By applying for one or more SIP plans, the amount is automatically debited from his/her bank account and invested in the mutual funds which an investor has purchased at the predetermined time interval. The units of mutual funds are allocated based on NAV. With every investment, the amount being reinvested is larger and so is the return on those investments. Investors can choose to receive the returns at the end of the SIP’s tenure or at a periodic interval.

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The best time to invest in an SIP:

SIP investments can be started anytime ensuring minimum risk with the correct suitable scheme plan. The investor needs to choose the scheme which suits his long-term goals well. There is no fixed or suitable time frame within which an investor should start a SIP investment plan, the sooner the decision is taken the better.

Types of Systematic Investment Plan:

  • Top-up SIP-The investment amount can be increased periodically allowing the flexibility to invest higher when one has a higher income. It can help in making the most out of the investments by investing in the best and high performing funds at regular intervals.
  • Flexible SIP- This kind of SIP plan carries flexibility of amount to be invested. An investor can increase or decrease the amount to be invested as per his own cash flow preferences.
  • Perpetual SIP- An SIP usually carries an end date after 1 Year, 3Years or 5 years of investment. But this SIP allows to carry on the investments without an end to the mandate date. The investor can withdraw the amount invested as per his financial goals. 

Benefits

  1. SIP can be the best investment option when an investor does not possess superior financial knowledge about the market movements. The money gets auto deducted from account and goes to mutual funds, it seldom needs any monitoring. It helps in working actively towards making investments grow because of the periodicity. 
  2. It brings the advantage of rupee cost averaging. As the investment amount is constant, for a longer timeframe with rupee cost averaging, advantage of market volatility is gained. The fixed amount invested by means of SIP averages out the value of each unit. One can buy more units when the market is low and buy lesser units when the markets are high, lowering down the average cost per unit. 
  3. SIP is a disciplined way of investing and ensures to make investments grow. The automation makes sure that investment grows as opposed to lumpsum where one may forget to invest some time. The small amount invested daily grows up to a large corpus due as a sum of contribution and the returns compounded over the years. 

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Krishna Rath is a SEBI Registered Investment Adviser, and since 2015 has been educating netizens on investments and insurance. Krishna is a fee only SEBI RIA and is Odisha's first SEBI RIA. With background in IT, Krishna is changing the advisory space with new innovations in AdvisoryTech.

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