What is SIP Investment Plan: Full Form, Meaning, Benefits, & How to Invest

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If you are an investor, you must constantly look for ways to grow your wealth steadily and securely. One investment avenue that has gained immense popularity in recent years is the SIP.

The full form of SIP is a Systematic Investment Plan.

What Is SIP (Systematic Investment Plan)

SIP is a methodical and strategic approach to investing in mutual funds designed to aid you in achieving your financial objectives over time. It offers a straightforward way to regularly invest a predetermined sum in your chosen mutual funds. SIP, with its promise to make investing accessible to everybody, has become a major changer in financial planning and asset management.

But besides understanding the meaning of SIP, it is also important to understand how it works and how it can play a huge role in the success of your wealth-building journey. Let's discuss SIP in detail.

How does SIP work?

SIP offers a convenient method for investing in mutual funds, allowing you to determine your desired regular investment amount easily. This amount is automatically deducted from your bank account to buy mutual fund units. Over time, these investments grow due to compounding. There are two principles on which the SIP works. They are:

Regular Investing

SIPs offer a strategic shield against the unpredictable tides of the financial markets. By adhering to consistent investments, SIPs ensure that the average purchase cost remains stable over the long term.

In practical terms, when market conditions are buoyant, you acquire fewer units of your chosen investment, and during market downturns, you secure more units for your investment. This key difference between SIP and mutual fund investing can provide investors with a risk-mitigation strategy and potentially higher returns over time.

Power of Compounding

The power of compounding in SIP refers to reinvesting the returns generated by your mutual fund investments back into the same fund. Over time, this process leads to exponential growth as your returns earn additional returns.

The longer you stay invested, the more significant the compounding effect becomes, potentially resulting in substantial wealth accumulation, making SIP an effective strategy for long-term financial goals.

Let's consider two friends, Alice and Bob:

Alice started investing ₹10,000 annually in an SIP at 25, with an expected SIP return rate of 10% per annum. Over 30 years, she has made a total contribution of ₹3,00,000.

On the other hand, Bob started his investments at the age of 35 and invested Rs Rs 10,000 annually, expecting a 10% annual return. Over 20 years, Bob's total investment amounted to ₹2,00,000.

Now, let's examine the difference:

At 55, Alice's investment has grown to approximately ₹17,44,940 due to the power of compounding.

Meanwhile, Bob invested for only 20 years and accumulated approximately ₹6,72,750.

Benefits of Investing in SIP

Investing in SIP is a wise choice to grow your money quickly. There are various benefits of SIP, including:

Disciplined Saving

SIPs encourage disciplined saving. Since you invest a fixed amount regularly, it instils a saving habit. It thus helps you reach your future goals, whether buying a house or funding your child's education. It also lets you calculate the approximate future value of your SIP using the SIP calculation formula.

Flexibility

SIPs offer the flexibility to increase or decrease your investment amount per your financial situation. You can switch between different funds easily if your goals or risk tolerance change.

Convenience

SIPs offer a hassle-free investment method that can be easily initiated online with a one-time setup of instructions. Your SIP contributions are automatically accumulated, simplifying the investment process.

Risk Reduction

While lump-sum investments can carry higher capital risk due to market fluctuations, SIPs mitigate this risk by spreading your investment over time. This approach helps lower the overall risk to your capital and provides a more effective means to navigate market volatility.

Why should I Invest in SIP?

Consider Mohan, a 30-year-old accountant, as an example to understand why SIP could be the perfect choice for you.

Mohan has significant financial goals for the next two decades, including buying a car, owning a home, and funding his daughter's wedding. While he currently invests in bonds, projecting his savings forward reveals a potential shortfall in achieving these goals.

This shortfall arises from two key factors:

Inflation tends to outpace the returns from bonds. Over time, this erodes the purchasing power of his savings, leaving him with less real value than he expected.
Mohan acknowledges that investing in equities can offer higher returns than bonds. However, he prefers a safer approach to investing, opting for bonds.

Now, the question is, how can Mohan achieve substantial growth without exposing himself to excessive risk? The answer lies in embracing a Systematic Investment Plan.

Investing in SIP provides individuals like Mohan with a balanced approach reaping the benefits of the SIP return rate. It allows them to participate in the potential for higher returns through equity instruments while maintaining a disciplined and systematic approach. SIPs mitigate the risks associated with market turbulence by spreading investments over time, making it an ideal choice for those prioritising financial security.

How do you get started with SIP Investment?

Investing in a SIP is easy. You can follow this process:

Step 1: Define Your Financial Goals

Begin by setting clear and achievable financial goals tailored to your specific needs and aspirations.

Step 2: Establish a Timeline

Determine when you will require the invested funds, as this will determine the duration of your investment, known as the investment tenure.

Step 3: Calculate Your Investment Amount

Utilise a SIP calculator to compute the regular investment amount necessary to achieve your financial objectives.

Step 4: Make a Choice

You must consult your financial advisor and choose a plan that meets your needs.

Types of SIP

When considering Systematic Investment Plans (SIPs), there isn't a universal solution that fits everyone. SIPs come in various forms, each catering to a specific objective, offering the flexibility to tailor your investment strategy to align with your requirements. Some of the types are:

Fixed SIP: The SIP requires you to invest a fixed amount consistently.

Top-up SIP: The SIP requires you to periodically add more to your investments.

Flexible SIP: You can adjust your investment amount in this SIP to suit changing circumstances.

Perpetual SIP: Such SIP does not have any end date.

Trigger SIP: You can invest in this SIP based on predetermined market conditions or triggers.

Systematic Withdrawal Plan (SWP): You can receive regular payouts in this SIP by withdrawing from your investments.

Flexible SWP: The amount you pay varies across various instalments.

Systematic Transfer Plan (STP): In this SIP, you can regularly shift funds from one mutual fund to another.

Conclusion

SIP is a smart and disciplined approach to investing in mutual funds. It enables individuals to accumulate wealth through consistent, convenient investments gradually. By defining precise financial objectives, creating a timeline, determining the appropriate investment sum, and seeking guidance from a financial advisor, you can realise your aspirations and safeguard your financial stability.