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

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)

Systematic Investment Plan (SIP), is a smart and steady way to invest money in mutual funds. In this investment approach, investors contribute a fixed amount regularly in an investment vehicle like mutual funds. Instead of investing a large amount as lumpsum, this way of investing makes it easy for investors to grow their wealth in the form of regular investments.

You can start with as little as Rs. 100 per month. It is flexible, so you can choose how much you want to invest regularly, whether it's Rs. 500, Rs. 1000, or more. This method of investing in mutual funds helps you stay disciplined and takes away the stress of timing the market. Over time, this steady form of investment can help you reach your financial goals. It's like setting up a savings plan where your money works harder for you in the long run.

How Does SIP Works?

Systematic Investment Plan (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:

1. Power of Compounding

2. Rupee Cost Averaging

Power of Compounding

The power of compounding in Systematic Investment Plan (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 ₹1,000 monthly 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 ₹360,000.

On the other hand, Bob started his investments at the age of 35 and invested ₹1,000 monthly, expecting a 10% annual return. Over 20 years, Bob's total investment amounted to ₹2,40,000.

Now, let's examine the difference:

At 55, Alice's investment has grown to approximately ₹22,79,000 due to the power of compounding.

Meanwhile, Bob invested for only 20 years and accumulated approximately ₹7,65,697.

Disclaimer : Data shared is for illustration purposes only actual numbers can vary.

Rupee Cost Averaging

Investors regularly contribute fixed amounts to mutual funds through SIP, fostering financial discipline. Rupee Cost Averaging, an underlying principle, mitigates market volatility's impact by ensuring more units are purchased when prices are low and fewer when prices are high.

For instance, if an investor invests Rs. 10,000 monthly in a fund with an initial NAV of Rs. 50, they'll buy 200 units. If the NAV drops to Rs. 40 the next month, the same Rs. 10,000 fetches 250 units. Conversely, if the NAV rises to Rs. 60 in the third month, it buys approximately 166.67 units.

Over three months, the investor accumulated 616.67 units, averaging the cost to around Rs. 15.34 per unit. This systematic approach not only smoothens investment costs but also potentially enhances returns over time, showcasing the efficacy of SIP coupled with Rupee Cost Averaging.

6 Benefits of a SIP

A Systematic Investment Plan offers a host of different SIP benefits. Here’s a quick overview of a few of them.

1. Flexibility

One of the major advantages of a SIP is that it is very customizable. You get the freedom to choose the amount of investment, the tenure, and the mutual fund. Such a high level of flexibility makes Systematic Investment Plans the perfect investment mode for all kinds of investors irrespective of their risk profile.

2. Low Investment

Systematic Investment Plans have no entry barriers whatsoever. You can start a SIP in a mutual fund by investing as low as just ₹500 per month. Thanks to such low minimum investment limits, you can easily partake in the wealth-creation process without burning a hole in your wallet. That’s not all. Most SIPs also give you the option to increase the amount of investment over time as well.

3. Automation

Unlike a lump sum investment, you won’t have to invest manually if you opt for a SIP. Once you’ve set it up, the chosen amount of investment is automatically deducted from the linked bank account and is used to purchase units of the mutual fund of your choice.

4. Rupee Cost Averaging

When the market is at a high, the SIP purchases fewer mutual fund units and when the market is at a low, the number of units purchased would be higher. As a SIP continues to invest in the mutual fund for a long period, the cost of your investment is reduced significantly through a phenomenon known as rupee cost averaging. Thanks to the lower per-unit cost, the returns that you get are likely to be higher than what you would have experienced had you made a lump-sum investment.

5. Convenience

Another very important benefit of investing in a mutual fund through a SIP is that it eliminates the need to time the market. A Systematic Investment Plan is designed to work through the different market phases. Therefore, once a Systematic Investment Plan is set up, you won’t have to spend time researching or analysing market movements. This makes a SIP the perfect option for beginner investors who lack an in-depth understanding of the stock market and those who don't have the time to conduct extensive research.

6. Financial Discipline

Many individuals lack financial discipline, which happens to be a major reason for them not reaching their financial goals. When you start a SIP, you essentially commit to investing a fixed sum of money for a specific period. This tends to automatically bring about the financial discipline required for the wealth creation process.

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.

Read Also: How to Invest in SIP

How Do You Get Started with SIP Investment?

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

For Net Banking Investors

Login to your Net banking account.
Select the investment tab.
Proceed with the purchase option.
Select category of scheme eg. Equity or Debt.

For Mobile Banking Investors

Login to your mobile banking app.
Select the investment option.
Purchase the mutual fund.

You can also visit the nearest branch if you need assistance in investing in Mutual funds.

Types of SIP (Systematic Investment Plans)

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.

Frequently Asked Questions

Q: What is the full form of SIP?

SIP stands for Systematic Investment Plan.

Q: What is SIP investment?

SIP (Systematic Investment Plan) is a disciplined approach to investing in mutual funds. Investors contribute a fixed amount regularly, benefiting from rupee cost averaging and long-term wealth creation.

Q : How to start SIP?

To start SIP, choose a mutual fund, complete necessary paperwork, and provide bank details. Many platforms offer online registration for easy setup. Begin systematic and disciplined investing.

Q: What is SIP in mutual fund?

SIP (Systematic Investment Plan) in mutual funds involves investing a fixed amount at regular intervals. It provides a disciplined approach for investors, fostering long-term wealth creation.

Q: Which mutual fund is best for SIP?

The best mutual fund for SIP depends on individual goals, risk tolerance, and investment horizon. Consult a financial advisor for personalized recommendations aligned with your financial objectives.

Q: Is SIP safe?

SIP (Systematic Investment Plan) in mutual funds carries market risk, but it's disciplined approach, rupee cost averaging, and long-term focus generally make it a safer option for investors.

Q: How SIP works?

SIP (Systematic Investment Plan) works by allowing investors to contribute a fixed amount at regular intervals into mutual funds, promoting disciplined and systematic wealth creation over time.

What is SIP? - Meaning, Benefits, & How it Works