SIP Full Form

SIP (Systematic Investment Plan) is a form of investment mode followed by mutual funds to attract investors to invest small amounts in intervals/periodically instead of lump sums. This process takes place usually weekly, monthly and quarterly. For Example, you can invest with a minimum amount of Rs. 500 and ask your bank to debit the specific amount every month. The SIP tool plays an important role in managing the financial system at ease in a disciplined manner.

It(SIP) is a plan in which small retailers make equal payments regularly into a scheme they choose. A systematic investment plan allows investors to save regularly with a smaller amount of money in return for long-term advantages of dollar-cost averaging (DCA). By using a DCA strategy, Most investors buy and invest after proper calculation and discussion.

Some plans let you choose a fixed number of shares to buy as the amount invested by you is usually fixed and does not depend on the unit or share. An investor buys more when the prices are low and buys less when the prices are high. 

A systematic investment plan is a passive investment and not an active one as investors are not dealing with or taking decisions every day. In simple words, once you invest money, you can keep adding money irrespective of how it performs. This is the reason why you need to keep tracking how much you have gained or accumulated. As soon as you hit your desired target you should reconsider your investment plans or modify them. Strategy plays an important role so try new strategies and move to a strategy that needs active attention this will allow you to grow your money faster. But it is better to consult with family, friends, and experts before making any dynamic decision.

How to calculate a SIP?

To calculate SIP (Systematic Investment Plan), there are four steps given below, that provide accurate results:

1. What will be the SIP amount? 

According to the customer income structure and risk appetite, it may vary; therefore, a customer can enter any amount whatever he wishes, then he has to sacrifice that prefixed amount on a monthly or quarterly basis. 

2. How many months can the SIP continue?

It depends upon the customer how many SIP payments he/she wishes to make.

3. How many months ago did the customer start the SIP?

If a customer has already started and has an ongoing SIP, he/she needs to put the number of payments that have already been made. Or if the customer hasn't started SIP, he/she has to enter zero.

4. What is the rate of interest expected by the customer per annum?

Firstly, the motive is to earn good returns in Mutual Funds when a customer is investing. With the help of calculated SIP, customers can adjust the rate of interest. They can make their own decision by entering a few details after which the SIP calculator will generate accurate results. By seeing all these, customers can judge themselves on their Return On Investment.

Advantages of SIP

• Sips Are Pocket-Friendly. 

It enables you to invest on small scales periodically for a certain time frame like weekly, monthly, quarterly.

• SIPs focus on Rupee-Cost Averaging. 

It (SIP) works better when it comes to low-cost investment plans, you can buy more mutual funds schemes when prices are low and similarly you buy a few mutual units when prices are increased.  This develops a good balance between rupee cost averaging.

• Sips Are More Effective For Future Plans.

Everyone has their own goals for the future such as buying a home, buying a dream car, a well-planned life but all this includes effective goal plans.

• Sips Scheme Benefits From the Power of Compounding For Long Term Investment. 

It enables you to compound your money invested, let’s say you have invested Rs. 1000 in a mutual fund scheme with SIP tenure of 20 years and anticipate a return of 15% p.a., where your money grows approx to 15 lakh.

What is the Power of Compounding?

The power of compounding is nothing but a concept in which interest is earned on the investment made by the customers.

Disadvantages of SIP

Even though they can help a small investor sustain a stable savings plan, Systematic investment plans come with some conditions. Systematic investment plans usually require long-term dedication from 10 to 25 years at least. However, investors are allowed to end the plan before the maturity of the plan,  Systematic investment plans are often costly to undertake.

SIP vs. Mutual Fund

SIP is a tool that is used for investing in mutual funds. SIP helps investors to save a small amount and pile up wealth for the long term. SIP is slightly similar to a bank recurring deposit. Customers can stop or redeem their SIP anytime if at all it is not lined with ELSS ( ELSS has three years of lock-in period).

A Mutual Fund is a fund that is made up of securities that differ from equity, fixed income or both. It is professionally managed by financial institutions that take money from many investors to purchase stocks, bonds, money market instruments, etc. It is a platform of opportunity for investors to invest in their daily activities. 

Is SIP safe? 

Yes, SIP is safe in investing in mutual funds schemes. Moreover investing in mutual funds will end up with a huge cost on mutual funds; to invest in mutual funds, you need to have a strong knowledge of market surveys. While in SIPs, you need to check on the market status, though it hardly costs a small amount to invest every month. Price may fluctuate (some months either high or low). If it is considered for a long term plan,  the price you pay will be the average of high and low. That is called rupee cost averaging.

Is a Systematic Investment Plan Better than a Fixed Deposit?

This is a commonly asked question nowadays. People get confused while investing whether to invest in a traditional way of fixed deposit or to go with SIP. Let us discuss some points which can help you determine what is best for you. 

When it comes to the best investment plan, a fixed deposit is only for conservative investors whereas a systematic investment plan is for both aggressive and conservative investors. Fixed deposit is a type of investment in which the investor has to pay in a lump sum but in a systematic investment plan, the investor has to pay in regular & equal installments. When the question of liquidity rises, FD has high liquidity, and SIP has low to medium liquidity. When compared both in risk factor FD has low risk whereas investing in SIP, the risk is high. Now let's talk about returns, the fixed deposit has guaranteed returns but in SIP, returns are not guaranteed. FD Investors get interested as their return on investment and SIP investors get dividends as a return on investment.

Important Details

A Systematic Investment Plan includes contributing in terms of investing a decided amount of money on regular intervals and mainly into the same security which we think fits.

A Systematic Investment Plan generally takes automated withdrawals from the capital account and may require from us an extended promise from the investor. SIP works on the principle of dollar-cost mode. There are several brokers and mutual fund companies that offer competitive Systematic Investment Plans.