Systematic investment plans (SIPs) were the investment plans that helped encourage Indians to invest in mutual fund schemes. Before 1993, i.e., the year SIP was introduced in India, professionals, both young and old, from the middle class did not think they could invest in mutual funds. Because not many of these professionals made enough money that could help them with investments. However, after the introduction of SIPs, working-class investors who were initially hesitant as their entire monthly earnings were devoted to monthly expenditures, started investing. SIPs not only helped in increasing the number of mutual fund investments but also helped them with long-term wealth accumulation. Read below to know things like what SIPs are and how are they helpful.
What are SIPs?
The systematic investment plan is one of the two modes of investment. With SIPs, you are free to choose to invest a fixed portion of your monthly income in mutual funds at consistent intervals (monthly investments being the most common example). An important aspect to remember about a systematic investment plan is that you need to have a long-term goal and thus, to achieve the financial goal, it is better if you were to start as soon as possible. To start a SIP, you need to determine your investment objectives, fill out your KYC and then, finally choose a plan.
How do they work?
Generally, a mutual fund plan is selected by an investor once they have done things like determining their financial goals and investment horizon, i.e., the total duration they expect to hold on to the mutual fund scheme. After doing that, you need to choose one of the two investment modes, i.e., lump-sum mode or systematic investment plans. If you chose SIP, then, you go ahead with regular monthly investments of a certain sum.
With a SIP, you can leave a standing instruction with the bank for automatic deduction from your bank account into the scheme. Your money in the fund is used by the fund manager to purchase a certain number of units. But, the said units are not selected by the manager arbitrarily. The said purchases are carried out after studying the current market price of the financial instrument. If you are a risk-averse investor, you can opt for SIPs because they are one of the recommended ways to invest whenever the market is going through a volatile phase.
What are the merits associated with SIPs?
Some of the benefits of SIPs are:
- SIPs are known for their feature of rupee cost averaging:
Thanks to this feature, you can purchase more units whenever the market is going through a bear phase. On the other hand, lesser units are bought by the fund manager whenever the market is performing well. Rupee cost averaging is the inherent feature of SIP. As per this feature, during every market correction, one can choose to buy more. And, if the market is having a bull run, they can reduce the cost of their investments.
- SIPs offer flexibility:
An advantage of SIP is that they come with flexibility. Furthermore, these investment plans can be withdrawn according to your choice. This also means that they don’t have a fixed tenure. You can choose for either full or partial withdrawals and that too without causing any losses for opting to withdraw. Apart from the lack of fixed tenure, the amount meant for the deduction, i.e., investment, is flexible and isn’t set in stone. According to your financial situation, you can opt to increase or decrease the amount of investment. However, if you have opted for SIPs, please remember that you need to have a long-term goal and a long investment horizon for wealth creation.
Have SIPs performed well in the past?
Ever since its inception in 1993, the systematic investment plan has performed well. That’s because the plan struck a chord with the people from the middle class. Unlike lump-sum investments where you are required to have access to the complete amount, for SIPs, you can start small. And as your financial situation improves, you can increase your amount of investments.