Systematic Investment Plan is a word which everybody is talking about these days. Thousands of investors are joining to the mutual fund industry through SIP accounts every day and every month around 7500 crores of investment are accumulated through this mode. Now, there are people who are still unaware of as to what SIP investment is and what are the benefits of investing in mutual funds through this mode. So, in this article, we are going to discuss what SIP is and why it is gaining popularity among investors
What Is SIP?
Systematic Investment Plan, also known as SIP, is a mode of investing in mutual fund schemes, with the help of which you can make a regular planned investment in mutual funds. The special feature of this mode is that like other monthly investment options (FD, RD, etc.), you don't have to make the monthly payments physically, once you choose a plan, the investment amount will be directly debited from your account at the selected date. Also, keep in mind that the intervals that are available for SIP investments are weekly, fortnightly, monthly, and quarterly. So, you can choose a debit cycle according to your needs and capability.
How Does it Works?
SIP investments are as easy as opening a Facebook account. Let's have a look at how you can invest in a mutual fund scheme through SIP:
- First, you have to choose that in which mutual fund scheme you want to invest and whether you want to invest in the regular plan or direct plan. In regular plan, you invest through a distributor, and in direct plan, you invest directly through the AMC's website. The difference between the two is that in regular plan, the expense ratio is a bit more but you will get recommendation and support from the distributor, and in direct plan, the expense ratio is less but you will not get any recommendations or support. New investors are recommended to go only for the regular plan as the knowledge they have about schemes is not that much.
- After choosing the plan, you will have to choose what investment cycle you want to follow (weekly, monthly, quarterly), and at what date you want the amount to be debited.
- After that, you will have to choose the amount for which you want the SIP for. Here you will have to choose the amount that you want to invest at the selected cycle. The minimum SIP amount for different schemes can range from Rs 100- Rs 1000.
- Now, the final step is making the initial payment to AMC. Different schemes have different initial investment amount which can range from Rs 100- Rs 5000.
So, by following these 4 steps, you can start a SIP investment account. Now, let's see that why SIP is gaining so much popularity.
Why Is SIP Gaining Popularity?
This is a question that every new investor have in his mind. So let's see that what are the reasons:
- Plans for Everyone - This is the top reason because of which SIP investments are gaining popularity. Systematic Investment Plan offers plans for as low as Rs 100. So, a person does not need a 7 figure salary to afford his monthly premium.
- Rupee Cost Averaging - This is a special characteristic of SIP which helps investors in beating market volatility. Let's say, you invest in a scheme that has a NAV of Rs 50, and you start a SIP of Rs 2000 in that scheme. So, the units you will get in the first month will be 40. Now, the next month price slips to Rs 40, and the total units you will be getting are 50. Now, when this process happens for a long-term, the average NAV of all the units becomes comparatively very much lower than the NAV of the scheme at that time.
- Compounding - This is the last factor responsible for the increasing popularity of SIP investment. Compounding in very simple words means 'Your Profits making profits'. Let's say your invest Rs 1000 every month through SIP and at the end of the year, the total amount comes after adding profit is Rs 13500. Now, the new investment amount is Rs 13500, of which Rs 12000 is your principal amount and Rs 1500 is your profit. So, the next year you will also be making profits on this Rs 1500.
Now you know what SIP is and why this mode of investment is gaining huge popularity. Millions of people have already joined the mutual fund market through this mode and if you are not one of them, then it is time to join the list.