Why should I invest in a Systematic Investment Plan?
A systematic investment plan (SIP) is an investment vehicle offered by many mutual funds to investors, allowing them to invest small amounts periodically instead of lump sums. The frequency of investment is usually weekly, monthly or quarterly.
In SIPs, a fixed amount of money is debited by the investors in bank
accounts periodically and invested in a specified mutual fund. The
investor is allocated a number of units according to the current net asset value. Every time a sum is invested, more units are added to the investors account.
The strategy claims to free the investors from speculating in volatile markets by rupee cost averaging.
As the investor is getting more units when the price is low and fewer
units when the price is high, in the long run, the average cost per unit
is supposed to be lower.
SIP claims to encourage disciplined investment. These are
flexible; the investors may stop investing a plan anytime or may choose
to increase or decrease the investment amount. SIP is usually
recommended to retail investors who do not have the resources to pursue
the active investment.
Why should one invest in Mutual Funds & SIP ?
- Professionally managed - Your funds are managed by qualified fund managers.
- Tax saving - You save up to Rs.1.5 lakhs under section 80 C of the Income Tax Act through investment into Equity Linked Saving Schemes.
- Affordability - You can start with small amount of investment as low as India National Rupee 100 in SIP.
- Diversification - You can invest in a basket of stocks or debt instruments.
- Liquidity - Your investments can be liquidated in 24 hours.
- Convenience - Your transactions are completely online.
- Low cost of investment - You have no to pay no brokerage, no commission, no entry load and minimal fund management fee.
Types of SIPs
Their are 4 different types of SIPs
Top-up SIP :
This plan increases the amount of your contribution
at regular intervals and enables you to benefit from the mutual fund
scheme that is performing well. With a rise in your income, you can
invest a higher amount. You have the advantage of making the most of an
increased income as well as a good MF scheme.
Flexi SIP :
Here,
whether monthly or daily, you have the choice to pay different SIP
amounts every time. This gives you, as the investor, an advantage of not
being bound to pay a certain amount every month or daily but decide
according to your cash flow at the time of payment. Thus, in case you
have a cash crunch you can skip the installment. However, it is not
recommended unless you understand the market conditions and invest
accordingly.
Perpetual SIP :
Keep
paying SIPs without an end date. Not for a year, 3 or 5 years, but keep
going till you wish! If you opt for this scheme, you have the option to
redeem the fund at a time of your choosing. However, this scheme is
generally not recommended, as having an end-date teaches financial
discipline and promotes a goal-based approach, which eventually leads to
financial satisfaction..
Trigger SIP -
This
is for the ones that are aware.. If you understand markets well, then
this type of SIP gives you the option to use that knowledge. You can set
a NAV or index level or event or a particular date to start payments
for this type of SIP. Trigger SIP encourages speculation and is
therefore not desired by many.
Advantages of SIP
- Stress-Free–The investors who choose to enter or deal with mutual funds through SIP route do not have to worry about payment or timing the market. A SIP is set in such a way that the fixed amount and time are set in the beginning and the process happens automatically. However, the investor should review the whole process on a periodic basis to stay updated.
- Discipline – This is the most important advantage of SIP’s. The investor who plans to redeem a decent gain from the mutual fund will automatically save his earnings for SIP monthly payments. This makes it easier for him/her to manage the fund in long run.
- Compounding – The major advantage of SIP is its compounding power. The investor has to pay only a small amount each month for a fixed period of time. Eventually, the invested amount keeps on growing each month and the investor does not feel the pain of paying. It is just like a piggy bank, in the end, you will have a huge amount invested in the mutual fund.
- Convenience –Normal mutual funds require huge funds from the investors, but in SIP the investor has to pay only a feasible amount each month for a fixed time period according to the investor’s convenience.
- Easy to Invest –SIP amounts can be as less as INR 500 per month. Investing in a SIP is one of the hassle free processes that automatically deduct the amount from the assigned bank account. The monthly payments are so less that the investor will not have a guilt feeling.
Disadvantages of SIPs
- Does not suit people with unpredictable cash flows – SIP route can opt only if the investor is sure that he/she can pay the fixed amount every month without fail. If the investor is a person with unpredictable cash flow, paying the SIP can be messy. He/she might not be able to pay the SIP monthly.
- Stopping the payment in between is a nightmare – SIP amounts are automatically deducted from the bank account assigned. If in case the investor has an emergency and wants to skip the payment a month SIP does not allow such provisions. If the bank account has the amount, the amount will be deducted and the only way to stop it is to cancel the SIP. But, remember once you cancel the SIP you will have to go through a lot of formalities to restart the SIP and apart from this to cancel the SIP you will have to inform the institution 2 weeks in advance.
- Fixed amount – Once the SIP is started a fixed amount has to be paid each month. This amount, however, is chosen by the investor in the beginning. But, the key disadvantage is that the amount fixed in the beginning should be paid every month without fail and the amount cannot be changed or modified under any circumstances.
- Dates and time period are fixed and cannot be changed–Once the date and period is fixed on a SIP payment. The date and period cannot be changed. The bank account should have the amount on the date assigned in the beginning without fail.
- Ups or downs investment is uniform–No matter of ups and downs in the market the investor has to pay the fixed monthly amounts. He/she cannot change the amount or periods.
Benefits of SIPs
1. Disciplined Investing approach:Some of you
may opt for stock options by timing the market to accrue wealth.
However, timing the market calls for market knowledge, research,
technical analysis and a lot of time from your end. Further it could
also be risky. But through disciplined, regular investments you can stop
worrying about when and how much to invest. In a way, it eliminates the
need to actively tracking the market. And SIP helps you to achieve just
that.
2.Takes advantage of Rupee Cost Averaging:Rupee
Cost Averaging is an effective investment strategy that eliminates the
need to time the market. All one has to do is to invest a fixed pre
decided amount of money on a regular basis for a long period of time.
Since the amount invested is constant one buys more units when the price
is low and fewer units when the price is high which may man a lower
average cost.
3. Simple, convenient and easy to monitor:You do not
have to take time from your schedule to make your investments. With a
completed application form, one can just submit post-dated cheques or
avail the Magnum Easy Pay (auto debit) ** facility and relax. You can
monitor your progress of investment through periodic statement of
accounts.
4. Benefits of Compounding:The key to building
wealth is to start investing early and to keep investing regularly. A
small amount of money invested regularly can grow to a large sum. This
helps in creating a substantial amount of wealth which includes your own
contribution, plus returns compounded over the years. For example, the
following graph demonstrates the effect of returns on monthly
investments of Rs1000 per month for a period of 30 years.
*Advisor Zaroori Hai*
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Sources:
Various publications
Disclaimer: The
information provided herein is based on publicly available information and
other sources believed to be reliable, but involve uncertainties that could
cause actual events to differ materially from those expressed or implied in
such statements. The document is given for general and information purpose and
is neither an investment advice nor an offer to sell nor a solicitation. While
due care has been exercised while preparing this document, we do not warrant
the completeness or accuracy of the information. We will not accept any
liability arising from the use of this material. The recipient of this material
should rely on their investigations and take their own professional advice.
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