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Systematic Investment Plan

What is a SIP?

SIP stands for Systematic Investment Plan. This is a convenient method of investment in which the investor can invest a predetermined amount of money in mutual funds at regular intervals. The investment can be made on an annual, half-yearly, quarterly, monthly or weekly basis. This pre- planned, systematic method of investing in mutual funds enables the stakeholder to earn regular returns on investment.

How Does SIP Work?

A Systematic Investment Plan offers flexibility to the investor in terms of managing assets and investing money in mutual funds. This method is convenient since the pre-fixed amount will be debited automatically from the investor’s bank account and this will be used to make an investment in a particular mutual fund portfolio. A Net Asset Value (NAV) will be assigned to the investor based on the existing market conditions. When an investment is made, additional units of an asset available under the mutual fund scheme will be purchased and added to the investor’s mutual fund account. This also ensures that the units accumulated are bought at different prices. Therefore, the investor will benefit from the purchase due to the Compounding factor and also due to Rupee-Cost Averaging.

Benefits of Systematic Investment Plan (SIP)

Compounding Benefits

Since the investor will make an investment over a regular interval, the investment accrues more money over time. The sooner an investment is made, the longer the funds have to mature and earn aggressive returns.

Example: Person A, aged 40 years, invests Rs. 10,000 in a SIP, at an interest on investment worth 7%. He will earn Rs. 52, 40,000 by the time he reaches 60 years of age.

Now, Person B who is 30 years old, invests Rs. 10,000 in a SIP, at an interest on investment worth 7%. When he attains 60 years of age, the returns accrued on his investment will be worth Rs. 1.22 Crore.

Hence, with a 10 year time difference, Person B gains more than 2X the returns gained by Person A.

Rupee-Cost Averaging

When an investor goes for an SIP, he/she need not rely on speculation in order to invest money in mutual funds. Since the stakeholder will make regular investments, the volatility of the market will not affect the average cost per unit. The investor can purchase more units when the price is lower and less units when the price is high. This is a balances any loss the investor might incur due to market fluctuations.

Systematic Savings

SIP mutual funds encourage regular savings so that investments can be made at the chosen frequency. This leads to disciplined saving which alternately results in successful mutual fund investments.

Flexibility

Investors can invest in mutual funds over a prolonged period of time. However, there is no time limit during which an investment has to be made. The investors can also choose to discontinue the plan at any point of time. The pre-determined amount that is invested regularly can also be changed as per the investor’s choice.

Long-Term Gains

Due to the benefits of compounding and rupee-cost averaging, the investor can accrue good returns on investment in the long-term.

Convenience

The mode of investment in mutual funds is very convenient. The investor can place a standing instruction to his/her concerned bank and the amount will be auto-debited from the account.

Can a Systematic Investment Plan be Customised?

Customers are allowed to customise their SIP. Although most people who invest in an SIP invest a fixed sum each month, you can customise the manner in which the money is put into your SIP. A good number of fund houses across the country enable investors to put in money every month, every fortnight or twice a month based on their preference and convenience.

Besides, Step-up SIPs enable investors to raise the amount invested in SIPs on a periodical basis. One of the most popular methods is ‘Alert SIP’ under which an investor receives an alert to purchase more when the markets are down.

Another method is ‘Perpetual SIPs’ under which investors will not be required to select the date on which the SIP ends. Once the SIP meets the investor’s goals, it can be stopped by submitting a written communication to the company or fund house.

How much will I need to start an SIP?

The minimum amount required to start a Systematic Investment Plan is Rs.500.

Top 10 SIPs in India and their Return Rate

SIP 5-year monthly SIP (XIRR) 10-year monthly SIP (XIRR)
Aditya Birla SL India GenNext Fund (G) 22.95% 20.63%
Tata Equity P/E Fund (G) 26.86% 20.34%
Reliance Growth Fund (G) 24.01% 18.05%
Quantum LT Equity Fund (G) – Direct Plan 17.27% 16.86%
Templeton India Growth Fund (D) 21.63% 16.74%
SBI BlueChip Fund – Reg (G) 19.07% 16.69%
ICICI Pru Dynamic Plan (G) 18.64% 16.69%
Aditya Birla SL Top 100 Fund (G) 18.53% 16.69%
ICICI Pru Top 100 Fund (G) 18.43% 16.02%
Canara Rob Emerg Equities Fund – Reg (G) 32.63% 26.51%
Disclaimer

Mutual Fund investments will be subject to market risks. Any mutual fund listed in the document does not guarantee fund performance or its underlying creditworthiness. Do read the mutual fund document thoroughly before investing. Specific investment needs and other factors have to be taken into account while designing a mutual fund portfolio.

GST rate of 18% applicable for all financial services effective July 1, 2017.

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