In this blog, we elaborate more on what is SIP – the Systematic Investment Plan. What are the advantages and disadvantages of investing in SIP, How long you should invest in a SIP and Who should invest in SIP?

What is SIP in Mutual Funds?

SIP or Systematic Investment Plan is a popular way of investing in mutual fund schemes. It allows you to invest a small amount regularly over a long period of time. When you opt for an SIP, a fixed amount is automatically deducted from your bank account at regular intervals and invested in the mutual fund scheme of your choice.

Who should invest in SIP?

If you are getting a salary every month, have little amount that you can consistently invest every month, and you have zero idea of investments, SIP is a vastly diversified portfolio and is a mainstream investment instrument that you can invest in.

Mutual Funds have 35+ Stocks and is managed by an active fund manager who manages the fund for crores of investors.

SIP is better than FD but less attractive than portfolios with less number of stocks or individual stocks.

The vast portfolio has the potential to offset risk better. This comes with a price – profits on the portfolio is not extraordinary compared to carefully picked individual stocks or portfolios with less number of stocks.

Anyone who is interested in long-term wealth creation and has a disciplined approach to investing can consider investing in a SIP (Systematic Investment Plan). SIPs are a popular investment option in which an investor invests a fixed amount of money at regular intervals (usually monthly) in a mutual fund or exchange-traded fund (ETF).

SIPs are particularly beneficial for individuals who may not have large sums of money to invest upfront but still want to participate in the stock market or other investment opportunities. They can also be a good option for individuals who want to take advantage of the power of compounding and build wealth over the long term.

How long should you invest in a SIP?

You cannot time the market. Choose your duration based on your investment goals and not the prediction of market performance based on any “market astrologer”.

Always add a cutoff period of 1 to 2 years. Prepare to wait for one or two years after your ideal duration just in case the market is low when you want to exit.

The ideal investment period for a SIP (Systematic Investment Plan) depends on the individual’s financial goals, risk tolerance, and investment horizon. In general, SIPs are considered to be long-term investment options, and investors should aim to stay invested for at least 5-7 years or more to maximize their returns. The risk is offset in most SIP Funds after 7 years.

The longer the investment horizon, the higher the potential for generating returns due to the power of compounding. By investing regularly over a long period, investors can benefit from rupee-cost averaging, where the average cost of purchasing units decreases over time, resulting in higher returns.

Regardless of the ideal time, you can also pocket returns from a short-term SIP based on your investment goals.

However, it is important to note that the stock market is subject to fluctuations, and short-term volatility can sometimes impact investment returns. Therefore, investors should not panic and withdraw their investments during market downturns, but instead stay invested for the long term to benefit from potential market upswings.

Ultimately, the investment period for a SIP should be aligned with the investor’s financial goals and risk profile.

What is an ETF?

ETFs trade on stock exchanges like individual stocks. ETFs typically have a lower minimum investment requirement than mutual funds. This makes ETFs accessible to a broader range of investors. ETFs are tax-efficient than mutual funds and are mostly passively managed. This means most ETFs track an index instead of an active fund manager managing the fund.

Advantages of SIP:

Power of Compounding: One of the biggest advantages of SIP is the power of compounding. When you invest regularly over a long period of time, your money earns interest, and the interest earned also earns interest. This results in a significant increase in the value of your investment over time.

Rupee Cost Averaging:

SIP also helps you to benefit from rupee cost averaging. When you invest a fixed amount at regular intervals, you buy more units of the mutual fund when the price is low and fewer units when the price is high. This helps to reduce the average cost of your investment, and over time, it can lead to higher returns.

In simple terms,

This means you can invest say, Rs. 500 in the first month and then Rs.1000 after 3 months when the market is favorable and the full amount after 6 months when the market adjusts.

Small Amount:

SIP allows you to invest a small amount regularly, which makes it a convenient option for those who want to invest but don’t have a lump sum amount to invest.

Disciplined Investing:

With SIP, your investment is automated, and the amount is deducted from your bank account at regular intervals. This helps to develop a disciplined investing habit, and you don’t have to worry about timing the market.

Benefits of Investing in Mutual Funds:

When you invest in mutual funds, you benefit from the expertise of professional fund managers who manage the investments on your behalf. Mutual funds also provide diversification, which helps to reduce risk.

Benefits of Investing in Mutual Funds:

No Control over Market Fluctuations: With SIP, you don’t have control over market fluctuations. The value of your investment can go up or down depending on the performance of the mutual fund scheme.

Long Term:

SIP is a long-term investment option, and it may take several years to see significant returns. If you’re looking for short-term gains, SIP may not be the right option for you.

Average Cost:

While SIP helps to reduce the average cost of your investment, it also means that you may miss out on buying individual stocks when the price is low.

How does SIP work?

SIP works in a simple and straightforward manner. When you opt for an SIP, you choose the mutual fund scheme and the amount you want to invest. The amount is then automatically deducted from your bank account at regular intervals, such as monthly or quarterly, and invested in the mutual fund scheme.

Example:

If you opt for an SIP of Rs. 5,000 per month in a mutual fund scheme with an NAV of Rs. 100, you will get 50 units in the first month. In the second month, if the NAV is Rs. 110, you will get around 45 units, and so on. Over time, the value of your investment will grow as the NAV of the mutual fund scheme increases.

What is NAV?

NAV is the Net Asset Value of the Mutual Fund.

Net Asset Value (NAV) = (Total assets of the scheme – Total liabilities of the scheme) / Total number of outstanding units.

For example, let’s say a mutual fund scheme has total assets worth Rs. 10,00,00,000 and total liabilities worth Rs. 50,00,000. The total number of outstanding units of the scheme is 1,00,00,000. Then, the NAV of the scheme would be:

NAV = (10,00,00,000 – 50,00,000) / 1,00,00,000 = Rs. 95 per unit.

A unit represents a portion of the total assets of the scheme. When you buy units of a mutual fund scheme, you become part owner of the stocks held by the scheme based on how much units you own.

Conclusion:

SIP is a convenient and disciplined way of investing in mutual funds. It allows you to benefit from the power of compounding and rupee cost averaging, and you can invest a small amount regularly over a long period of time. While SIP has its disadvantages, the benefits outweigh the drawbacks, and it is a popular investment option for those who want to create wealth over the long term.