What is a SIP Investment and How Does It Work?

An SIP (Systematic Investment Plan) is an investment plan that allows the investor to put aside a fixed sum of money regularly on a fortnightly, monthly or bi-monthly basis in an equity or a mutual fund. Every time money is put down, small units are purchased and added to your account. Each purchased unit has a different rate based on market fluctuations. By do doing so regularly on a periodic basis the investor will be able to take home the benefit of Rupee-Cost Averaging and Compounded-Value appreciation over a defined period of years.

How Does Rupee-Cost Averaging Work?

Rupee-Cost averaging allows the investor to meander through market volatility and cushion against risky ventures. When the market is down, the fund fetches more units and vice-versa.

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What Are the Benefits of SIPs?

SIPs are a great way to invest small amounts in mutual funds regularly without feeling the financial Pinch of investing. 

Returns from SIP investment averages over a period of time, thereby, helping in maximizing returns. 

It is a regular investment scheme, which is based on units awarded. It is neutralizingmarket conditions. When the market conditions dip, the investor is cushioned with more units and vice-versa thus averaging the cost of his mutual fund units. 

Regular investment over a period of years can fetch a good lump sum return. The other plus side to this investment is, the compounding value of the fund. Which means a higher corpus. 

It is Affordable

SIP investment can begin as low as Rs. 300. This plan is customizable based on one’s budget. Flexible options are given to allow him to invest monthly, fortnightly, bi-monthly or on a daily basis. This allows the investor to plan his investment based on his budget and income frequency. 

Step-Up SIP Options-

These options give flexibility to an investor to bump up down his investment on a regular basis based on his earnings. 

Perpetual SIPs Plans

These plans offer options where the investor does not have to choose the end date. Once the target is met he can give a written consent to stop further payments by communicating to the fund house in writing

Flexibility –

SIP investment offers flexibility of increasing or decreasing the investment based on market volatility and if one wishes to discontinue and encase he can do so without any hassles. 

Long-Term Gains –

Attractive returns can be fetched over a longer period of time. 

Hands off

Banks can be instructed to auto-debit on a period basis. The hassle of tracking and paying can be avoided. 

Daily Investment SIP

In an effort to combat the fluctuating market, Mutual Fund houses have now started offering attractive daily SIP investment options with amount as low as RS. 300 a day. This is a great way to capture market volatility through rupee cost averaging. It is a convenient way of saving, for individuals who earn daily wages or are employees in unorganized sectors like private financiers, chit funds or earn wages on commissionbasis. SIPs are meant to be long term. Daily SIP is a improved route to capitalize in equity, to benefit investors from averaging rupee cost and help beat market volatility.

Bear in mind, with a 30-year investment of Rs. 2860 an individual can accumulate a corpus of RS. 1 crore assuming a compounded return of 12%. However, for a 20-year compounded plan to reach a corpus of RS. 1 crore, a sum of Rs.10100, as monthly deposit at 12% is required. The investor will have to put down a much higher amountregularly if the period of investment is shorter. So it is always wise to start young and invest over a longer period of time, like 30 years to ensure a secure future.

Generally, a period of 3-5 years of SIP investment is advisable for rupee cost averaging to reap attractive benefits. SIP or what is SIP Investment are meant for long term investment. Short term investment can capture market volatility, but not give the advantage of a long-term compounding interest rate. However, some may argue that daily investment can put your money to work by capturing market volatility and earning,instead of letting your income sit idle in the bank for a whole month. It is a personal choice, depending on how much risk an individual is willing to take.  

Daily SIPs Are Not Free from Drawbacks

Statistical trends have shown that returns from Daily SIPs or Monthly SIPs more or less equalize over a period of 3-5 years.

Too many entry transactions in your annual SIP investment account statement can make it cumbersome to track your investments.

You may not invest enough, being overly cautious about meeting your monthly expenses.

Many investors are in a conundrum as to invest in Daily, Monthly or other SIPs. My advice would be, to have a good mix. Daily SIPs can be a good balance with long term SIPs. One way of beating the drawbacks of daily SIPs is to split the investment and put a small part into Daily SIPs for a short term to take advantage of market volatility. A bigger chunk of SIP investment can be put into Fortnightly/Monthly/Bi-Monthly SIPs to take advantage of long-term compounded appreciation. Ultimately it is the call of the investor as it depends on his earning capacity, budget and frequency.