This article may contain affiliate links. If you make a purchase using my links, I’ll earn a small commission at no extra cost to you. Thank you for your support!
The popularity of investing in a SIP has tremendously gone up in the last few years. Below you’ll find details on Systematic Investment Planning (SIP) and see if SIP is an ideal choice for investors such as you.
What is Systematic Investment Planning (SIP)?
Systematic Investment Planning (SIP) is an investment plan where investors make regular payments into a mutual fund.
This helps an investor to consistently invest small amounts of money in Mutual Funds and enjoy the amazing advantage of Rupee Cost Averaging.
SIP is not the same as Mutual Funds, it’s a tool to invest in Mutual Funds systematically and easily. SIP works great for salaried people who can easily invest at regular intervals.
This develops two qualities in an individual
- The quality of Saving Money
Saving is important, especially if you want to enjoy better financial security in the future.
Today more than ever, it’s important to save money for unexpected expenses. So investing in SIP ensures you develop the habit of saving
- The quality of Investing Money
Of course, if you invest, you develop the habits of investing consistently. You make money then save money but if you don’t invest your money from time to time, your money will reduce in value over time, it won’t remain the same due to inflation destroying your money value.
SIP is a great way to invest for your future, to ensure your money value does not drop in value.
How SIP Works
A systematic investment plan involves investing a specific sum of money into a specific mutual fund scheme at regular intervals (usually a month).
Mutual funds and other investment companies usually offer two types of investment for an individual looking to invest their money – Lump sum investment and Systematic Investment Plan.
Lump-sum means investing the entire amount at once while systematic means investing equal amounts at regular intervals.
The sole advantage of SIP over Lump sum investment is that any person with little money to invest can start small and invest at regular intervals.
As the amount paid at each interval is the same, an investor ends up buying more shares when the prices drop and fewer shares when the prices rise. Let’s understand this with an example,
March – Rs 500 @ 55 a share = 9 shares
April – Rs 500 @ 45 a share = 11 shares
May – Rs 500 @ 50 a share = 10 shares
Due to the higher cost of a share, in March we only got 9 shares. While in April, cost of share reduces, thus we get 11.
Is SIP a Safe Investment?
If Safe investment translates to lower risks and better rewards, yes a SIP is a safe investment compared to directly investing a lump sum amount in Mutual Funds.
If you go with the lump sum method of investing, you may pay more for a share or you may pay less for a share, it’s a 50-50 chance.
The only way to get a good deal is knowing the market in and out and that’s taken time and practice.
The easier way is by using rupee cost averaging strategy you’re surely going to balance out the highs and lows to ensure your share price isn’t too much or too less.
Can you Stop SIP Investment?
Yes, you can opt-out of a SIP any time you wish. You can then withdraw the money out of the SIP or let the money remain invested in the Mutual Fund.
Unlike fixed deposit or recurring deposit (provided by the bank), you will not be charged to stop the investment.
Is SIP better than FD or RD?
I have to say that SIP is better than FD or RD simply because it offers higher interest rates than a fixed deposit or a recurring deposit.
Your SIP returns are flexible, it depends on the Mutual Fund you’re investing in, if that Mutual Fund grows, your money will grow and if it doesn’t, you may face losses.
In general, it is observed that in the long run, returns earned on SIP are greater than returns earned on FD or RD.
Is SIP profitable in the long run?
The entire purpose of creating a SIP is to get better returns than your saving account, fixed deposit and recurring deposits.
In the short run, you may face some losses, but it has been proved time and again that a SIP is a profitable investment option that minimizes risk due to rupee cost averaging.
Instead of waiting to accumulate a large sum of money to then invest it, you can start a SIP and invest each month. This way, your money is always growing.
What is Rupee Cost Averaging (RCA) in Investing?
Rupee cost averaging is an investment strategy in which an investor divides the total amount to be invested in a regular time frame mainly to ensure that his risk is reduced by the volatility in the market.
The purchase of shares is made whether the market price is high or low; it works on averaging the entire share price, thus giving an investor a good return on investment.
This strategy is effective if you are a type of person who doesn’t want to time the market and purchase shares at the best price possible.
A good example of rupee cost averaging is a recurring deposit account, where you make monthly payments into an account and you get a return over some time; the only difference is that the interest rate on recurring deposit is predetermined while interest earned on SIP depends on the market, if the market is good your investment grows and vice versa.
Rupee cost averaging is a very basic technique that almost every investor uses, but at the same time, it’s one of the best ways to alleviate risk and increase returns.
Let me help you with an example – Sakshi invests Rs 3000 per month for 12 months. Let’s say the market fluctuates and sees a drop in share price and then rises back again, we observe that.
|Month||Amount invested||Price per share||Total Units|
Sakshi invested a total of Rs 36000. Here, the average price was 27.6 and 1304 shares were purchased. Our current market value of shares is Rs 39120. So our Return On Investment (ROI) is Rs 3120 in the first year which equals to a 10% Return on investment in the first year.
Thus a SIP gives you average to good returns for the short term but great returns in the long term. I suggest you should create a SIP for at least 3-4 years and sit back to enjoy its benefits.
Power of Compounding
Some call the power of compounding the eighth wonder of the world.
Compounding is the process in which your profits earned from investing in mutual funds are reinvested back into the mutual fund to generate an additional return over time.
This happens because the investment will make profits from the initial amount invested as well as the new earning reinvested.
Compounding is a great way to increase the value of your investments, for that, start investing in SIP and invest for the long term.
The Automatic Withdrawal Permission
To add money into your SIP on regular intervals, your funding account (usually bank account) will be debited and the money will be transferred to your SIP Mutual Fund account.
To ensure your investments don’t miss an internal, it is suggested that you automate this process. Under your standing instructions, the bank will debit your account each month and give it to your investments.
While this is good for your investments, if you don’t have enough money in your bank account after debiting the SIP amount, your expenses will go for a toss.
For example, if you have 10,000 in your bank account, a monthly SIP of 6,000 that leaves you with 4,000. Now your monthly expenses come up to 6,000. How will you be able to cover your expenses?
Many individuals who want to invest aggressively in the stock market do this mistake and then hit bankruptcy. Make sure you have enough money after your SIP instalment is deducted.
Which SIP should you Invest in?
The SIP you invest in depends on your risk-taking capacity. If you are willing to take risks, I suggest you look at small and mid-cap mutual funds.
On the other hand, if you would prefer less risk, you can opt for large-cap mutual funds as they tend to be less risky. Large-cap funds include the best companies in the market.
These companies rarely fluctuate and their growth, as well as their returns, are normal, not too bouncy.
So if you prefer lower risk, the large-cap is the way, whereas if you want to take on some risk, small or mid-cap mutual funds can suit your needs.
Generally, if you’re young, you can take more risk as you have the time to take risks so that you could opt for a small or medium cap, but that’s totally up to you and your needs.
Is SIP the Best Investment Opportunity?
A Systematic Investment Plan is an organised way to invest in a Mutual Fund.
It’s not always possible to invest huge amounts of money into the stock market, there are so many expenses to look after, loans to pay off, it’s much better to invest small portions of money monthly to gain the benefits of investing while minimising risk to a great extent.
Increasing your income and Investing is a long term journey. Most people never start, so by taking the first step to care for your finances, you are way ahead than 95% of the people out there.
The earlier you start the easier it is to reach your financial goals. You might make a few mistakes along the way but the learning will be greater than risk suffered if you do the right things and stay away from too much risk and what’s the one way we learnt today that reduces our risk while investing – Yes, it is Systematic Investment Planning (SIP).
If you found this post helpful, I’ll be super happy if you shared it with your friends and family.
Enjoyed this post? If so, you might like to subscribe to the TSM newsletter. It usually contains life lessons and money-related topics, some interesting observations, links to interesting articles or books I’ve read, and tips to be a better person. If you’re interested in these things then subscribing will be simply wonderful :) PS: Subscribe and Get your Freebie below!