Want to bring discipline to your investing habits? Then Systematic Investment Plan is all you need.

All of us are victims of the Covid-19 Pandemic that made India incur many losses. As an investor, you also must have been worried and thought of stopping your Systematic Investment Plan at some time. But, experts advise against it. Want to know why?

Want to bring discipline to your investing habits? Then Systematic Investment Plan is all you need.

Are you someone new to the world of investing and want to strategically plan your investments and make your financial goals a reality? Then you are at the right place. You must be wondering why the term discipline has been used in the title? Let's find out in this article.

"An investor without investment objectives is like a traveler without a destination.”                                                                                                         ~Ralph Seger

SYSTEMATIC INVESTMENT PLAN

A Systematic Investment Plan, more popularly known as SIP, is a method of investing a fixed amount, either weekly, monthly, or quarterly in a mutual fund scheme. SIP allows you to invest small sums at regular intervals to buy mutual fund units on a date and frequency chosen by you. Systematic Investment Plans were introduced in India way back in 1993 by Franklin Templeton Mutual Fund.

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The fixed amount of money can be as low as Rs. 500. 

Now, let's try to understand the significance of the term discipline in the title. SIP makes one a disciplined investor as one invests in a time-bound manner without worrying about the market dynamics and can be benefitted in the long-term,  according to the changing rates of the units every week/month/quarter. Financial advisors ask not to withdraw from the market during crisis situations as SIP eliminates the need to look for peaks and downfalls in the market.

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Market dynamics are forces that will impact prices and the behaviors of producers and consumers, resulting from the fluctuation of supply and demand for a given product or service.

In simple words, if a person thinks of saving some money every month without considering any investment plan, then the possibility is that they might miss out on that month due to some reason. But with SIP, regularity can be maintained. It is designed to help investors save regularly and thus accumulate wealth in a disciplined manner over the long term.

"We don’t have to be smarter than the rest. We have to be more disciplined than the rest. "                                                                                                                 ~Warren Buffet

SIP returns benefit from rupee cost averaging. It helps you to keep your average cost of investment low. You end up buying more units for the same SIP amount when markets correct and less when markets rise.

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You may sometimes wish to invest a big sum, but you do not have the full amount at one go. A systematic investment plan (SIP) can come in handy here. A SIP works on the basis of periodic and consistent investments, quite like a recurring bank deposit.

Types of SIP

There are basically 3 types of SIPs one can choose from-

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Any date SIP allows you to select a scheme, its frequency, and the amount by mentioning the start and the end date. The Asset Management Company(AMC) will deduct the amount on the specific date and allot units to you and make this continue till the end date.
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Perpetual SIP is somewhat similar to Any date SIP, the only difference being that there is no end date.
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Top-up SIP allows you to increase the installment amount at certain intervals, say – annually, by a certain percentage(say 10%) in the chosen frequency. This facility helps you invest more and get benefitted in the long run.

Benefits of investing in a SIP

  • SIPs are light on the wallet as amounts are smaller and to be invested at regular intervals.

  • SIPs enable rupee-cost averaging. Under rupee-cost averaging, you would buy more of a mutual fund unit when prices are low, and similarly, buy fewer mutual units when prices are high.

  • SIPs benefit from the power of compounding. Power of compounding refers to the process by which the money you save, earns interest. Then you earn interest on the money you originally saved, plus on the interest, you've accumulated.

This graph shows the fluctuations in SIP prices from January 2019 till January 2022 and how good the returns were for an investor who was consistent in investing throughout both the waves of the Covid-19 pandemic

“Far more money has been lost by investors trying to anticipate corrections than lost in the corrections themselves.”
~Peter Lynch

How to start your SIP journey?

Systematic Investment Plan(SIP) is easy once you know how much to invest and how often. To invest, there are two ways – either you take the help of a mutual fund distributor or do it yourself online. In order to open SIP online, KYC is a mandatory requirement.  Here is a step by step guide to starting your SIP journey-

  1. You have to be KYC compliant to start your SIP journey. For which your address proof, and documents like PAN Card will be needed.
  2. The next step is to choose a mutual fund scheme.
  3. In order to make the first SIP installment, you must choose a date, the amount, and the mode of payment (Net Banking or NEFT/ RTGS payment).
  4. The final step after submission of details online to the AMC(Asset Management Company) is receiving an acknowledgment through email and SMS.
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Some leading AMCs in India are HDFC Mutual Fund, Kotak Mahindra Mutual Fund, Aditya Birla Sun Life Mutual Fund.
Source: Bankbazaar.com

It can be said that SIP helps one in bringing discipline to your investment habits by making you invest regularly in small amounts. This will be convenient even for small investors to make their money grow exponentially. Pausing SIPs will be an imprudent thing to do when markets are volatile as Rupee-cost averaging would be defied and compounding will be hindered.


FAQs

1. What is better, lump sum or SIP?

A systematic Investment Plan (SIP) is the most convenient way of investing in mutual funds. By opting to invest via a SIP, you eliminate the need to have a lump sum to get started with your mutual fund investment. Through a SIP, you can invest a small sum on a regular basis into the mutual fund scheme of your choice.

2. What happens if we miss one SIP installment?

While mutual fund companies don't penalize for non-payment of a few SIP installments, your SIP will automatically be cancelled if you fail to make the payments for three consecutive months.


3. Is SIP better than FD?

You will accumulate a large amount of money in a certain time period. Making an investment in mutual funds through a SIP will offer you good returns also.


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