What's SIP?

Simply put, a SIP refers to a Systematic Investment Plan that is a method of systematically and regularly investing in mutual funds. The investment method is similar to your investment in a recurring deposit (RD) with a bank where you deposit a fixed amount of money (in your recurring deposit account), but the only difference here is that your money is deployed in a mutual fund scheme (equity schemes and/or debt schemes) and not in a bank deposit, so your investment (in mutual funds) is subject to market risk.

A SIP enforces a disciplined investment approach and infuses regular savings habits that we all probably learned when we used to maintain a piggy bank during our childhood days. Yes, those good old days when our parents gave us some pocket money that we deposited in our piggy banks after spending and at the end of the particular tenure we saved every penny became a big amount.

SIPs also work on the simple principle of regular investment that allows you to build long-term wealth. In the case of SIPs, a fixed amount as you wish is debited from your bank account on a specified date that may be on a daily, monthly or quarterly basis (Either through an ECS mandate or through post-dated checks sent) and invested in the scheme as chosen by you for a given tenure (months, years).

Some Asset Management Companies (AMCs) / mutual fund houses / robo-advisory platforms today also provide online transaction ease and convenience. They have set up their own online transaction platforms where SIP investments can be made by following the procedure provided on the websites.

5 SIPs benefits: 

1. SIPs are light on the wallet SIPs allowing you to invest regularly (daily, monthly or quarterly) in smaller amounts. This in turn reduces the burden on your bank account to defray a lump-sum-at one go. If you can't invest Rs 5,000 in one shot, that's not a huge stumbling block, you can just take the SIP route and trigger mutual fund investment as low as Rs 500 a month.

2. SIPs can help you manage (even-out) market volatility well by making market timing irrelevant SIPs. Market timing can be detrimental to your wealth and health. Instead, focus on' time on the market' in the long-term (at least 5 years) effort to create wealth by selecting the best mutual fund scheme to invest. Studies have repeatedly highlighted equity's ability to outperform other asset classes (debt, gold, even real estate) and are effective in countering inflation.

Now one might ask: If equity is such a big thing, why do so many investors complain? Well, it's because they either have the wrong stock or the wrong mutual fund or the wrong timing. In our opinion, both of these problems can be solved by means of an SIP in a mutual fund with a steady track record, stay invested for the long term as the SIP route allows you to effectively balance the volatility of equity markets.

3. SIPs allow averaging rupee-cost Many times an SIP works better than one-time, lump-sum investment. This is due to the average rupee cost. Under rupee-cost average, when prices are low, you would typically buy more from a mutual fund unit, and similarly, when prices are high, buy less mutual units. This infuses good discipline as it forces you to commit cash at lows on the market when other investors around you are cautious and out of the market. It also allows you to lower your investment's average cost.

4. As SIPs subscribe to the habit of investing on a regular basis, it allows you to compound your invested money. So, say you're starting a Rs 1,000 SIP, following prudent investment system and processes in a mutual fund scheme, with a 20-year SIP tenure and expecting a modest 15 percent p.a. return, your money would grow to about Rs 15 lakh.

Thus, SIPs can better and more systematically compound wealth over the long term as opposed to investing a lump sum, especially when the wealth creation journey is volatile.

5. SIPs are an effective means of planning goals We all have financial goals–maybe buying a house, buying a dream car, providing children with good education, getting them (children) married well, retiring, etc. But with systematic financial planning, all this comes along. Very often many invest in equity markets, with a motive to make short-term gains, and often ignore the use of equity markets as a window for creating long-term wealth to achieve one's financial goals. By registering for SIPs, you can effectively achieve your financial goals. The better it is the earlier you start.

Despite the advantages, many investors have misconceptions about SIPs due to incorrect information