Tavagapedia

Systematic investment plan

Key Takeaways

  • A systematic investment plan or SIP is a way of investing in the market by choosing a specific sum of money to invest at regular intervals
  • Investors can change their SIP amounts by canceling the existing mandate and submitting the revised one.  

What is a SIP?

A systematic investment plan or SIP is a way of investing in the market by choosing a specific sum of money to invest at regular intervals. A SIP helps us be systematic in our investments. It keeps us from bothering with timing the market with lump sums. SIPs can be done in ETFs as well as MFs.

How does SIP work?

Mutual funds exchange-traded funds and other investment companies provide investors different investment options, including SIPs. A systematic investment plan offers investors the chance to make small investments over a longer time period instead of making a large lump sum investment all at once. Most systematic investment plans require consistent payments, which are usually weekly, monthly, or quarterly, into the plan. Systematic investment plan is based on periodic and regular purchases of units of securities of a fund, shares, or other investment. Investors can also change their SIP amounts by cancelling the existing mandate and submitting the revised one.  

When can I start a SIP?

In case of an open-ended mutual fund, an investor can start a systematic investment anytime he/she wants. There are some formalities that need to be done, such as filling and submitting the application for with SIP mandate to the point of acceptance. Banks usually take about 10 to 30 days for registering the SIP mandate and starting it.

Advantages of SIP

There are many benefits of a systematic investment plan. The first one being the investor does not need to take much trouble once he/she sets the amount and the frequency of investing. Many SIPs can also be funded automatically so the investor just has to make sure that there is ample amount of balance in the funding account. The advantages of a SIP investment can be summarised as:

· It lets the investor “Set and forget it.”

· It imposes discipline and limits emotional decisions

· It works well with small amounts

· It risks less capital

Disadvantages of SIP

Even though SIP can help in maintaining a steady savings plan, there are many stipulations with the systematic investment plan as well. The first one being the plan requires a long-term commitment which can be up to 25 years. Investors are allowed to leave the plan before the end date as well, but they can incur a heft sales charge. Other disadvantages of a SIP investment are mentioned below:

· It may carry a hefty sales charge

· It demands a long-term commitment

· It can have an early withdrawal penalty

· It can lead to missing out on bargains and buying opportunities

Example of SIP

Suppose you want to invest Rs 1,00,000 then you have two options in which you can make this investment.
You can either make a full-time payment of Rs 1,00,000 which is known as a lump-sum investment or you can choose to invest through SIP.
You can start SIP with as low as Rs 500 and this amount will get deducted from your account every month at a date fixed by you and this will continue till the period.