Systematic Investment Plan (SIP) is an investment plan (methodology) offered by Mutual Funds wherein one could invest a fixed amount in a mutual fund scheme periodically, at fixed intervals – say once a month, Quarterly instead of making a lump-sum investment.
The SIP instalment amount could be as little as ₹500 per month or ₹1500 per Quarter. SIP is similar to a recurring deposit where you deposit a small /fixed amount every month or every Quarter.
SIP is a very convenient method of investing in mutual funds through standing instructions or one time mandate to debit your bank account every month, without the hassle of having to write out a cheque each time.
SIP has been gaining popularity among Indian MF investors, as it helps in Rupee Cost Averaging and also in investing in a disciplined manner without fear about market volatility and timing the market. Systematic Investment Plans offered by mutual funds are easily the best way to enter the world of investments over the long term.
Common sense suggests that “Buying low and selling high” is perhaps the best way to get good returns on your investments. But this is easier said than done, even for the most experienced investors. There are many factors at play when it comes to any market - debt or equity, and all of them are inextricably linked.
SIP is a simpler approach to long term investing is disciplining and committing to a fixed sum for a fixed period and sticking to this schedule regardless of the conditions of the market.
Rupee cost averaging, as this practice is called, in a way ensures that you automatically buy more units when the NAV is low and fewer when the NAV is high…e.g., an SIP of ₹1000 gets you 50 units when the NAV is Rs. 20, but gets you 100 units when the NAV is Rs.10. The average cost for buying those 150 units would be Rs. 2000/150 units i.e. ₹ 13.33.
However, please remember that the Rupee cost averaging does not assure profit, nor does it protect one against investment losses in declining markets. It merely ensures disciplined & regular investment in stock markets, which helps overcome the natural impulse to stop investing in a falling or a depressed market or investing a lot, when markets are buoyant and euphoric.
There is a great advantage with long-term investments, namely, compounding which is considered one of the greatest mathematical discovery.
To put it in simple words, compounding is when the interest (or income) you earn is reinvested in the original corpus and accumulated corpus continues to earn (& grow). Every time this happens, your investment keeps growing, paving the way for a systematic accumulation of money, multiplying over time.
To illustrate, a small amount of ₹1000 invested every month at an interest rate of 8% for 25 years would give you ₹ 9.57 Lakh! That means your investment of just ₹ 3 Lakh would have grown three times over!
Here is a graph that represents the same for a time period of 15 years.
To get the best out of your investments, it is very important to invest for the long-term, which means that you should start investing early, in order to maximize the end returns.
Let’s understand this better through an illustration –
Let's assume that two friends, both aged 25, decide to invest ₹ 2000 every month for a period of 5 years and earn 8% p.a. on a monthly compounding basis. The only difference is that while one starts investing promptly at the age of 25 itself, the other starts investing 10 years later at the age of 35 years. Both decide to hold on to their investments till they turn 60. So while both of them would accumulate principal investment of ₹1.2 Lakh over a period of 5 years, the investment of the person who started early at the age of 25 appreciates to over ₹ 14 Lakh, the investment of the second person who started later grows to only about ₹ 6 Lakh.
Thus, you can clearly see the difference between the two and the clear advantage of investing early. So go ahead. Start investing through SIP today itself.
SIP start With Goal base like child future, wealth creation, Retirement Planning, Daughter’s Marriage.
Availing of free of cost insurance by starting SIP in equity funds is a good idea. It will provide you with a group term insurance cover of 10 times the monthly SIP Instalment during the first year. The cover will increase to 50 times for second year and to 100 times from the third year onwards subject to maximum cover of Rs.20 lakhto Rs.25 lakh per investor across all folios and schemes. Performance of the fund is in no way influenced by this add-on.
This SIP will cease either when the tenure ends or upon redemption/switch out (fully/ partially) before the end of the term. Before adding such a feature to your SIP it would be good to consider the following points:
• If you discontinue your SIP within three years, you will lose your insurance coverage.
• It will cover only the first unitholder. The second and third unitholders will not get any insurance cover.
• Incase your SIP stop after 36 month regular instalment your Insurance cover continue till the term or you can withdraw /switch out whichever is earlier.
• Instalment can bounce or returns 3 instalment, you will lose your insurance coverage.
If you are planning purchase or construct a new home on home loan, you can take a long period a loan and start SIP with home loan EMI.
SWP refers to Systematic Withdrawal Plan which allows an investor to withdraw a fixed or variable amount from his mutual fund scheme on a pre-set date of every month, quarterly, semi-annually or annually as per your need.
You can customize the cash flows as desired; you can either withdraw a fixed amount or just the capital gains on his investments. SWP provides the investor with a regular income and returns on the money that is still invested in the scheme.
STP refers to the Systematic Transfer Plan whereby an investor is able to invest lump sum amount in a scheme and regularly transfer a fixed or variable amount into another scheme.
In case of a volatile market, STP helps the investors to periodically transfer funds from one scheme (source scheme) to another (target scheme) and help them save the effort and time by compressing multiple instructions required for redemption from one scheme to invest in the other into a single instruction.
Transfers are usually made from debt funds to equity funds or equity to debt funds,if the market is doing well and vice versa if the market is not performing well. The STP can be classified based on the amount transferred from the source scheme to the target scheme. If a fixed sum is transferred from the source to the target scheme, then it's called Fixed STP, and if the sum transferred is the profit part of the investment of source scheme, then it’s called Capital Appreciation STP.
Volatile Market, Target Scheme, Source Scheme, Fixed STP, Flexi STP, Capital Appreciation STP.
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