Systematic Investment Plan

Systematic Investment Plan

Systematic Investment Plan (SIP) is the style of investment in which the investor is supposed to select a specific mutual fund as per his/her preference and invest the uniform amount of capital in that mutual fund on the periodic basis. Systematic Investment Plan involves the concept of bit-wise investment spanning over a long duration instead of directly investing a lump sum amount of capital in one go. An investor through Systematic Investment Plan invests small amounts of capital either on monthly basis or quarterly basis or half-yearly basis for a long duration of time leading to generate higher returns in the long run. The Systematic Investment Plan is a smart way of investing that enables an investor to invest from small amount of money to considerable amount of capital as per the choice, requirement and financial goals of the investor. Although the systematic investment plan is also surrounded by the market and event driven short term risks, yet the selection of the appropriate mutual fund in terms of experience of fund manager, safety of capital and returns of the fund reward the investors’ patience and perseverance in the long run.

After having applied for single or multiple Systematic Investment Plans, the equivalent amount of investment is automatically transferred from investors’ bank account and get invested in the mutual funds that investor have bought at the fixed time duration. By the end of the day, the investor gets the units of mutual funds assigned relying on the Net Asset Value of a mutual fund. Along with every investment in a Systematic Investment Plan in the country, extra units are infused into investors’ account based on the market value. With each investment, the capital reinvested is enormous and thus is the return on investments. This is at the disposition of the investor to obtain the returns at the end of the Systematic Investment Plan’s term or at regular intervals.

Although there are a variety of Systematic Investment Plans are available across the market but some of the popular types of Systematic Investment Plans are mostly preferred by the investors. Some of those popular types of Systematic Investment Plans are discussed here:

  • Flexible Systematic Investment Plans: Alternatively known as Flexi SIP, it lets the investors to modify the investment amount as per the individual’s financial conditions and the market circumstances. In case of personal financial crunch or adverse market scenario, one can reduce the amount of investment in SIP whereas in the scenario of personal wealth addition or bright market conditions, one can enhance their amount of investment in SIP using this type of Systematic Investment Plan.
  • Step up Systematic Investment Plans: Alternatively known as Top up SIP, it permits the investors to upgrade the amount of investment in SIP at fixed intervals of time. This kind of Systematic Investment Plan works well for the regular income working class who expect a raise on yearly basis.
  • The Systematic Withdrawal Plan supports an investor by getting a fixed regular amount which can help him or her in managing his or her children’s educational expenses or in getting a proper income in his or her retirement years.
  • Perpetual Systematic Investment Plans: This kind of investment applies to all range of investors. While getting started with the Systematic Investment Plan, the SIP requires the investor to enter the start and the end date of the SIP. In a few cases, investors set the ending date making SIP a definite time SIP. However, in most of the cases, investors do not mention the ending date which implies the SIP has now turned into a Perpetual Systematic Investment Plan. With no ending date of SIP, the Perpetual SIP automatically sets the ending date as 2099.
  • Trigger Systematic Investment Plans: Trigger Systematic Investment Plan implies a trigger option is available with the investor for their SIP investment. For example, a trigger could be set like the investment shall be withdrawn from the bank account and used for buying the units of the selected Mutual Fund scheme only if the Net Asset Value of the scheme declines below a trigger level set by the investor. Other trigger options such as specific dates or price levels of indices are also used by the investors as triggers. This type of Systematic Investment Plan is generally recommended to those experienced investors who possess the expertise and experience to implement these triggers efficiently.

Systematic Investment Plan has multiple benefits which are listed below:

  • Ease of Investment is the best advantage of the Systematic Investment Plan. One can choose to start investment in a decisive, convenient, disciplined and a phase wise manner. The convenience in initiating investment can be as low as Rs. 100 on monthly basis and can be as high as per the wish of the investor.
  • Systematic Investment Plan provides the investor an opportunity to participate in the capital markets without actively timing the market. The benefits of the SIP could be availed by enabling investor to purchase more units when the price declines and less units when price shoots up. This style assist investors to reduce their average cost per unit of investment through the procedure known as Rupee Cost Averaging.
  • The Miracle of Power of Compounding is witnessed in the Systematic Investment Plan over a long term. When the capital is invested consistently in a disciplined fashion over a long period of time. The wealth multiplies itself and the compounding factor of returns set in. Accompanied with Rupee Cost Averaging, the Compounding ensures attractive returns in comparison to the one-time lump sum investment.
  • Systematic Investment Plan acts as the modern and a lucrative alternative to conventional style of investments such as Fixed Deposits, Public Provident Funds and other financial instruments. The mutual funds that function under Systematic Investment Plans have the massive potential to help grow investors’ wealth in a consistent and a low-risk manner. Systematic Investment Plan also gives higher returns as compared to its traditional counterparts.
  • As compared to one-time lump sum investments which lead to huge losses during market downfall, Systematic Investment Plans have the potential to protect capital from drastic market crash as it follows Rupee Cost Averaging technique.
  • Though the financial discipline is a very essential aspect of every person’s life and yet on many occasions people fail to display this aspect while investing or planning their finances. Systematic Investment Plan acts as an enabler of the financial discipline and instils this attitude in the individual right since the inception of the investment. With the choice of the automated payments available, investors now even need not to undergo the pain of physically operating their investment every time.
  • Systematic Investment Plan falls in line with the financial goals of the individuals. One can choose to invest in any mutual fund and can also decide the tenure as per one’s financial needs and objectives.
  • Systematic Investment Plan comes as a savior in times of any financial crisis related to investor. Investor can decide to halt the Systematic Investment Plan at any time. Further the investment can also be redeemed at any time provided that there is no lock-in period in the plan.

While selecting the mutual funds for Systematic Investment Plans, investors should set some selection criteria which facilitates the selection of Best Mutual Fund. First of all, the Size of the Asset under Management matters the most. Generally, the asset size of Rs. 500-600 crore is assumed to be the benchmark size for picking the mutual fund. Though the lower assets size mutual funds can also be opted for investment but that comes with the additional and unforeseen quality risks which investor is willing to take. Second factor is the life of the Systematic Investment Plan. If the tenure of the Systematic Investment Plan is long, it is treated as the ideal investment. If the capital stays invested as long as possible, it grows over the period of time and the power of compounding effect multiplies the capital to result into a significant sum at the end of the tenure of the investment. Thus it is recommended to invest the capital on periodic basis even if that is a little amount. And also to stay at least invested for long time in case investing on periodic basis does not work out. Third factor is the reputation of the fund manager. The name of the fund manager is extremely crucial while deciding on the mutual funds as their quality and ability to handle such large funds could be assessed based on their reputation in the market. The fund manager can be an individual or an institution. Their experience to tackle the uncertainties, identifying the appropriate investment opportunities, managing hefty investment funds and maneuver through volatility of the market plays as a determining role in picking the right mutual fund. Forth factor is the self-evaluation of the risk tolerance, financial objectives and requirements. Based on which the selection of the Mutual Funds depends. As one can go for those mutual funds where risk levels and financial objectives match with investors’ risk-return profile. Fifth and final factor is analyzing the fund quantitatively which is by examining various aspects of the mutual funds such as previous years’ performances, expense ratio, financial ratios, exit load and lock in period.

Systematic Investment Plan can be initiated anytimemaking sure risk is low with the appropriate scheme plan for the investor mapped to investor’s risk-return profile. It is very crucial for the investor to select the scheme which achieves his long-term goals and meets his financial objectives effectively. Thus, there is no single time duration within which an investor is supposed to start the systematic investment plan. The sooner, the better.

  • What is an SIP?
  • A Systematic Withdrawal Plan enables an investor to withdraw their investments from mutual funds scheme in a systematic and a phase wise manner. This withdrawal could be done on monthly, quarterly, semi-annually or annually basis.

  • How does the Systematic Withdrawal Plan function?
  • Systematic Investment Plan (SIP) is the style of investment in which the investor is supposed to select a specific mutual fund as per his/her preference and invest the uniform amount of capital in that mutual fund on the periodic basis.

  • How does the SIP function?
  • After having applied for single or multiple Systematic Investment Plans, the equivalent amount of investment is automatically transferred from investors’ bank account and get invested in the mutual funds that investor have bought at the fixed time duration. By the end of the day, the investor gets the units of mutual funds assigned relying on the Net Asset Value of a mutual fund. Along with every investment in a Systematic Investment Plan in the country, extra units are infused into investors’ account based on the market value. With each investment, the capital reinvested is enormous and thus is the return on investments.

  • What are the types of SIP?
  • Though there are a variety of Systematic Investment Plans available across the market but some of the popular types of Systematic Investment Plans are:
    1) Flexible Systematic Investment Plans
    2) Step Up Systematic Investment Plans
    3) Perpetual Systematic Investment Plans
    4) Trigger Systematic Investment Plans

  • What are the benefits of the SIP?
  • SIP has multiple benefits such as Ease of investment, Rupee Cost Averaging, Power of Compounding, Profitable Alternative, Capital Protection, Financial Discipline and Financial Goals.

  • What is Power of Compounding?
  • When the capital is invested consistently in a disciplined fashion over a long period of time. The wealth multiplies itself and the compounding factor of returns set in leading to higher returns.

  • What are the factors that affect the selection of best mutual funds for SIPs?
  • The following factors affect the selection of best mutual funds for SIPs:
    1) The Size of the Asset under Management
    2) The life of the Systematic Investment Plan
    3) Reputation of the Fund Manager
    4) Self-evaluation of the risk tolerance, financial objectives and requirements
    5) Analysis of various factors such as previous years’ performances, expense ratio, financial ratios, exit load and lock in period.

  • What is the right time for Systematic Investment Plan?
  • There is no single time duration within which an investor is supposed to start the systematic investment plan. The sooner, the better.