A Comprehensive Guide to SIP or Systematic Investment Plan

You often hear a lot about SIPs when you approach a financial advisor to manage your savings. It is one of the most commonly used methods to save money periodically. You should not neglect this instrument in the early stages of your career, as it can have a huge impact on your finances. Unlike traditional investment plans, SIPs inculcate a lot of financial discipline in an individual and you should carefully consider its advantages when looking at investment options. So, let us take some time out and discuss the various aspects of SIPs in detail.

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SIP Benefits
Start SIP with as low as ₹1000
Start SIP with as low as ₹1000
No hidden charges
No hidden charges
Save upto ₹46,800 in Tax
Save upto ₹46,800 in Taxunder section 80 C
Zero LTCG Tax
Zero LTCG Tax^ (Unlike 10% in Mutual Funds)
Disciplined & worry-free investing
Disciplined & worry-free investing

What exactly is SIP?

Systematic Investment Plan, as it is referred to in financial terms, allows an investor to regularly invest some amount of money in the financial market. With this plan, the investor has complete flexibility to choose an amount, according to his/her financial situation, and invest the money in the mutual fund^^ market.

There is no need to worry about the highs and lows of the financial market as the mutual funds are handled by experts, and investing every month gives you the advantage of rupee-cost averaging so you will not be stuck with highly priced instruments. It is also possible to withdraw the money at a later stage and this is the main advantage of choosing such plans.

Why should you save money regularly with SIPs?

You should always make it a point to save money for your future expenses. Remember that misfortune can come anytime and you need to be prepared to handle any situation efficiently. Without substantial savings, you will be left with no other option but to borrow money for your emergency financial needs. This can spiral into a huge burden as you will have to pay interest for the borrowed money. On the other hand, when you save regularly, it will accumulate into a lump sum amount in the future and you will be rewarded by way of interest and profits from the investment. For this reason, you should always save money regularly and develop financial discipline early in your life. Ideally, you should begin saving right from your first income. This will ensure that you always have enough savings to deal with emergency situations in the future.

Are SIPs suited for working professionals and businessmen?

Systematic Investment Plans are suitable for anyone who wants to save money on a regular basis. If you are a working professional, you will often notice that your expenditure keeps increasing along with your earnings, thereby not increasing your savings proportionately. By choosing SIPs, you will be motivated to save some money regularly and it will provide you with good returns in the future as well. In the same manner, even businessmen should also consider such plans as there is no guaranteed income allotted for them. It is possible to change the amount reserved for your SIP investment, according to your financial condition, and this flexibility is particularly useful for the self-employed.

Why SIPs are better than investing in individual stocks?

In normal circumstances, most people invest money in the stock market whenever they have some additional funds. However, the profit they make from the stock market depends upon the price of the stocks at the time of their entry. In the same way, they also need to exit the stocks at the right time when the price is high in the market. Very few people are lucky enough to enter all the stocks at low prices and sell them at high prices. Thus, there is no guarantee that people will earn money even by investing in stocks for a very long duration.

On the other hand, choosing SIP will ensure that you will be investing in similar financial instruments on a monthly basis. In this way, you will be buying financial instruments at different prices and you will not be stuck at a high price. This reduces the risk by a significant margin and you can easily get more returns from SIPs in the long run, when compared to the stock market.

Why should you avoid lump sum investment and choose SIPs?

Investing a lump sum in the financial market is like putting all your eggs in one basket. You should always avoid this and instead, invest your money in instalments. This reduces the risk and you will be able to purchase different instruments at different prices. If you continue this method for few years, your average price will usually be quite low and will fetch you good returns in the future.

If you are not able to enter the market when the price is low, you will be risking your investment in the financial market. Remember that many people get stuck after buying stocks and other instruments at very high prices and they have to wait for many years to see a similar price range for such entities. This is the biggest risk associated with investing a large sum of money at once.

SIPs are effective means to handle market volatility

Financial markets are well known for their volatility and it can get affected due to various global and local factors. In this situation, it is always a good idea to invest regularly in systematic investment plans as your average price will be able to factor the volatility in an effective way. You will also be able to take advantage of market fluctuations and capture different financial instrument at very low prices. In the same way, you need not worry if you are buying few units at very high prices as you will also be left with many units that are in the low price range and this will average out in the future.

What is Rupee Cost Averaging in SIP?

This is the biggest factor that differentiates SIP from other Investment plans in the market. In simple terms, this means that you will be investing a fixed amount of money to buy mutual fund units on regular intervals. If the price of a unit is high, you will get fewer number of units for that particular transaction. Similarly, when the units are trading at a lower value, you will get more number of units for that transaction. This does not put additional burden on your financial situation and you will have complete flexibility with regard to saving as much as you desire on a regular basis.

Benefits of choosing Systematic Investment Plans

  • You can invest small amounts of money by choosing this option.
  • The risk is diversified, to a large extent, in this plan.
  • It is possible to customize the plan according to your financial situation.
  • You can choose to increase or decrease the size of investment at a later stage, depending upon your current financial condition.
  • It gives better returns when compared to investing in individual stocks.
  • It will develop financial discipline in individuals and they will be left with significant savings to fulfill their future requirements.
  • You can even choose the plan on a monthly or bi-monthly basis, according to your convenience.
  • Some SIP schemes can also provide you with different tax benefits, under section 80C of the Income Tax Act.
  • There is no need to constantly research the future direction of the market when you choose to invest on a regular basis.
  • Temporary fluctuations in the market will not affect the investment in the long run.
  • This is the most effective way to average the cost of purchasing mutual fund units in the long run so you can get the best returns.
  • SIPs also provide compounded returns which can drastically increase your earnings in future.

How to invest in SIPs?

It is very easy how to invest your money in SIPs, all you need to do is to consult your investment advisor about a suitable plan. You can choose from the online trading accounts and handle all the transactions over the internet. It is also possible to approach your bank and enquire about different options available with them in this regard. You can even provide the authority to the financial service provider to withdraw certain amount of money from your bank account and this can be invested in the mutual funds. In this way, you will not have to manually process the transactions on a regular basis.

Investing need not be a difficult task and you can easily take the stress out of the entire concept by choosing the systematic investment plans. These are very effective and give excellent returns in the long run. It is also a good idea to invest in multiple plans so that the bad performance of one plan will not affect your overall savings and you will be able to get good returns.

How to Calculate using an online SIP calculator?

You can use an SIP calculator to know the expected returns from your monthly SIP investment and wealth gain. It gives you a rough estimation on the maturity amount for a monthly SIP without any manual calculation, as per the estimated rate of return.

+For Mutual Fund midcap category Returns https://www.morningstar.in/tools/mutual-fund-category-performance.aspx & for Insurance midcap fund category Returns- https://www.morningstar.in/tools/insurance-fund-category-performance.aspx
*Past 10 Year annualised returns as on 01-12-2023
*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
~Source - Google Review Rating available on:- http://bit.ly/3J20bXZ
^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

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