Full-Form of SIP (Systematic Investment Plan)
Full form of SIP, i.e. systematic investment plan, is one of the investment methods in which an investor can put a constant amount in the several mutual fund schemes available in the market, periodicity being monthly or quarterly and at the same time, enjoying the dual benefits of high returns of the stock market and full safety of debt market.
- The volatility of the stock marketStock MarketStock Market works on the basic principle of matching supply and demand through an auction process where investors are willing to pay a certain amount for an asset, and they are willing to sell off something they have at a specific price. and the investment timing has given rise to the systematic investment plan. It is one of the most popular ways of investing in the stock market, without worrying about the company’s fundamentals as the professionals are managing the same.
- It works on the basic principle of consistency of investments. Like a recurring deposit of banks, a fixed amount, as decided by an investor, gets deducted from his bank account at selected intervals.
How does it Work?
- When an investor pays the amount to the Mutual FundMutual FundA mutual fund is an investment fund that investors professionally manage by pooling money from multiple investors to initiate investment in securities individually held to provide greater diversification, long term gains and lower level of risks., the fund allocates the units (like shares in the company) to the payer, at a price, which is known as Net Asset ValueNet Asset ValueNet Asset Value is calculated by subtracting the total value of the entity's liabilities from the total value of its assets and dividing the result by the total number of outstanding shares. or NAV. NAV depends on the market sentiments, and the investor gets more units if the NAV is low and gets a smaller number of units when the market is rising.
- This increase and decrease of NAV result in averaging of the investments, which helps the investor to get good long term returns as compared to risky short-term gains. This concept in the mutual fund industry is known as averaging the cost of investments or the power of averaging.
- As the fund gets accumulated and re-invested, the investor enjoys another benefit of SIP, which is known as the power of compoundingPower Of CompoundingCompounding is a method of investing in which the income generated by an investment is reinvested, and the new principal amount is increased by the amount of income reinvested. Depending on the time period of deposit, interest is added to the principal amount..
How to Invest in SIP?
Investing in mutual funds is not a very cumbersome process. It is advisable to start it as soon as possible to reap the benefits of compounding and good returns.
Steps to Commence a Systematic Investment Plan
Why Invest in a Systematic Investment Plan?
#1 – Reap the Benefits of Diversification
It is the basic principle of investing in the stock markets – Don’t keep your apples in one basket. Mutual funds work on the same principle. Unlike stock markets where a large number of funds get blocked in one company shares, here, the systematic investment plan amount is invested into several companies, resulting in better returns to the subscriber.
#2 – Money in the Professional Hands
Unlike the stock market, wherein an investor should be aware of the fundamentals of the company in which he is investing, here, the fund is being managed by professionals who carry tons of experiences in the industry. So, what you need is the amount; the rest would be taken care of by them.
#3 – Systematic investment plan is Low as Filling One Time Fuel in Your Vehicle
You don’t need huge chunks of money. You require only financial discipline. The systematic investment plan amount starts from a very nominal amountNominal AmountNominal Accounts are the general ledger accounts which are closed by the end of an accounting period. Their balance at the end of period comes to zero so they don't appear in the balance sheet. and gets deducted from your bank account regularly. You don’t need to make a separate budget for investing in mutual funds.
When to Invest in Systematic Investment Plan?
There is no thumb rule which defines the best time to invest in mutual fundsMutual FundsA mutual fund is an investment fund that investors professionally manage by pooling money from multiple investors to initiate investment in securities individually held to provide greater diversification, long term gains and lower level of risks.. The earlier, the better. All are being encouraged to invest in mutual funds, including college-going students. As per the past trend and experiences, one should invest in mutual funds, when
- NAV is low as this would result in gaining a large number of units at a lower cost
- The stock market is trading at the bottom.
- Interest rates on debt instrumentsDebt InstrumentsDebt instruments provide finance for the company's growth, investments, and future planning and agree to repay the same within the stipulated time. Long-term instruments include debentures, bonds, GDRs from foreign investors. Short-term instruments include working capital loans, short-term loans. are the highest.
Interesting Facts about SIP
#1 – Start Small and Earn Big
Mutual funds encash the power of compounding. They take small amounts in the form of SIPs from several investors and keep investing the income earned from these investments (when the Mutual fund typeMutual Fund TypeBalanced funds, Equity Funds, Fixed-income Funds, Index funds, Money Market Funds, Funds of Funds, Global Funds, and Specialty Funds are some of the different types of mutual funds available in the market. is growth), which results in a multiplier effect, getting good returns at the time of maturity.
#2 – Averaging Principle
When the stock market is bullish, it results in high NAV, resulting in lesser units. As opposed to this, when the stock market is bearishBearishBearish market refers to an opinion where the stock market is likely to go down or correct shortly. It is predicted in consideration of events that are happening or are bound to happen which would drag down the prices of the stocks in the market., it results in low NAV, resulting in more units in the hands of an investor. This high and low NAV neutralizes the adverse effects of the market, creating a beneficiary position for the investor as a whole.
#3 – Going International
Because of globalization, now mutual funds are going global, thereby your systematic investment plan amount is pouring into international markets also, helping you to reap the benefits arising due to international changes.
#1 – Tax Benefit
The government encourages its citizens to have a systematic investment plan by giving incentives in the form of deductions in the tax return.
#2 – Convenience
As food ordering has become online and convenient, the same is the case with SIPs. If you want to enroll for a systematic investment plan, you can start it from any part of the world. If you wish to discontinue, then no worries. No need to wait for long processes of approval. Submit an online request, and it’s being done.
#3 – No Lock-in Period
Except for tax funds on which deduction is available in the income tax returns, all funds allow withdrawal of funds at per the requirement of the investors, resulting in the availability of funds as and when required.
#1 – Pre-Determined Interval
In this, you need to specify the date on which the amount would be deducted. The markets won’t move according to your investment dates. So, at the pre-decided date, what if the market is bullish, then we can’t exercise our choice, resulting in loss to us in terms of lesser units.
#2 – Entry and Exit Charges
Though mutual fund offers your convenience, this comes at a cost in the form of investment advisory fees, marketing fees, etc. Professionals earn a good amount of salary, and their commission is also sliced out from the investments made by the investor. Mutual funds need to incur heavily in marketing costs, resulting in a reduction of lower investment returns.
#3 – Diversification has its Cons
With diversification, you are safeguarded from incurring major losses; then, you are also devoid of making any major gains from the portfolio.
Mr. Rob and Mr. Charlie both start their investment at the same time, but Rob invests in mutual funds through a systematic investment plan, and Charlie invests in Recurring deposit of bank.
- Initial Fund Amount – $1000
- Tenure – 3 years
- Interest Rate Type – Recurring Deposit follows Simple InterestSimple InterestSimple interest is interest determined on a person's principal amount borrowed. It is determined by multiplying the principal amount borrowed by the interest rate and the time period for which interest is charged. and Mutual Fund, Compounding
- Rate of Return – 10%
- After 3 years, at maturity, the investment would turn out to be like this
See the maturity amount difference, $31. Here simpler and smaller figures have been taken for understanding purposes. Imagine the scenario when you are investing a big amount every month and measure your maturity with the simpler interest investment amount. This is known as the power of the compounding of a systematic investment plan.
- It is the thumb rule in a systematic investment plan that the early you start, the better it would be. The longer you stay, the more you are going to reap the fruits of compounding. The consistency would pay you in the form of a mammoth amount.
- Keeping all things apart, investment in SIPs is considered as one of the best and safest ways to increase the wealth of the person in today’s turbulent scenario. Cost averaging and compounding would accompany you in the long run.
This has been a guide to the Full Form of SIP, i.e. (Systematic Investment Plan) and its definition. Here we discuss how does it work, how to invest in SIP, why to invest in SIP, and interesting facts about SIP along with advantages and disadvantages. You may refer to the following articles to learn more about finance –