Full Form of SIP

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.

Explanation

Full-Form-of-SIP

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How does it Work?

How does SIP work

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

How to Invest in systematic investment plan

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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.read more 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.read more. 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

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.read more 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.read more, 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.

Advantages

#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.

Disadvantages

#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.

Example

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.

  1. Initial Fund Amount –  $1000
  2. Tenure – 3 years
  3. 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.read more and Mutual Fund, Compounding
  4. Rate of Return – 10%
  5. After 3 years, at maturity, the investment would turn out to be like this

Rob

YearAmount
11,100
21,210
31,331

Charlie

YearAmount
11,100
21,200
31,300

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.

Conclusion

  • 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.

Recommended Articles

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 –

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