Full Form Of SIP

Updated on April 17, 2024
Article byWallstreetmojo Team
Edited byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Is The Full-Form Of SIP (Systematic Investment Plan)

The full form of SIP, 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.

Full-Form-of-SIP

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At the same time, enjoying the dual benefits of high stock market returns and full safety of the debt market. 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.

Full-Form Of SIP Explained

The full form of SIP is systematic investment plan which is a very disciplined manner of making investments into the financial market through mutual funds. The money gets invested in a variety of financial instruments, provide diversification of portfolio.  The investor need not worry about tracking the market everyday. As the full form of SIP investment explains, since a small amount of fund in invested on a regular basis, it is easy to manage, providing a methodical investment opportunity.

The volatility of the stock market and the investment timing have 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 manage the same.

How does SIP work
  • When an investor pays the amount to the Mutual Fund, the fund allocates the units (like shares in the company) to the payer at a price known as Net Asset Value 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 the investments, which helps the investor get good long-term returns 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 per the full form of SIP investment the fund gets accumulated and re-invested, the investor enjoys another benefit of SIP, known as the power of compounding.

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How To Invest?

Investing in mutual funds is not a very cumbersome process. However, starting it as soon as possible is advisable 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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Thus, as per the above steps, the investor first has to go to the mutual fund office or the bank or any other financial institution that will help them with the process. Next will be the verification of documents, where the required forms will be filled, along with the various proofs related to identity and address will be verified.

After that the investor has to select the type of fund they want to invest in. In this process, the financial advisors are the best people to help because they are professional having experience in not only managing portfolios but also analysing the creditworthiness and taking ability of the investor and then deciding upon the type of fund. In this process, the investment objective and time horizon should also be considered.

Thus, once the application procedure is complete and according to the full form of SIP in bank, small amount of money is invested, the SIP starts, where the investor can either put the fund on the regular basis by themselves or give a standing instruction to the bank to debit their account for this purpose.

Why Invest In It?

There are many reasons why people can go for this type of investment. The reasons are highlighted below.

#1 – Reap the Benefits of Diversification

The basic principle of investing in the stock markets is: Don’t keep your apples in one basket. Mutual funds work on the same principle. However, unlike stock markets where many funds get blocked in one company’s shares, the systematic investment plan amount is invested in several companies, resulting in better returns to the subscriber.

#2 – Money in the Professional Hands

Unlike the stock market, an investor should be aware of the company’s fundamentals in which he is investing. Here, the full form of SIP in finance proves that professionals manage the fund with tons of industry experience. So, what you need is the amount; it will take care of the rest 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 amount and gets regularly deducted from your bank account. You don’t need to make a separate budget for investing in mutual funds.

When To Invest?

There is no thumb rule which defines the best time to invest in mutual funds. 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 instruments are the highest.

However, according to the full form of SIP in bank, since it is a systematic method of growing money where the funds are handled by experienced and skilled individuals who know the market well and put the client’s interest first in their profession, it is being accepted widely by people from different age groups, whoever want to multiply their assets without giving too much time in studying and analysing the market.

Example

Mr. Rob and Mr. Charlie both start their investment at the same time. But, Mr. Rob invests in mutual funds through a systematic investment plan, and Mr. Charlie invests in the bank’s recurring deposit.

  1. Initial Fund Amount –  $1000
  2. Tenure – 3 years
  3. Interest Rate Type – Recurring Deposit follows Simple Interest 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, we took simpler and smaller figures for understanding purposes. Imagine the scenario when you are investing a big amount every month and measuring your maturity with the simpler interest investment amount. It is known as the power of the compounding of a systematic investment plan.

Thus, from the above example it is clear that full form of SIP in finance proves that they are a better way to grow money comparatively faster and in a methodical way.

Interesting Facts About SIP

Let us learn some important and interesting facts abut the topic.

#1 – Start Small And Earn Big

Mutual funds encash the power of compounding. They take small amounts of SIPs from several investors and keep investing the income earned from these investments (when the Mutual fund type 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 a high NAV, resulting in lesser units. As opposed to this, when the stock market is bearish, 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. As a result, your systematic investment plan amount is pouring into international markets, helping you reap the benefits arising from global changes.

Advantages

Some advantages of the financial concept are as follows.

#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 in a systematic investment plan, you can start from around the world. If you wish to discontinue, then no worries. No need to wait for long processes of approval. Please 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 per the investors’ requirement, resulting in the availability of funds as and when required.

Disadvantages

Here are some disadvantages of the same.

#1 – Pre-Determined Interval

You need to specify the date on which it would deduct the amount. 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 our loss in terms of lesser units.

#2 – Entry And Exit Charges

Though mutual funds offer your convenience, this comes at a cost in the form of investment advisory fees, marketing fees, etc. Professionals earn a good salary, and their commission also slices out from the investments made by the investor. As a result, mutual funds need to incur heavily in marketing costs, reducing lower investment returns.

#3 – Diversification Has Its Cons

With diversification, it safeguards you from incurring major losses. You are also devoid of making any major gains from the portfolio.

It is clear from the above points that even though the method is gaining much importance in today’s financial market, it has its own benefits and limitations. It is always better to take the help of financial advisors or professionals who have the expertise to suggest what would be the best investment method as per the risk appetite and investment goal.

It is the thumb rule in a systematic investment plan that the earlier you start, the better it will be. The longer you stay, the more you will reap the fruits of compounding. The consistency would pay you in the form of a mammoth amount.

Investment in SIPs, keeping all things apart, is considered one of the best and safest ways to increase a person’s wealth in today’s turbulent scenario. Cost averaging and compounding would accompany you in the long run.

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This article guide to what is the Full Form Of SIP. We explain how to invest, why to invest & when to do so with examples, important facts & advantages. You may refer to the following articles to learn more about finance: –

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