Updated Feb 14, 2022

What is SIP?

What is SIP?

 

 

A systematic investment plan (SIP) is a strategy in which investors put money into a mutual fund, a trading account, or a retirement account like a 401(k) (k). SIPs allow investors to save more frequently with a lower amount of money while still reaping the benefits of dollar-cost averaging over time (DCA). An investor who uses a DCA approach buys an investment using periodic equal transfers of funds to progressively create wealth or a portfolio.

 

 

How SIPs Work

 

Investors have a variety of options for investing, including systematic investment programs, mutual funds, and other investment firms. Rather than making large lump sum contributions all at once, SIPs allow investors to invest little amounts of money over time. The bulk of SIPs requires that you pay into the programs on a weekly, monthly, or quarterly basis.

 

The concept of systematic investment is straightforward. It depends on the regular and periodic purchasing of shares or units of securities of a fund or other investment. Dollar-cost averaging entails purchasing the same fixed dollar amount of securities at each periodic interval, regardless of its price. As a consequence, shares are purchased at a variety of prices and in varying volumes, however, certain programs may allow you to purchase a specific number of shares. Because the amount invested is frequently fixed and unaffected by unit or share values, an investor buys fewer shares as prices climb and more shares as prices decline.

 

Because you keep investing in SIPs regardless of how well they do, they are termed passive investments. That's why keeping track of how much money you're putting into your SIP is so important. If you've attained a certain level of wealth or are approaching retirement, you may want to reconsider your financial goals. Changing to an actively managed strategy or investment could help you make even more money. However, speaking with a financial counselor or specialist to decide the best situation for you is always a smart idea.

 

 

Particular Points to Consider

 

Proponents of DCA claim that it reduces the average cost per share of the security over time. Of course, if you have a stock that rises in price slowly but steadily, the strategy can backfire. As a result, investing over time will cost you more than buying everything all at once. DCA reduces the cost of an investment in general. The risk of investing a large sum of money in security is also reduced.

 

Because most DCA approaches are set up on a regular purchasing schedule, systematic investment plans limit the potential of the investor making inaccurate decisions based on emotional reactions to market changes. Investors prefer to acquire more risky assets when stock prices rise and news outlets proclaim new market highs, for example.

 

When stock prices fall sharply for an extended period, on the other hand, many investors rush to sell their holdings. Buying high and selling low, especially for long-term investors, is in direct opposition to dollar-cost averaging and other smart investment techniques.

 

 

SIPs and DRIPs

 

Many investors use their earnings from their assets to acquire more of the same security through a dividend reinvestment plan, in addition to SIPs (DRIP). Dividend reinvestment allows stockholders to buy shares or fractions of shares in publicly traded companies they already own. Instead of delivering a quarterly dividend cheque to the investor, the company, transfer agent, or brokerage firm utilizes the funds to buy more stock in the investor's name. Dividend reinvestment plans are likewise automatic—when an investor opens an account or buys the stock, they specify how dividends should be handled—and they allow owners to invest variable amounts in a company over time.

 

DRIPs run by a company are commission-free. This is because a broker is not required to facilitate the transaction. Some DRIPs offer cash purchasing of additional shares directly from the corporation at a 1% to 10% discount with no fees. DRIPs allow investors to invest small or large amounts of money, depending on their financial conditions.

 

 

Advantages of SIP

 

SIPs offer several advantages to investors. The main and most obvious benefit is that there isn't much else to do once you've decided on the amount and frequency of your investments. Because many SIPs are automatically financed, you simply need to ensure that the funding account has adequate funds to match your contributions. It also allows you to withdraw a modest amount at a time, so you don't have to deal with the consequences of withdrawing a large quantity all at once.

 

There isn't much feeling involved because you're utilizing DCA. This reduces some of the risk and uncertainty associated with other assets such as equities and bonds. You're also incorporating some financial discipline into your life because it demands a set amount at regular periods.

 

 

Disadvantages of SIP

 

Formal systematic investment plans have several restrictions, although they might assist an investor in maintaining a consistent savings program. For example, they frequently need a long-term commitment. This could take anything from ten to twenty-five years. While investors are permitted to exit the plan before the expiration date, they may be subject to significant sales charges—up to 50% of the initial investment if done within the first year. Your plan will be canceled if you do not make a payment on time.

 

Establishing systematic investing planning might often be costly. A charge for creation and sales can be as much as half of the first year's investment. Investors should also be aware of mutual fund costs, as well as custodial and service fees if they apply.

 

 

Types of SIPs

 

Let's have a look at the four most common SIP facilities:

 

Top-Up SIP: 

You can use the top-up SIP capability to boost your SIP investments as your career progresses and you earn more. You can raise the quantity of your existing SIP regularly with top-up SIP (for example, you could increase your existing SIP of Rs.1, 000 per month by Rs. 500 after every 6 months; this means, after 6 months, your monthly SIP will become Rs.1, 500; after another 6 months, it will rise to Rs.2,000 and so on).

 

Perpetual SIP: 

When you start a permanent SIP, you don't know when your SIP will finish. Unless you give specific instructions to halt them, your periodic installments will continue to be invested.

 

Flexible SIP:

Flexible SIPs allow you to adjust the amount of money you invest regularly based on your cash flow. While you must specify a predetermined investment amount when initiating a flexible SIP, you can change it up to 7 days before the installment date. It's even simpler if you use SIP online.

 

Trigger SIP: 

SIP with Trigger is an option for experienced investors. If the market becomes turbulent, you can set a trigger to automatically redeem and/or switch from one scheme to another.

 

In the hands of investors, a SIP is a fantastic tool for accumulating wealth through monthly investments. Individuals who want to save before they spend and become disciplined investors might consider SIPs through mutual funds.

 

 

Conclusion

 

SIP is a technique of investing a set amount in a mutual fund scheme regularly. SIP allows you to buy units on a set date each month, allowing you to create a savings plan for yourself. The primary benefit of SIP is that it eliminates the need to time the market.