Systematic investment plan is an investment scheme associated with mutual funds that has transformed the perception on investment from the outlay of lump sum amount, to periodic bit-wise investments. SIP’s are devised to enable investors to disperse equal amounts at regular intervals to a mutual fund scheme. To sum up SIP’S are investments made in installments at regular intervals to a mutual fund scheme.
Some of the Factors that make SIP’S popular among investors are
- The installment amount can be small as say Rs. 500 per month.
- A disciplined investment plan
- Neutralizes effect of market fluctuations to a great extend.
- Investments without a demat account
How does SIP work?
SIP operates on a manner similar to a recurring bank deposit
- On a standing instruction attached to your bank account the investment amount will be auto debited at stipulated intervals.
- Amount so debited will be used in acquiring mutual fund units.
- The acquisition of units depends on the Net Asset Value (NAV) of the fund
- When the market is down more units will be acquired and vice versa.
- This variation in NAV’s and units acquired leads to averaging of cost of purchase which is termed as Rupee cost averaging which neutralizes the effects of market fluctuations.
Benefits of SIP’s
- Disciplined Investment scheme: as investment are made at regular intervals
- Benefits of Rupee Cost averaging: neutralizes the risk associated with market fluctuation
- Power of compounding: investment in SIP’S for a fairly long period of time help’s an investor to enjoy the benefit of power of compounding which is earning profit by investing profit.