Benefits of Systematic Investment Plan (SIP)
Once you decide to keep aside a portion of your earnings for a prosperous future of your loved ones and yourself, nothing can be better than starting a Systematic Investment Plan popularly referred to as SIP.
SIP is an investment tool that helps you to save regularly in small portions. It can be identified as a recurring deposit in a post office or a bank that demands you to save a small portion of your earning on monthly basis with a slight difference. The difference is that the amount of your saving would be invested in a mutual fund.
Mutual fund can be explained as a pool of fund that comprises of many investors who put in small deposits of their earnings which are in turn invested in securities like bonds, stocks etc. It is managed by professionals who aim at churning capital gains and incomes for the investors.
Thus, SIP helps you in saving regularly and provides you with long term capital gains. You are not required to shell out a lump sum amount from your pocket thus aiding in proper management of your priorities instead of making a hole in your pocket.
You can invest in SIP on monthly or quarterly basis and the minimum amount for most of the mutual fund schemes is Rs 1000. However, the tenure may vary from scheme to scheme. SIPs enable you to build your own portfolio as you are free to choose your funds and invest in small portions thus diversifying your risk.
In order to maximize your returns, it is always advisable to stay invested for a longer duration. You can start an SIP by giving post dated cheques to the mutual fund or you may take advantage of the Electronic Clearance System (ECS) in which the amount would be automatically debited from your account on a specific date.
Benefits of Systematic Investment Plan (SIP)
- Discipline and Regular Investments – SIPs help you in saving small amount from your earnings regularly thus bringing a discipline in your saving regime. It helps you being focused about the portion of investment on monthly or quarterly basis and also helps to increase your wealth in long term.
- Rupee Cost Averaging – This is an important benefit of investing in SIP as it saves you from getting hit by the market fluctuations. The cost averages out over a period of time as you are able to purchase more units when the Net Asset Value (NAV) drops and you buy fewer units when the NAV rises.
For example – You invest Rs 5000 every month in a fund whose NAV is Rs 20. For first month the NAV was Rs 20 thus 250 units get credited to your account. However, if in next month the NAV falls to Rs 10 then 500 units get credited to your account. Similarly if the NAV rises to Rs 40 then only 125 units get credited to your account. This results in averaging out the cost over a period of time.
- Compounded Benefits – This states that if you begin with SIP early in life it gives you the power of compounding. Compounding of funds may lead to a massive difference in your savings over a long period of time.
- Easy to Operate and Maintain – SIPs prove to be quite hassle free as they come with easy payment options. You may either give post dated cheques for your fund or may give standing instructions to your bank to debit your account for a particular SIP amount on a particular date.
- Other Benefits –
- If you opt for saving through SIPs then there are numbers of mutual funds available that will not charge an entry load from you. You can also be exempted from paying the exit load if you do not sell your units within a year.
- SIP is an investment that can be made by people of all ages. The duration, fund options and amount may vary from one age group to the other but investors of all age groups can enter and gain from SIPs
- SIPs provide you with liquidity i.e you can have access to all or part of your invested funds as and when required. This means that there is no lock-in period i.e no minimum specified period for which you compulsorily have to keep your money invested.
- It provides an opportunity to those who cannot invest a large volume of money in one go. It helps you to invest small amount and provides substantial gains.
- First In First Out (FIFO) works for SIPs that is Capital gains are taxed on FIFO basis wherever applicable.
- There is a bouquet of options available in SIPs and you can choose any one from Balanced Fund, Growth Funds, Equity Diversified Funds, Tax Saving Funds, Index Funds etc as per your requirement and convenience.
- If you invest in SIP in Equity Taxing Saving Mutual Fund (ELSS) you will be able to get tax benefit under Section 80C for a maximum investment of Rs 1 Lac.
It is always advisable to enter the SIP funds only if you plan not to touch your money for a minimum period of 3-5 years. SIPs provide you with better returns only in long term.
Many investors opt out of their funds if they see a fall in the market conditions which is not a wise decision at all. Market conditions fluctuate and when you invest through SIPs you tend to get the feel of the lows and highs of the market. If you stay invested for longer duration, you yield better returns as you sail through all the phases of the market be it bull or bear.
When is a good time to start a SIP – Systematic Investment Plan as stated earlier helps you to save small amount on regular basis be it monthly or quarterly. So any time is a good time to start a SIP as market conditions are volatile. Thus entering in a SIP helps you to go through the lows and highs of the market as you keep investing on monthly or quarterly basis. You sail through all the phases of the market and Rupee Cost Averaging saves you from getting hit by market fluctuations. The key is to stay invested for a minimum span of 3-5 years in order to get good returns.
Limitations of SIP – Though investing in SIP is a popular and advisable option but it suffers form few disadvantages which are as follows:
- It has been viewed by financial experts that SIP delivers better returns in when opted to play in equity market as compared to debt funds.
- As SIP is an option available in mutual fund you cannot completely ignore the risk related to a mutual fund plan. If invested for short term period it may not be able to deliver the assumed returns. The returns do depend on the type of fund invested in, the scheme’s performance and also on the skills of the fund manager to an extent.
- If the market remains consistently on a rise then the returns on SIP will be low and thus lump sum investments when the markets are undervalued are also advisable occasionally.
- For few investors the date options on which the monthly investment gets accrued may be termed as a limitation. As the date options which are mainly 1st, 5th, 10th, 15th, 20th and 25th in a month you end up investing in multiple funds on same dates which may hinder your flow of cash for your regular expenses.
- In the event of some emergency expense in a particular month it becomes difficult to immediately stop an SIP as you need to give a two week notice in order to stop your SIP. The only option available in this case is to cancel the SIP but this too may prove cumbersome if you have multiple SIPs.
- The Turn Around Time (TAT) that Mutual fund houses take in starting a SIP is a month and two weeks if you wish to stop a SIP which may seem to be a long span in the fast paced world.
- Those of you who have unpredictable cash flows, SIP may not be the most sought after investment option as it would be difficult for you to commit to a fixed amount of investment every month.
However, SIP is a very good investment option for a long term investor. Those who wish to play safely in equity market and cannot afford to put in a lump sum amount may get started with an SIP. Those who wish to cultivate a regular saving regime for there loved ones and themselves that helps in churning out wealth, SIP would be the right place to invest in.
Contributed By: Megha Sharma |
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Megha Sharma works as a guest lecturer in Delhi. She holds an MBA & Doctorate from the UPTU. With extensive knowledge and experience in various financial products, she also works as a consultant in banking & finance domains wherein she offers advice to her clients in managing personal finance. | |
Recently I started working in a corporate Hospital in Patna in a good position with starting salary of 50000. Please guide me for better option of Investment where i can get better return and exempt from tax. I have heard little about SIP.
Thank you in advance.
pl apprise, if we invest , say Rs.500/- per month in SIP mutual fund, i.e. Rs.6000/- per annum. Then what return shall i get after a year. can u pl say tentatively.
kindly guide, that to in which mutual fund like of ICICI, UTI,HDFC etc..it is better to invest in.
thanks for your valuable feedback.
Regards,
S.Chakraborty