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

Explanation

  • The volatility of the stock marketStock MarketStock Market works on the basic principle of matching supply and demand through an auction process where investors are willing to pay a certain amount for an asset, and they are willing to sell off something they have at a specific price.read more 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.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.

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Full Form of SIP (wallstreetmojo.com)

How does it Work?

  • When an investor pays the amount to the Mutual FundMutual FundA mutual fund is a professionally managed investment product in which a pool of money from a group of investors is invested across assets such as equities, bonds, etcread more, the fund allocates the units (like shares in the company) to the payer at a price known as Net Asset ValueNet Asset ValueNet Asset Value is calculated by subtracting the total value of the entity’s liabilities from the total value of its assets and dividing the result by the total number of outstanding shares.read more 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 the fund gets accumulated and re-invested, the investor enjoys another benefit of SIP, known as the power of compoundingPower Of CompoundingCompounding is a method of investing in which the income generated by an investment is reinvested, and the new principal amount is increased by the amount of income reinvested. Depending on the time period of deposit, interest is added to the principal amount.read more.

How to Invest in SIP?

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

Why Invest in a Systematic Investment Plan?

#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, 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 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 regularly deducted from your bank account. 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 a professionally managed investment product in which a pool of money from a group of investors is invested across assets such as equities, bonds, etcread 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:

  • NAV is low as this would result in gaining a large number of units at a lower costThe stock market is trading at the bottom.Interest rates on debt instrumentsDebt InstrumentsDebt instruments provide finance for the company’s growth, investments, and future planning and agree to repay the same within the stipulated time. Long-term instruments include debentures, bonds, GDRs from foreign investors. Short-term instruments include working capital loans, short-term loans.read more are the highest.

Interesting Facts about SIP

#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 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 a 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 globalizationGlobalizationGlobalization is defined as the extension of trade, commerce and culture of an economy across different nations.read more, 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

#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

#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.

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.

  • Initial Fund Amount –  $1000Tenure – 3 yearsInterest Rate Type – Recurring Deposit follows Simple InterestSimple InterestSimple interest (SI) refers to the percentage of interest charged or yielded on the principal sum for a specific period.read more and Mutual Fund, CompoundingRate of Return – 10%After 3 years, at maturity, the investment would turn out to be like this

Rob

Charlie

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.

Conclusion

  • 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.

This article guides the Full Form of SIP(Systematic Investment Plan) and its definition. Here, we discuss how it works, how to invest in SIP, why to invest in SIP, and interesting facts about SIP and its advantages and disadvantages. You may refer to the following articles to learn more about finance: –

  • Equity InvestmentStock Index MeaningRisk AverseShare Market Meaning