What is Systematic investment Plan (SIP)? How to invest in SIPs? Top 5 SIP plans in India
Why SIP? Benefits of SIP plans
Systematic investment Plan (SIP) is an easy investment plan. It’s basically a combination of market investment and a Saving Plan. Systematic investment Plan (SIP) is an investment plan in which one needs to invest the same amount of money in Mutual Funds (MF) at regular time periods. One can tap the stock market through SIPs without directly taking part in it. Mutual funds will invest your funds in the stock market on behalf of you. The biggest advantage if SIP is that you need not time the market. Stock markets may do well during a certain period and decline during other periods.
You can start investing in SIP with amounts as low as Rs 500
In SIP, you will invest a particular sum in mutual funds without worrying about the stock market trend. This way your risk is reduced and you are assured a fixed return. This is called Rupee Cost Averaging. Investing through SIPs will also be lighter on your purse unlike investments like Gold or real estate.
Systematic investment Plans (SIPs) are an excellent form of investment in the long term.
Power of Compounding
You can benefit from reinvesting the money that you have already earned. Therefore, the earlier you start the longer is the opportunity for compounding. You will earn more if you start investing at the age of 30 rather than at the age of 40. For example, suppose you invest Rs. 50000 in a fund that yields 10% returns over a year. The interest gained on the principal amount will be Rs.5000. In the second year, the interest (ie investment return) will be added to the principal making it Rs. 55000. The returns may seem smaller at the beginning but over a longer period you will see substantial returns
How to invest in SIPs?
One can invest a pre-determined amount on a monthly or quarterly basis depending on their choice. It is easy to enroll for SIPs. You can obtain the necessary application forms from your mutual fund investor. You can choose to pay the amount through auto-debit from your bank account through ECS or you can issue post-dated cheques
You can start investing in SIPs with an amount as low as Rs 500
How SIP works?
Once you invest in SIPs, you will be allocated certain number of units called NAV (Net asset value) based on the prevailing market rate. Let’s assume that you bought 100 units by paying a NAV of Rs. 10. The next month the NAV may rise to Rs 15 and you could get lesser number of units to compensate for the price change. Sometimes, the NAVs may reduce in value based on market conditions. In such cases, the number of units allocated will increase. If you wish to sell a SIP unit, always do so when the NAV is higher. In simple words, buy SIPS units when the NAV is lower and sell them when the NAV is higher.
When SIPs could be a disadvantage?
If you want to speculate and take risk, SIPs are not the right form of investment for you. During a bullish period in the stock period, even though the value of the NAV may rise, you will not get the profit. The mutual fund investor will get the profit instead. You will only get fewer numbers of units to adjust to the rise in NAV
Which are the popular SIP Mutual funds?
- Some of the popular and best performing SIP Mutual funds in India are
- UTI equity fund (Large cap)
- Birla SL Frontline Equity fund (Large cap)
- UTI Mid cap fund (Mid cap)
- ICICI Pru value Discovery fund (Diversified)
- HDFC Balanced Fund (Hybrid)
- SBI Blue Chip fund
- Franklin India Prima Plus fund(G)
As always, read the offer document carefully before investing. All the best