Systematic Investment Plans (SIP) is a method of investing.
Many have come to confuse it with an investment option itself.
For most investors, SIP means investing in mutual funds.
how does a sip work
When you set up an SIP, you choose the mutual fund to invest in, the amount to invest every month, and the date on which the amount will be deducted every month.
The frequency of SIP is monthly in most cases though some mutual funds also offer weekly and daily SIP.
Once set up, an SIP will deduct that amount and invest in the mutual fund forever — till the SIP is canceled.
SIPs can be canceled anytime.
One big advantage: automation.
When you set up an SIP, the amount is scheduled to get deducted automatically every month.
This might sound like not-a-big-deal but simply by automating monthly investing, a lot more people end up investing.
sip benefits
Without it, many people tend to skip many months and eventually, it results in not investing enough money.
This is true even though any body can cancel an SIP at any point in time.
The above reason is also why most people set up SIPs in the beginning of the month — right after they receive their monthly income.
This ensures money is invested before being spent on something else.
Rupee cost averaging.
This is one of the biggest advantages of SIPs.
When you invest an amount on a particular day, the market could be above 'fair' levels on that day.
The markets are always moving up and down in the short term.
When you invest on different days, on some days your money will be invested on days the market is too high.
On some days it'll be invested when the markets are low.
Over a long period of time, these different investments will average out and ensure the money never gets invested only when the markets are overvalued.
This is called rupee cost averaging.
In SIPs, this automatically happens as SIPs cause money to be invested on different days.
Sometimes, some mutual fund managers feel like they have too much money to invest and not enough stocks to buy.
This happens very rarely.
When it does happen, mutual fund managers close mutual funds from accepting more investments.
They continue managing whatever has already been invested.
Many times, they close all new investments but let existing SIPs continue.
In such cases, the SIP investor stands to benefit.
There is no guarantee that a fund that stops accepting fresh investments will continue taking SIP investments. But many times, they do allow SIPs.
SIPs are not just in mutual funds.
Any investment method that allows you to automatically invest in a regular manner is technically an SIP.
FD is a one-time investment. But RD is sort of an SIP.
Likewise, some platforms let you invest in stocks via SIP.
In such cases, you’d have to choose the amount to invest, the stock to invest in, and the date on which the investment would take place every month.
benefits of sip mutual fund
The benefits of doing so are similar to the benefits of starting an SIP in a mutual fund.
Despite this, it isn’t a popular choice because most investors who pick their own stocks like full control over the buying process.
But for mutual funds, it is extremely popular.
