What is a Systematic Investment Plan (SIP)?
SIP or Systematic Investment Plan is one of the best methods of saving and investing small amounts of money, automatically every month.
How does it work?
- You first decide how much to save per month E.g. Rs 50,000 per month.
- Select a mutual fund scheme or multiple schemes. E.g. Let’s say you select two funds – ABC bluechip fund and XYZ equity fund for Rs 25,000 investment in each of the funds.
- Apply to start a SIP (either online or via a one-time paperwork process).
Once your SIP application is approved and starts, Rs 50,000 will be automatically deducted from your bank account every month and invested in the funds you have selected.
You can choose to do this for a minimum period of 6 months and can also stop and withdraw your money anytime you wish to.
Your small monthly amounts grow over a period of time to a large lump sum amount.
Also, since your money is automatically deducted every month, you don’t have to worry about manually making monthly transfers.
Rupee Cost Averaging
A SIP also allows you to take advantage of a concept called Rupee cost averaging, especially in the case of Equity Funds.
Let’s say you want to invest in the equity asset class – However, you can’t predict which month the Sensex will be high and which month it will be low.
So instead of trying to predict and time the stock market, you invest a small amount of money every month. If the markets are high, you will get a lesser number of units in your mutual fund account, and if the markets are low, you will get a larger number of units. This way, you are buying when the markets are high and also when the markets are low – Over a long period of time the market usually appreciates in value so your average cost of acquiring each unit will be low.
Tax Saving Investments in ELSS
Most people make tax saving investments in ELSS tax saving mutual funds at the end of the financial year in either January or February. They also do it in one go and invest up to Rs 1.5 lakhs at one shot.
If you need to make investments of Rs 1.2 lakhs for tax savings, and if you invest it all at one go, you are taking a chance. That’s because you don’t know if the markets are at their highest or lowest at that point in time.
If the markets are low, you will gain an advantage but if the markets are high, it may be a while before you can significantly grow your investment.
Instead, if you start a SIP of Rs 10,000 every month from March onwards, you will invest all throughout the year and your money would have even grown at the end of the year. You also won’t have to struggle to find Rs 1.2 lakhs at the end of the year.
The biggest advantage of a SIP is the habit of regular, disciplined savings. Every month, like other EMIs, this also gets deducted from the bank account through electronic clearing service, which is convenient. Since you will have lesser money in your account, chances are that you will probably spend less too.
If you have surplus savings left in your account every month, please consider starting a few SIPs to grow your money better.
Apart from tax saving investments, SIPs can be used to plan and meet almost any goal that you may have.
It’s similar to the concept of PF deduction which happens every month from your salary – However, the major difference is that instead of your employer, you decide where and how much to invest and you have the flexibility to get your money back anytime you wish.