What is SIP and its Advantages?

Last Updated: 9 Nov 2023

A Systematic Investment Plan, commonly known as SIP is where regular fixed amounts are invested in your preferred Mutual Fund scheme. A Fixed amount is deducted each month from your savings account which is invested in the Mutual Fund of your choice.

Advantages of investing in SIP:

Here is a look at the advantages of investing in SIP:

• Simplicity of choice

  With SIP, you can start investing small amounts as small as Rs 500 each month and watch it grow. A SIP is not only simple and convenient to track, but also makes you save more.

• Rupee Cost Averaging:

  The unique feature of SIP is the Rupee Cost Averaging, where you buy more units when the market is low and buy less when the market is high. This is because of the inherent feature of SIP, where at every market correction, you will buy more, reducing your cost of investment and higher gains.

• Flexibility:

  SIP provides you with tremendous flexibility. Long-term commitments like investing in instruments like Public Provident Fund or Unit Linked Insurance Plans can be avoided with SIP. These are open ended funds to be withdrawn as per your choice, meaning they do not have a fixed tenor. You can either withdraw the full or a partial amount from your investment, without incurring any losses. The amount of investment is also flexible: it can be increased or decreased. Just remember to have a long investment horizon for wealth creation.

• Higher returns:

  As compared to traditional fixed deposits or recurring deposits, SIP provides double the returns. This can help you beat the inflated costs.

• Power of compounding:

  SIP operates on the principle of receiving compound interest on your investments. In other words, a small amount invested for a long time fetches better returns than a one-time investment.

• Acts as an emergency fund:

  Being an open-ended fund without any tenor, you can withdraw your SIP Investment as a contingent fund.

One-time investment vs SIP: Which is better?

If you are confused between one-time investment or SIP, refer to the comparison chart below:

	SIP investment	One-time investment
Tenor	Can be withdrawn anytime without any monetary loss.	Sudden withdrawal might attract charges, penalties, or might just not be allowed.
Earnings	Earns better during market lows. Investment yields higher returns because of the power of compounding.	Earns better during market highs. The investment yields fixed income, which is lower than SIP.
Protection from market volatility	SIP can protect your investment from any potential market crash.	One-time investment is not cushioned against market volatility. As such, this investment could be a major loss, if the market crashes.
Knowledge of market	This is a simple plan, and you do not require to have a thorough knowledge of the market.	In many cases, one-time investments may either require expert counsel, or a thorough knowledge of the market.

How to invest in SIP?

• Identify your financial and investment goal:

  First of all, you should identify your investment goal–whether it is wealth creation for short-term, medium-term or long-term. Start investing in SIP as per your goal. Remember that longer duration SIP yields higher returns.

• Select the right Mutual Fund:

  You must shortlist the right SIP mutual fund which is in the loop with your financial goals. You can compare different SIPs, and select the best.

• Contact the financial institution:

  Inform the financial company about your decision to invest in the specific SIP and fill the requisite form to complete KYC documentation.

• Invest:

  When your research is complete and you’re ready to make an informed decision,Invest in your preferred SIP. You can do so with the help of an online demat account, to help simplify the process.

Thus, SIP stands for minimum investments and maximum returns. Invest in an SIP now and reap the returns later!