SIP Mutual Funds Investment Book
Systematic Investment Plan (SIP) is an Investment route offered by Mutual Funds wherein one can Invest a fixed amount in a Mutual Fund scheme at regular intervals– say once a month or once a quarter, instead of making a lump-sum Investment.
SIP stands for Systematic Investment plan, and it is a way to Invest a fixed amount regularly in mutual fund schemes. It is similar to a Recurring Deposit (RD) in a bank. In SIP, an Investor selects a period (1 year, 3 years or even perpetuity), intervals (weekly, monthly, quarterly etc.) and amount. The amount will auto-debit from the Investor’s bank account after every interval for a selected period. As retail Investors’ participation has been increasing in mutual funds, SIP is also gaining popularity amongst them. But still, most of the retail Investors are still unaware/unclear about Systematic Investment Plan (SIP). So, below we have explained the benefits of SIP.
Pros of SIP:
Rupee Cost Averaging
This is the primary benefit of Investing in mutual funds via SIPs. Rupee cost averaging is a phenomenon in which an Investor continues to Invest a particular amount at fixed intervals regardless of the share price/NAV. An Investor receives more units when the NAV of a mutual fund scheme decline and fewer units when NAV of the scheme rises. Therefore, over a long period of time, the cost of units to Investors will be significantly lower despite volatility.
By committing to Invest a particular amount at a fixed interval for a particular period of time, Investors instill discipline in their character, which is essential for building wealth in long term.
Investors can decide the amount, period and interval of SIP as per their convenience. Besides, they can increase, decrease or stop the SIP in a mutual fund anytime.
Cons of SIP:
SIP returns are lower in consistently rising markets:
Imagine this situation – Its New Year eve of 2009 and your rich uncle impressed by you & your cousin gifts both of you Rs 1 Lac. You both being financially prudent want to grow this windfall. You approach a financial planner and as every good planner would, he recommend you to Invest in NIFTY BeeS using SIP. So you follow him and plan Investment in 12 monthly SIP installments while your cousin puts his entire money as lump sum Investment in the same NIFTY BeeS. Who do you think made more money by 2010 New Year eve? Your cousin would have around Rs 1.72 Lac while you would have Rs. 1.37 Lac. So your cousin gained 25% more just by doing lump sum.
Limited options of dates:
For a SIP in Mutual Fund you need to decide a date in advance when you like to do your SIP and give an ECS mandate for the same. Most of the MFs have limited option (mainly 1st, 5th, 7th, 10th, 15th, etc). So you tend to Invest in multiple mutual funds on the same date. You want to lessen your risk by spreading your SIP in the entire month by choosing different dates for different funds.
There are times when you feel that markets are undervalued and you want to Invest more but then in SIP only a predetermined fixed sum gets Invested. Same is the case when you want to Invest less, you can’t do it.
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