Systematic Investment Plan (SIP) is a disciplined way of investing, where you invest fixed amounts at a regular frequency (say, every month or quarter). It is bit by bit systematic investment. For example, you commit to invest a pre-specified amount (Rs 500 onwards) every month in a mutual fund. You fix a date on which every month the amount gets invested. The first investment has to be by a cheque and then you can opt for electronic clearing system (ECS).
SIP is an option through which the investor can decide to invest a fixed amount on a monthly basis for a fixed period in the scheme(s) of his choice. SIP in an equity fund acts as a tool to create wealth in the long-term.
There are several advantages of opting for an SIP in an equity fund
- Allows the investor to invest even a small fixed sum of money at regular intervals
- It reduces risk by making volatility work in investor’s favour
- It provides the benefit of rupee cost averaging — investors gets more units at low NAV and vice-versa
- Power of compounding allows small amounts to grow into a significant amount in due course of time
- Imparts time tested discipline to investing and helps to manage anxiety caused by dips in the market.
It is very simple to operate an SIP — after the initial account opening it can work automatically through a standing instruction. Investors should not make the mistake of closing the SIP during a bear phase in the market. Markets are cyclical and during a bear phase the investor is able to get more number of units as he is able to buy low. SIP in 3 – 4 equity funds should be able to give the investor the necessary diversification.