What is a Systematic Investment Plan (SIP)? How does SIP work and the 5 different types of SIP?

What is a Systematic Investment Plan (SIP)? How does SIP work and the 5 different types of SIP? | Vrid
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If you have been our newsletter subscriber for a while, you probably know we’re big fans of investing through SIP. And guess what? So is Warren Buffett and pretty much everyone in the market!

But here’s the thing – not everyone knows about SIPs, and many have misconceptions about SIPs. So in this post, let’s dive into what SIPs are, how they work, and the different types available in India.

Estimated read time: 4 minutes and 28 seconds

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What is a Systematic Investment Plan (SIP)?

A Systematic Investment Plan (SIP) is a hassle-free investment strategy that allows you to invest a fixed amount of money regularly in a fund. 

For example, if you earn ₹30k per month and want to start investing. Through SIP, you can invest a fixed amount, like ₹5k per month. You don’t need to wait to save a lump sum amount to start investing. 

Many people think SIP is an investment in itself. But that’s wrong. SIP is a mode of investment, just like lump sum investments. You can invest in any mutual fund through the SIP mode. 

The selection of the fund depends on you. (If you want to learn more about how to find the best active or passive mutual funds, read here and here)

SIPs offer the benefit of disciplined investing, helping you build wealth over time by investing small amounts at regular intervals, regardless of market fluctuations.

How does SIP work?

Let’s say, based on your financial situation, goals, risk appetite, and others, you have selected a specific mutual fund scheme to invest in. You also decide the amount you want to invest and the frequency at which you want to make these investments (monthly, quarterly, etc.). 

You log in to your brokerage account to set up the SIP. You fill in the details similar to the image shown below and create the SIP. Remember, each fund has its own minimum limit on initial investment and instalment amount.

SIP Mandate of UTI Nifty 50 Index Fund from Coin by Zerodha | Vrid

Source: Coin by Zerodha

After setting up the SIP, the brokerage will ask you to create a mandate with your bank to deduct the monthly investment amount directly from your savings account.

By this, a fixed amount is automatically deducted from your bank account and invested in the chosen mutual fund scheme.

Since the amount you invest remains constant, you buy more units when prices are low and fewer units when prices are high. This way, over time, the average cost per unit of your investment tends to be lower. It helps reduce the impact of market volatility, giving you a smoother investment journey.

Benefits of investing through SIP

1. Disciplined Investing 

SIPs encourage regular and disciplined investing. By automating your investments, you avoid the temptation to time the market, which can be challenging even for experienced investors. It helps inculcate a habit of saving and investing consistently.

2. Convenience 

SIPs offer convenience by automating your investment process. Once you set up the SIP, the predetermined amount gets deducted automatically from your bank account. You don’t need to worry about market timing or making manual investment decisions.

3. Flexibility 

SIPs offer flexibility in terms of investment amounts and frequencies. You can choose the amount you want to invest and the frequency that suits your financial goals and cash flow. It allows you to start with a small investment and increase it gradually as your income grows.

4. Rupee Cost Averaging  

SIPs utilise the power of rupee cost averaging to reduce the impact of market volatility. During market downturns, you purchase more units at lower prices. And during market upswings, you buy fewer units at higher prices. Over time, this strategy might lead to better returns.

5. Long-term Wealth Creation 

SIPs are ideal for long-term wealth creation. By staying invested for a longer duration, you can benefit from the compounding effect, where your returns generate additional returns. This can significantly boost your wealth over time.

5 Different Types of SIP

SIP is a proven and reliable investment method. It’s a convenient option that keeps getting better over time. To attract more people to invest in mutual funds, brokers and fund houses have introduced various additional features alongside the traditional SIP. 

These new features enhance the regular investing experience. Remember, not all brokerage and fund houses will provide all the features.

Below are the 5 different types of SIP available in the Indian market with some useful features.

1. Perpetual SIP  

A perpetual SIP allows you to continue investing in a mutual fund scheme indefinitely without specifying an end date. It provides a convenient option for long-term investors who want to stay invested for an extended period without the hassle of renewing the SIP periodically.

2. Step-up SIP 

A step-up SIP allows you to increase your investment amount periodically by a predetermined percentage or a fixed amount. For example, increasing your investment yearly by 5 or 10% as your income increases.

This type of SIP helps you boost your investment as your income grows over time, ensuring that your investments stay in line with your financial progress. 

3. Flexible SIP

In a flexible SIP, you have the freedom to increase or decrease the investment amount periodically, based on your financial situation. This type of SIP offers flexibility and allows you to align your investment with your changing income or expenses.

4. Trigger SIP 

Trigger SIPs are designed to take advantage of market movements. In trigger SIPs, investments happen only when a specific event occurs in the market. This specific event can be a favourable market movement or a predetermined NAV level.

To profit from this type of SIP, you must have an understanding of the market. Thus, this SIP is meant only for experienced investors with the required time and adequate knowledge.

5. Smart / Dynamic SIP 

In smart or dynamic SIP, investors try to time their SIP investments to potentially earn higher returns compared to regular SIPs.

It involves using an algorithm that considers factors like the price-to-earnings ratio to determine how much to contribute to the SIP. The investment amount is adjusted based on how the market is doing. Many brokers have started to offer this SIP. 

Remember, SIP is one of the best ways to invest. But this does not mean that you won’t lose money through SIP. You need to be careful while selecting the fund. Make a realistic assessment of the risk you are willing to take before investing.

Remember to share these insights with your buddies.

Still Curious?

If you are like us, who likes to analyse a little more or check out content in different formats, well you are in luck. Below you can find some suitable content we found.

ClearTax – SIP – Invest in Best Systematic Investment Plans

ET Money – Systematic Investment Plan : Meaning, Benefits, How It Works

CA Rachana Ranade – Lumpsum or SIP, which is better?

Note: We don’t have any affiliation with them. We are sharing links only for educational purposes. The opinions expressed by them belong solely to them and do not reflect the views of Vrid.

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DISCLAIMER: This newsletter is strictly educational and is not an investment advice or a proposal to buy or sell any assets. Please be careful and do your own research.

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