SIP or Systematic Investment Plan is an investment option for investors to invest money in mutual fund periodically. In case of SIP, investor has choice of investment on weekly, monthly and quarterly basis. SIP is a good option for small investors who do not have lump sum amount to invest in mutual funds. In general terms you can compare a SIP with bank’s RD. In both the products investor can save on periodic basis. But these are different from each other. Some of main difference between these two is as follow:
|Invest amount in equity and debt securities through mutual funds||RD is similar to fixed deposit in which amount can be deposit on recurring basis.|
|SIP has no fixed return||RD has a predefined fixed interest rate|
|Maturity amount cannot be determined.||Maturity amount fixed and known in advance|
|Investment can be made on weekly, monthly or quarterly basis||Investment can be made on monthly basis|
|No TDS applicable||TDS is applicable|
|Minimum investment is Rs 500||Minimum investment is Rs 100|
|Tenor can be longer||Maximum 10 years tenor|
|No pre closure charges||Penalty for pre closure|
|Varieties of fund choice||No choice|
As you can see from the above table that a SIP is much different from a RD. Now let us discuss some benefits of SIP.
Small Amount Investment
You can start a SIP from a minimum amount of Rs 500/-. This is very good for the small investors who do not have fund to invest in lump sum amount.
Long Term Saving
SIP are good investment vehicle for long term saving. As there is no any pre-closure penalty, you can remain invested for any period. It can be 1 year, 10 year, 30 year or even more.
Opening of SIP is very convenient these days. You have various options to enroll for SIP. You can enroll online through Mutual Fund AMC website or you can use your DMAT account to purchase SIP or you can visit a broker’s office.
As SIP is a periodical investment vehicle, you can set aside the amount of investment first from your net inflows. Investment in SIP follows the principle of Save First and Spend Later. A periodical investment makes your investment habits disciplined.
Rupee Cost Averaging
As you can see, stock market is always volatile. An SIP gives you the benefits of rupee cost averaging. If market is in bear phase than you can receive high number of units in comparison of bull market. A systematic investment helps to average down this volatility. For example in first month of your investment you buy unit at Rs 10 and in next month unit cost become 11 it means your net investment value will be Rs 10.5.
Investment in High Risk Fund
If you are investing in Mutual fund through SIP you can choose a high risk fund to invest because of its rupee cost averaging benefit. As we know a high risk fund can give high returns therefore, periodical investment in mutual fund reduce the risk factor for SIP investor.
Disadvantage of SIP
SIP is a very good investment vehicle in Mutual Fund. We have discussed various benefits of SIP above. But an SIP is also having disadvantages. It is not 100% true that a SIP will give positive return. It depends on the entry and exit of the investor. If an investor starts a SIP in bull market and exit in bear market, then there are high chances that he will lose money.
For example, you start a SIP and in 5 years NAV reached to Rs 200 from Rs 100 and your average unit price for this time period is Rs 175. Now market enters in bear phase and NAV come down to Rs 150 in next 6 month and your average price came to Rs 165. If you want to exit the scheme now you will lose 15 Rs per unit. Therefore, it is always advised that buy more when market is weak and sell when strong. Your exit time from market will define your profit.
In share market, fear spread at higher speed than greed. Therefore, keep a check on the economic and market condition. Always accumulate maximum during bear phase and try to exit scheme in bull phase. SIP is a very good investment too to invest in mutual fund. Choose your mutual fund scheme wisely before starting a SIP, follow the trend of the market and fulfill your investment goals. Happy Investing.