When allocating funds into financial schemes, you are investing your money. It is done to earn extra money. However, investments are not a monolith, and numerous investment options exist. One of them is lumpsum investments. In that, you opt to make a one-time payment into a scheme. Another one is a systematic investment plan or SIP.

What are SIPs?

A systematic investment plan, i.e., (SIP) is an investment mode through which you can invest in mutual funds. As the term indicates, they are a systematic method of periodically investing fixed amounts of money. Investments can be made either monthly, quarterly, or semi-annually. When you invest steadily in this manner, it can become easier to meet your financial goals.

How do they work?

Investors who invest through a SIP allocate a fixed sum of money in a given period. This amount helps the investors to purchase a certain number of fund units. If this continues for a long time, one gets to invest in the fund during the highs and lows, i.e., investors don’t need to time the market to make their investments. Market timing can be risky as one can invest at the wrong time. A SIP investment can remove this factor of unpredictability. After deciding on the investment tenure and frequency, investors can automate their investments by giving standing instructions to their banks. While an investor will start small while making the first investment, it does not mean that the invested amount will remain the same until the time of redemption. Sometimes, investors might opt to increase their contributions to the SIP as their financial state improves.

What are the advantages of SIP?

Here are the numerous advantages of SIP:

• You could enjoy the benefits of rupee cost averaging:

A unique feature of SIP is the rupee cost averaging. With the help of this feature, an investor can buy more units when the market is going through a low phase and buy less when the market is performing well. That’s the case because of the inherent feature of SIP: during every market correction, the investor can opt to buy more and reduce the cost of their investments when the market is performing well enough.

• You can enjoy the benefits of compounding:

When you put money regularly through SIPs, the income generated through the plan gets reinvested. This results in a snowball effect as time passes, where the investor’s payment may increase manifold. You can make the most of this feature by investing for an extended period. SIP generally operates on the principle of compound interest. Simply put, a small amount invested for a long time fetches better income than a one-time investment.

• They are flexible:

Another popular benefit of SIP is that it provides you with tremendous flexibility. These plans are open-ended funds that can be withdrawn per the investor’s choice. This means systematic investment plans don’t have a fixed tenure. If you have opted for a systematic investment plan, you can withdraw your money whenever you want. Also, you can remove either fully or partially from your account without incurring any losses.
Moreover, the amount of investment in a SIP is also flexible and isn’t set in stone. The investment amount can be increased or decreased based on your financial situation. However, if you have opted for a systematic investment plan, please ensure a long investment horizon for wealth creation.

SIP is an excellent way of investing your money in mutual funds. It helps you invest fixed money periodically in a mutual fund scheme. Moreover, they also allow you to put money in mutual funds in a disciplined manner over time.

Mutual Fund Investments are subject to market risks. Read all scheme-related documents carefully.