What is SIP? What are its advantages?

When investing in mutual funds, one primarily has two options:

1. Lumpsum investment, or
2. Investment through SIP

SIP stands for Systematic Investment Plan. The difference between the two styles of investing is that in lumpsum investment, the entire amount is invested into the mutual fund scheme chosen at one go, whereas in SIP investment, the investor makes the choice to split the investment amount into several small packets and invest them periodically.

In other words, SIP allows an investor to invest, let’s say, every month or every week, a fixed amount to the mutual fund scheme chosen. This arrangement allows for the averaging of purchase price over a longer duration of time as compared to lumpsum investment, where the entire amount is invested in one go.

To know more about mutual funds, click here to read our article: What is a Mutual Fund?

Why is it advisable to invest through SIP? What are the advantages of SIP over lumpsum investment?

There are several advantages that SIP offers over lumpsum investment:

1. Ease of payment: SIP allows you to get the investment amount deducted whenever you decide, from your bank account. For example, if you want to invest Rs. 10,000, every two weeks from your account, it is possible to do so by setting up the SIP with your advisor.
2. Convenience: A systematic investment plan (SIP) frees you from the worry of timing your investment and from the hassles of form filling and therefore, simplifies investing. One can set it and forget it. Installments, as decided with the advisor, shall be deducted automatically from the bank account, without one having to worry about it.
3. No requirement to time the market/ Rupee Cost Averaging/ Fight market volatility: With an SIP investment, one is not required to time the market, as opposed to a lumpsum investment, where investors are typically hunting for an opportune time, when the NAV of the mutual fund scheme is just right. This also allows the investor to benefit from the averaging of prices, that is, since investments are made over a long period of time, one can benefit from the fluctuations in price and investments are made at an average price.
4. Power of Compounding: SIP allows an investor to make use of the power of compounding: the gains multiply over a long period of time as gains are stacked on top of the initial investment. To read more on the power of compounding, check out our article here: The Power of Compounding
5. Flexibility: SIP offers an investor flexibility to choose when to invest, how much to invest and with whom to invest. One can rest assured knowing that the amounts to be invested, shall be automatically deducted, as has been decided earlier.

What is the minimum amount for investing in SIP?

You can start with as little as Rs. 500 per month. Once the investments begin and you become more comfortable, you can increase the amount.

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