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A SYSTEMATIC investment plan (SIP) is an investment method wherein a fixed sum of amount is regularly invested in a mutual fund (MF) scheme. The mode of investment is similar to saving in a regular savings scheme, such as recurring deposit. An SIP lets you to systematically invest small amounts on a regular basis with a convenient monthly or quarterly plan, allowing you to build an investment portfolio over a period of time. This makes it one of the best savings instruments for those who are yet to attain disciplined investment plan. SIP mode of investment is available for MFs, exchange-traded funds (ETFs) and gold funds.

However, given the volatile nature of markets, you should stay invested for a long term (at least five years) to reap the benefits of SIPs. Here are a few advantages of SIP schemes:

  • Disciplined investment: A large number of people enter the market for investing money, but fail due to lack of discipline. At times, you will find it difficult to periodically invest lump sum amounts in MFs. However, through an SIP, a regular schedule of monthly or quarterly investment can be easily followed.
  • Rupee cost averaging: Investing a fixed amount every month allows you to purchase more units when prices are low. Over the long run, the average cost of buying MF units is often lower than the amount invested as lump sum. SIPs make you commit cash at market lows when an average investor would become worried and might start exiting from the market. Thus, SIP investment saves you from the folly of investing during market highs and exiting during market lows by reversing the trend.
  • Low investment amount: Through an SIP you can start investing with an amount as low as Rs 500 per month. This allows investors of all backgrounds to invest in capital markets.
  • No entry or exit loads: Various fund houses waive off entry or exit load in mutual funds when the investment is done through an SIP thereby lowering the cost of your investment. However, exit load is usually charged if you redeem the units within one year of purchasing the units.

By Naveen Kukreja,
First published in Financial Chronicle

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