What is SIP (Systematic Investment Plan)? How does it work? Definition & Explanation

what is sip, how sip works, advantages of sip explanation by zerobizz

A Systematic Investment Plan is the simplest way to increase a person's wealth.

What is a Systematic Investment Plan (SIP)?

A systematic investment plan is a plan just like a bank recurring deposits wherein an investor need to invest regularly a fixed amount of money in a mutual fund. 

It is a flexible investment avenue that helps investors to save regularly instead of making a huge one-time investment. 

SIPs help investors to make regular savings with a little amount of money while benefiting from the long-term benefits of Rupee Value Averaging.

How SIPs work?

Mutual fund companies offer investors different types of investment plans also including systematic investment plans. SIPs provide investors to invest a small amount of money which helps the investors to save regularly instead of making a huge one-time investment. 

The minimum investment amount differs from company to company. You can invest money weekly, monthly or quarterly as per your convenience.

The SIP is periodic. It deals with regular and periodic purchases of units of a fund or other investment securities. Rupee cost averaging includes buying the SIPs units at a fixed price. 

Your money invested at a different interval( weekly, monthly or quarterly) and the amount of your periodic investment. You can buy more units, when NAV(net asset value) is low and buy fewer units when the market is high. So, it averages the cost per unit. 

The return of the SIP depending on the market situation as well as how does the company invest in different securities. Some AMCs allow a minimum investment of Rs 500 while there are certain AMCs where the minimum SIP amount is Rs 1000

Advantages of systematic investment plans

  1. With the help of SIP, an individual indicates the habit of regular and systematic saving.
  2. More suitable for the common investors as he doesn't need to worry about timing the market.
  3. Minimize the risk through a systematic investment plan.
  4. Helps to achieve long term goals through SIP.
  5. Benefited from the power of compounding.

Can I decrease or increase the amount of your SIP?

This is the common question that comes to mind. You are free to increase or decrease the amount of your SIP whenever you want, there are no charges or penalty for doing or you can stop, resume, decrease or increase the tenure of your investment anytime you want.