Title-SIP Meaning, Benefits, and How to Invest in SIP | Zell

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      What is SIP, How to Start, Advantages & Disadvantages

      Last Update On 2nd December 2024
      Duration: 8 Mins Read

      Want to invest but do not know how to? Introducing the Systematic Investment Plan—an intelligent, hassle-free way to grow your wealth over a period of time. Whether you are a first-timer or a seasoned pro in investing, SIP offers a flexible, disciplined, and hassle-free route toward building your financial future.

      This blog will teach you how to invest in SIP. What is the meaning of SIP? What does SIP stand for? Discuss which is better SIP or mutual funds? To determine whether investment in SIP is good or bad? Which is the best SIP to invest in? Discuss the advantages and disadvantages of investing in SIP. Differentiate between SIP and mutual funds

      What is the Meaning of SIP? What does SIP stand for?

      A Systematic Investment Plan (SIP) is a disciplined way of investing in mutual funds. In SIP, an investor can make a periodic investment of a sum of money in a mutual fund scheme, usually every month or quarterly. Unlike investing lump sums, through SIPs you can invest smaller amounts regularly over time, making it lighter on your pocket and quite within reach for any new investor.

      SIP works on the concept of automatic deduction of the sum of money one would like to invest from one’s bank account and invests that money in a mutual fund. The major advantage of SIPs is the killing of the “time the market” factor, wherein, at different price points, you buy units of the fund, allowing rupee cost averaging.

      The benefit in the case of SIPs is the power of compounding. Over a period of time, investments generate a return, which would get reinvested to generate more returns, and this cycle will repeat to lead to exponential growth in your wealth. A disciplined and automatic way of investing is what one needs to create wealth gradually for long-term financial goals.

      What is SIP Investment?

      A SIP is a process wherein the investor invests a certain amount in a mutual fund scheme at regular intervals. You are not investing in a bulk one time; rather, you are investing a small periodical amount normally monthly or quarterly. This will help in making systematic saving easier and aid in the building of wealth in a disciplined manner, totally free from the stress of timing the market. You can invest in a portfolio of equity, debt, or hybrid mutual funds under SIPs, which depend on your financial goals and risk tolerance.

      What Are The Advantages And Disadvantages To Invest in SIP

      Advantages and Disadvantages of SIP Investment

      SIP stands for Systematic Investment Planning, it is important to learn the advantages of SIP investment as much as it is essential to learn the disadvantages of SIP investment for you to make more informed decisions.

      Advantages of SIP investment:

      Rupee Cost Averaging: SIPs help to invest in various market cycles. More units are bought when prices are low and less when high, reducing the average cost of investment and thus reducing the impact of volatility in the markets.

      Power of Compounding: SIPs get the benefit of compounding interest. Your returns get reinvested to generate more returns. This can lead to a significant enhancement of wealth over the long term.

      Disciplined Investment: As a SIP automates investment at regular intervals, it helps to inculcate discipline habits of investing. This consistency will be there to let you continue investing, irrespective of market conditions.

      Affordable Entry: You do not need buckets of money to invest. You can start investing with small amounts through a SIP, which makes it very accessible to many investors.

      Flexibility: Most SIPs allow you to increase, decrease, or even pause your contributions without any penalty. This flexibility makes it easier to adjust the investments in accordance with your financial situation.

      No Need to Time the Market: You do not worry about the timing of the market. Your regular investments spread out the risk over a period of time and across several phases of the market.

      Disadvantages of SIP investment: 

      Market Risks: While SIPs do better than volatility, in the end, they are also related to mutual fund investments linked with markets. If the fund performs badly, then your returns might be at stake.

      Long-Term Orientation: SIP works better in the long run. In case you are targeting short-term gains, then not much will help through SIPs. They generally work better for long-term wealth creation.

       

      Returns Not Guaranteed: Mutual fund investments through SIP are subject to market risks, and there are no guarantees on returns. Unlike fixed deposits or bonds, returns in SIPs could go either way according to the market conditions.

      Lower Returns in Bull Markets: In a bull market—a rising market—lump-sum investments may have higher returns than SIPs. SIP investments may not do as well during fast market growth because they are spread out over time.

      Discipline Required: Though very much a feature of SIPs, the discipline it instills may get affected if there is a case of missing multiple payments. Investors need to remain committed for the long term.

      Difference between SIP and Mutual Fund 

      Here’s a comparison highlighting the main differences between SIP (Systematic Investment Plan) and Mutual Funds for you to determine which is better SIP or mutual fund, according to your risk tolerance:

      Aspects  SIP (Systematic Investment Plan) Mutual Fund
      Definition A method in which a fixed amount gets invested regularly in a mutual fund. It is a pool of money, obtained from different investors, to invest in stocks, bonds, or other kinds of securities.
      Investment Frequency  Regular monthly or quarterly investments, usually. Either in one time (lump sum) or through SIP mode.
      Amount Required Nominal, fixed amounts of money involved, starting as low as ₹500. It could be either a huge one-time investment or a variable.
      Market Timing No need to time the market as investments are spread over time. Lump sum investing can involve market timing.
      Risk Level Entails lower risk due to regular investments and rupee cost averaging. Higher risk if putting a lump sum into volatile markets.
      Compounding Effect Regular investments allow for consistent compounding over a period of time. Interest is compounded on the investment, but may be less if the market falls after a lump sum is invested.
      Investment Flexibility It would simply mean that investors can easily initiate, stop, increase, or decrease investments. Lump sum requires more planning, and adjustments are harder.
      Suitable for Long-term investors looking to build wealth incrementally with discipline. Investors seeking to put one big lump sum across the board into an investment or those looking forward to diversifying across various assets.
      Rupee Cost Averaging It benefits from rupee cost averaging, buying more units in a down market. No rupee cost averaging if it’s a lump sum; the value would be influenced by market conditions.
      Emotional Impact Automating regular investments to reduce emotional decision-making. Lump sum investments can lead to emotional decisions based on market movements.
      Risk Management Lowers the impacts of short-term market volatility. High risk in the volatile markets if invested as a lump sum.
      Initial Commitment Low commitment upfront; easy to get started. Higher upfront commitment, suitable for seasoned investors.

      The above table showcases the difference between SIP and mutual funds, this table will help you decide which investing option is better for you.

      A Step-by-Step Guide to Starting a SIP

      Systematic Investment Plan is a smart and disciplined approach toward wealth building. Here is a simplified step-by-step guide to kick-start the process: 

      1. Identify Your Financial Goals 

      Short-term or long-term? Determine your financial goals, whether it is for purchasing a house, retirement, or children’s education. This will guide you to the most appropriate mutual fund category.

      2. Select the Appropriate Mutual Fund

      Depending on the level of your risk tolerance and goals, choose the mutual fund that would be appropriate for you. You have equity funds for high growth but with increased risk, debt funds with low risk, or hybrid funds for a mix of both.

      3. Choose the SIP Amount

      Decide the amount you are capable of investing every month. With the majority of SIPs starting as low as ₹500, then the scheme is very affordable too to beginners.

      4. Choose the Duration of your Investment

      Decide the tenure for which you wish to invest. SIPs are best when used over the long term, say 5–10 years, so that you get the benefit of compounding.

      5. Open a Mutual Fund Account

      You can invest in a SIP through a mutual fund account with a broker or an online mutual fund platform. You can also choose from a wide range of apps and websites through which SIP investment can be started quite easily. You also need to complete your KYC (Know Your Customer) verification.

      6. Automate Your Debits

      Link your bank account and ensure monthly allocations are automated. This way, you’re not going to stray from the goal and continue to invest monthly.

      7. Track Your SIPs

      Every six months or annually, make a point to review your SIP portfolio to check if it aligns with your financial goals. Based on that, you can further increase the SIP amount or change the funds.

      8. Be Patient and Persistent

      SIPs are meant for long-term wealth creation. Do not panic during the short-term market volatility; you need to stick to your investment plan.

      How to Invest in SIP?

      If you are wondering how to invest in SIP? The following steps are just the thing you need to learn it: 

      Research & Choose a Fund: Find a mutual fund that aligns with your financial goals and risk appetite.

      Complete KYC: Provide proof of identity, address, and bank details to the mutual fund house or online platform

      Select SIP Amount: Decide on the fixed amount you can invest monthly.

      Select SIP Frequency: Generally, a SIP could be monthly, quarterly, or weekly. The most convenient choice is monthly.

      Automate Payments: Have automatic bank transfers to credit your SIP payments.

      Track and Adjust: Track your investments and adjust according to the changes in your financial goal.

      Best SIP to Invest 

      Here are some of the best SIPs to invest in across categories that are suitable for different types of investors:

      Mirae Asset Large Cap Fund: This fund is suitable for very risk-tolerant investors seeking long-term capital appreciation. 

      Axis Bluechip Fund: A good choice for investors looking for stable returns from well-established companies.

      HDFC Hybrid Equity Fund: This fund balances growth and safety by investing in stocks and bonds and is, therefore, ideal for investors with moderate levels of risk tolerance.

      ICICI Prudential Equity & Debt Fund: This fund provides a mix of equity and debt securities for a balance between growth and safety.

      SBI Small Cap Fund: It involves higher risk but provides an opportunity for strong returns through investment in small, growing companies.

      Aditya Birla Sun Life Tax Relief 96: This is an equity ELSS tax-saver fund. It’s ideal for every investor who looks at saving taxes under Section 80C and also builds wealth in the long term.

      SIP Investment Myths

      Various myths which are attached to the investment in SIPs are cleared below:

      1. SIPs are only for the rich.

      Fact: SIP offers an option to start investment through a small amount regularly. So anybody belonging to any level of income can invest through it.

      2. SIP assures high returns.

      Fact: Though SIPs can bring good returns in the long period, they do not guarantee high returns. Investment returns are subject to market risk.

      3. SIPs are the same as fixed deposits.

      Fact: SIPs are mutual funds, and hence the returns are market-linked; in contrast, fixed deposits have a fixed interest rate and guaranteed return. 

      4. Fast money can be made through SIPs.

      Fact: SIPs are for a long-term investment. Patience is the keyword, and one needs to continuously invest to see the real benefit.

      5. SIPs are only for beginners.

      Fact: A SIP is an ideal way for any investor, whether new or experienced. It is a disciplined way of investing, irrespective of experience.

      Conclusion

      SIPs are good for investing due to their structured nature, which makes them very useful in building wealth over time. By removing certain myths and understanding the reality behind SIPs, investors will be better equipped to make decisions that could help to reap the associated advantages with this investment strategy successfully. Remember that though it makes investing disciplined, you need to align investment choices with your financial goals and risk tolerance.

      FAQs on SIP:

      What does SIP mean? 

      The meaning of SIP is a mutual fund investment method followed by investing regularly with a certain definite amount. This helps to reduce the cost of investing by averaging the cost and reduces the risks of market volatility by investing at fixed intervals. SIP is recommended for long-term wealth accumulation.

      What are the advantages and disadvantages of SIPs?

      Advantages: SIPs work on disciplined investing, rupee cost averaging, and flexibility.

      Disadvantages: Return is not guaranteed, may be lower in the short-term, and can have liquidity constraints.

      Which is better, SIP or mutual funds?

      SIP means Systematic Investment Plan which is not an investment in its entirety but a method of investing in mutual funds. Now, you have to decide whether you want to opt for a regular investment with a SIP or a lump sum amount directly in mutual funds.

      What does SIP stand for?

      SIP stands for Systematic Investment Plan, a strategy to invest a fixed sum at regular periods in mutual funds.

      Why is SIP better than FD?

      SIPs offer better returns and flexibility in comparison with a fixed deposit, the rupee cost averaging principle inherent in these products helps SIPs fight market volatility.

       

      Partham Barot is an ACCA-certified professional. showcasing his expertise in finance and accountancy. he’s revolutionising education by focusing on practical, real-world skills. Partham’s achievements underscore his commitment to elevating educational standards and empowering the next generation of professionals.
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