As the name suggests, the SIP is a systematic way of investing, on a fixed date (usually on a monthly or quarterly basis), for a fixed period of time. SIPs can be used to invest in any mutual fund scheme.
Benefits of using SIP
There are many benefits of investing via SIPs.
1. Primarily, you get compounding advantage. For example: You invest Rs 5,000 per month. After 5 years, assuming an annualised return of 13 %, you will earn roughly, Rs4.15 lakh. In 10 years (after having invested Rs 6 lakh during this time), the value of your investment will be about Rs 11.81 lakh. Another advantage is even if you invest in a scheme that is an average performer compared to others, if you stay invested for the long-term, there is a good chance that you can make handsome gains.
2. Second, SIP allows you to avail the benefit of rupee cost averaging. In the stock market, investors try to 'time the market', i.e., try and buy low and sell high. In SIP you automatically do it by investing in all cycles of the market
3. Third, it is a great way to become a disciplined investor. Most investors don't invest on a regular basis due to various reasons and can end up not saving enough of their goals. They depend on windfalls like their bonuses or erratic monthly savings to invest. Investing through SIP ensures that you are investing regularly and in a hassle-free manner.
Missing an SIP date
If on the specified date there is no money in your bank account, No units will be allotted for that month. There is no penalty charged by the AMC for missing instalment of SIP. However, a bank may charge you for 'ECS' debit returns. Missing of SIP payments regularly may lead to the closure of SIP.
Closure of SIP
As an investor, if you know how to start a SIP, it is equally important to know how to close one. You may want to close it for various reasons, like the fund is not performing well, you have lost your job and cannot afford to invest anymore and so on. To close the account, you just have to submit the application of closure request to the mutual fund house. And just like application for opening a SIP, it takes 30 days to process the closure request as well.
Variants of SIP
Mutual fund houses have introduced different variants of SIPs, here are some of them.
Top-up SIP: Through the SIP top-up facility investor can increase his/her SIP amount either by fixed amount or as a percentage. Suppose you are investing Rs 7,000 per month and you want up the SIP amount by Rs 1,000 the next year. Then you can simply choose this option given on the SIP registration form and mandate the AMC that after one year, they should debit Rs 8,000 from your bank account.
On the other hand, if you have chosen the percentage top-up option of say 10 per cent, then Rs 700 will be additionally debited along with your existing SIP of Rs 5,000 from next year.
Flexi SIP: Flexi SIP works on the principle of 'buy low, sell high'. It continues to invest more when market valuations are low and vice versa. Here the investment date is fixed, however, the amount is not fixed.