Savings are important for a tension free living. One of the best forms of savings is investment in mutual funds or equity linked savings scheme. Mutual funds are a pool of funds formed and managed by an asset management company like Reliance, Tata, ICICI, SBI and many more. A person who does not understand the share markets and is afraid of investing there, can opt for investment in mutual funds. They too are subject to market risks but in a much lesser manner. For a middle class person it is often not possible to invest a big amount in one single go and prefers to invest in small chunks over the time. Similar is the case with Systematic Investment Plan, commonly known as SIP.
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What is SIP?
SIP is a facility offered by mutual fund companies to investors under which they can invest in mutual funds in small amounts at regular intervals. The amount under SIP is fixed for the period of investment. For example, an investor wishes to save 10 lacs for his child’s higher education, cannot save in big amounts but wants a decent return on his investment. He can opt for SIP under which he’ll need to deposit a said amount every month for the tenure he chooses. This not only lifts the burden of investing a big amount but also provides flexibility.
Payment under SIP
The periodicity of investment can either be weekly, bi-monthly, monthly or quarterly, as per investor’s comfort. In India, the SIP payments are collected via ECS, that is, Electronic Clearing System. Under this system, a standing instruction of payment to mutual fund company is added to ones bank account and on the specified date the amount is automatically deducted from the account. The asset management company allots units to investors on the basis of the day’s net asset value. Whenever a payment is received by the company, it allots more units to the investor.
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Benefits of SIP
SIP is generally opted by people only for one major benefit that is flexibility in savings. It is almost impossible for a person to save a hefty amount in one go. With all necessary expenditures at one hand, it is important that a person saves in small chunks regularly. This not only amounts to savings but also lifts a huge burden off ones shoulders. We all know that a continuous drop of water can fill a bucket and SIP works on the same principle. You won’t even believe that after some time you’ll have enough savings for future.
Another benefit of SIP is disciplined and controlled investment. SIP further covers the risk of losses. For instance, if the market is not doing well and economies are tumbling then you can instantly put a hold on your investment and stop further payments. In that way, in case there is a loss, it will only be for a small amount.
Systematic Investment Plan is safe and easy to apply. It assists in savings and also rolls out a decent return on investment.
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