Systematic investment plan
an investment plan allowing to invest small amounts periodically instead of lump sums
A systematic investment plan (SIP) is an investment vehicle offered by many mutual funds to investors, allowing them to invest small amounts periodically instead of lump sums. The frequency of investment is usually weekly, monthly or quarterly.
How it Works and Key Benefits
A Systematic Investment Plan works on a simple principle: investing a fixed amount of money at regular intervals (such as weekly, monthly, or quarterly) into a specific mutual fund. The process is typically automated, with the amount being debited directly from the investor's bank account.
When the predetermined amount is invested, it purchases units of the mutual fund at the prevailing Net asset value (NAV) for that day. Since the investment amount is fixed, the number of units purchased varies with the NAV. This mechanism leads to the primary benefits of SIPs:
Rupee Cost Averaging: This is the core advantage of investing through a SIP. When the market is down and the NAV is low, the fixed investment amount buys more units. Conversely, when the market is up and the NAV is high, the same amount buys fewer units. Over the long term, this averages out the cost per unit and mitigates the risk of investing a large sum at a market peak. This strategy frees the investor from the challenge of trying to time the market.
The Power of Compounding: SIPs are highly effective for long-term wealth creation due to the principle of compounding.
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