What is SIP and why you should invest in it?

A Systematic Investment Plan or SIP allows you to invest a fixed sum at regular intervals in selected mutual funds or shares. This allows you to buy smaller amounts at regular intervals, building fiscal discipline and saving you from the shock of a last minute lump sum payment.

It makes sense to invest in mutual funds if you are not an expert in the market.

Diversity matters:

If your SIP involves direct equity, unless you rejig your portfolio regularly, chances are that you will buy the same stock at regular intervals regardless of whether they are under or overvalued. In the case of a mutual funds however, fund managers rejig the portfolio periodically based on market movements to ensure maximum returns to unitholders.

Also, if you are investing around Rs 1,000 per month in shares through SIP, your ability to diversify your portfolio comes down. In the case of mutual funds however, your fund manager uses the pool to buy diverse stocks thus spreading out the risk and increasing your chances of higher returns. Whether you opt for direct equity or mutual funds, an SIP gives you the luxury of making smaller payments on a regular basis.

The tax factor:

Any investment made in selected tax saving mutual funds qualifies for tax deductions up to the specified limit under section 80C of the Income Tax Act.  They are thus a good option if you are not a professional investor but would still like to benefit from the stock market. Mutual funds are subject to market risks, but a well crafted SIP portfolio allows you ride out market turbulences and average out your returns.

There are two types of SIPs: amount based or quantity based.

While mutual funds have only amount based SIPs, stocks have both, amount based and quantity based SIPs.

Amount based SIPs

The more common option, this allows you fix a certain amount to be deducted at chosen intervals from your bank account to buy units of a specific pre-selected funds or stock. Cost averaging is used to buy more units at lower market rates and fewer at high market rates, which you cannot do with a lump sum payment.  

Quantity based SIPs

Under this scheme, a certain number of units of the specified stocks are bought regardless of their cost. And as always staying invested for the long term will help you glide over short term volatility and get more returns through the power of compounding.

So, now that you know what is SIP, it’s time to begin your investment journey.

Disclaimer: The contents herein mentioned are solely for informational purpose and shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.