What is sip? And What is the meaning of sip?

If you want to have a hassle free and smart way of investing money in mutual funds then SIP is the best way to do so.  Let’s find out what is sip?

What is SIP?

SIP a.k.a  systematic investment plan is very flexible and easy process investment plan which allows your money to be auto-debited from your bank account. After being auto-debited, the money is invested in a particular scheme of a mutual fund. This feature will help you to invest a certain amount that is pre-determined in a regular interval of time. This weekly interval can be on a quarterly, monthly or weekly basis. Have a better future by trusting and saving in the systematic investment plan. Now let us discuss what is the actual meaning of sip? How can it be beneficial to you?

What are the benefits or meaning of Systematic investment plans?

There are various advantages of SIP which are listed below.

  • If you invest in SIP you will be able to save on a regular basis. This is called disciplined saving and it is important when you want to achieve certain financial objects.
  • Flexibility is another advantage of the systematic investment plan. It is advised that SIP investment should be continued in a long-term time period but it is not a necessity. The investors have the power to put an end to the plan whenever they wish. The amount invested can also be increased or decreased as per the choice of the investor.
  • Long-term benefits are gained from systematic investment plan. If you have opted for a long-term investment plan with SIP then due to the compounding factor and also the cost of rupee averaging you are likely to get a handsome amount of sum as a return.
  • This is a very convenient method of investment. Auto-debit facility is provided by systematic investment plan which makes sure that you never fail to make any payment.
  • The implementation of SIP can be done in both online and offline process. The option of a paperless transaction is provided to you when you opt for online systematic investment plan which makes it very easy and hassles free.
  • In order to get an automatic investment that is uninterrupted, you can also link your SIP details with your bank account.

Before making an investment in the systematic investment plan, make sure that you fully understand the meaning of sip. Contact your financial advisor and ask him or her, what is sip. Understand the concept and meaning of sip then make an investment. But one thing is for sure that if you invest in this then you will be benefited from this investment plan. Hope we have cleared all your doubts regarding what is sip? We will come up with another post to quench your doubts regarding systematic investment plan.

So get ready to invest in Mutual funds use this free SIP calculator toll to calculate return on investment

How SIP works?

In order to make an investment, you do not require a large sum of money now. The systematic investment plan allows you to make an investment without the necessity of a big amount. Here is a detailed study of how SIP works?

How does a systematic investment plan (SIP) work?

The systematic investment plan or SIP works in a flexible way. If you are investing in SIP, the sum of money that you are investing at a particular interval of time will be auto-debited from your bank account so that you do not forget to make any investment. For a particular day, NAV or net assets is assigned to you. This is the number of units that are allocated to you based on the market rate that is currently going on. With each investment that you make, additional units which are part of the schemes are added to your account after they are purchased at market rate. For this reason, investors make a profit due to the power of compounding and rupee cost average after they buy units on various different rates. This is how SIP works.

What do you mean by rupee cost average?

In the market for investment, people are generally skeptical. They find a perfect time to make an entry. You can finally put an end to all this if you make an investment in SIP because it has the feature of rupee cost averaging method. SIP makes you a regular investor which helps you to fetch the better amount of units provided when the price is low. When the market is facing a volatile situation then for per unit cost you may achieve lower average cost. This is how SIP works in a very cost-effective way.

What does power of compounding means?

The quicker you are investing your money will have a longer time to grow. This is the foremost rule of compound interest. Let us take an example. Suppose the total amount of money that you are initially investing is ten thousand per month. If you make this investment for twenty years then your total investment amount is twenty-four lakhs. Due to compound policy, if the interest of your money is 7% per year, then after twenty years you will get an amount of RS. 52.4 lakhs.

When is the ideal time to start SIP?

SIP can be started at any time when you are opting for a mutual fund scheme that is open-ended. You will need to fill up an application form. After submission, it will take ten to thirty days normally for the bank to start the process.

So start SIP as soon as and use this SIP calculator to to check SIP return on investment

Different Types of Mutual Fund Investment

Systematic investment plan or SIP can be defined as a strategy in which an investor has to make an investment of the same amount of sum for a certain mutual fund within a particular period of time. The investor can take part in the Stock market without timing them actively if they invest in SIP. With SIP you will be able to buy more units in case the market price rises and when the price falls, you can buy lesser units. SIP is profitable as it follows compound principles.

There are several types of mutual fund investments. Here is the detailed study.

  1. Funds of money market

The fund of the money market is generally involved with those types of mutual funds that are related to short-term investment which is based on fixed income securities like governmental bonds, commercial paper, acceptance of bankers, deposit certificates, and treasury bills. These types of mutual funds are safe but they have a lower level of return when compared to other funds.

  1. Funds of fixed income

Like that of government bonds, highly returned corporate bonds and investment-grade corporate bonds, these types of mutual fund investments are associated with investments that will return you a fixed rate. These types of SIP make sure that you invest on a regular basis so that money continues to come into the fund.

  1. Equity funds

These types of sip funds which make an investment in the Stock market are known as equity funds. When compared to fixed income funds or money market fund, equity funds generate a huge rate of return amount. There are many types of equity funds like growth stocks, income funds, mid-career stocks, large-scale stock and small-scale stocks.

  1. Balanced funds

Investment when made of combining the fixed income security and equities then it is known as balanced funds. The balancing process of higher return against greater risk is involved in this system. The money is divided into various types of investments in case of balanced funds. In case of aggressive funds there is the number of equities and a lesser number of bonds and for conservative funds, there are more bonds compared to equities.

  1. The index funds

In order to keep track of the performance of a particular index, these types of mutual funds are used. They are involved with lower costs for the mutual funds which are actively managed. Active management is defined as the pieces in which the buying and selling of investment are done by the portfolio manager.

  1. Specialty funds

When funds generally focus on mandates like commodities, real estate and investment related to social responsibilities then it is called specialty fund. If we take an example, the socially responsible investment funds for companies which support human rights and diversity, environmental stewardship, and it generally avoids companies dealing in tobacco, gambling, alcohol and the military and weapons.

  1. Fund of funds

These types of sip make an investment in other-other funds. These types of funds create an easier allocation of asset and diversification for investors. Also in case of MER, it is higher in case of this type of mutual fund.

Try out our SIP Calculator to check SIP return on investment for specific period.

SIP V/S FD

Systematic Investment Plan SIP or Fixed Deposit FD? This is apparently one of the constant battles for all of us to decide where to put our hard-earned money into. While Fixed Deposits implies low risk, investing in Mutual Funds carry high market risk. Looking at the other side of the coin, MFs have the potential to give higher returns and FD rates are fixed, unaffected from market conditions.

To simplify as to where should you invest your money, we bring to you a comprehensive, comparative study on SIP vs FD. Here’s a glimpse of what we shall be covering in this article:

  • What is SIP and FD?
  • SIP vs FD – Structure of each product
  • SIP vs FD – Comparative study on:
    1. Investment Type
    2. Returns
    3. Liquidity
    4. Risk factor
    5. Expense ratio
    6. Taxation
    7. Investment goal
    8. Suitability
  • Advantages and disadvantages of SIP and FD
  • Which is a better option?

What is SIP (Systematic Investment Plan)?

Systematic Investment Plan, mostly referred to as SIP is a Mutual Fund product that enables investors to make an investment in installments in instruments such as debt, equity or both.You can decide to invest a sum regularly like bi-weekly, monthly or quarterlythrough SIP.

What is FD (Fixed Deposit)?

Fixed Deposit (FD) is a type of investment in which you decide to invest a lump sum amount with a bank or financial institutions and earn a fixed amount of interest during the investment’s tenure that is until the specified maturity date.

Product Structure – SIP vs FD

SIP: If an investor opts for investment in Mutual Funds via SIP, he/she has to deposit a sum a regular intervals viz. bi-weekly, monthly or quarterly and the amount of investment can be as low as Rs. 500. Once you decide upon a pre-agreed fixed sum, it would be auto-debited from your savings account on a fixed date and credited to the mutual fund(s) you buy.

In recent times, equity mutual funds have generated good returns which have been in excess of recurring deposit or fixed deposit schemes. Reportedly, the returns generated by SIP mutual funds have been around 12% to 22% in the last 5 to 10 years.

FD: In a Fixed Deposit scheme, the individual has to first choose the lump sum amount he/she has to invest along with the tenure. FD is undoubtedly only of the great ways to increase your savings as they offer higher rate of interest than the savings account. They are also considered as one of the safest investment options as being independent of market fluctuations, returns on them are assured/fixed.

SIP vs FD

As SIP and FD significantly vary in terms of returns, risk involved, tax implications and liquidity, we bring to you a comparative SIP vs FD study on each of these aspects.

Key Factor SIP (Systematic Investment Plan) FD (Fixed Deposit)
Investment Type As a way to invest money in Mutual Funds, SIP means depositing a fixed amount on a periodic basis which can be daily, weekly, monthly or quarterly. A lump sum fixed amount for a certain tenure.
Returns Return on SIP via Mutual Funds is dependent on the debt and equity markets, as well as the fund scheme chosen With fixed rate of interest, the investor gets a fixed return – known at the time of investment
Liquidity Higher liquidity as SIPs can be closed and money withdrawn without any penalty, depending on the scheme Low liquidity – till the tenure expires
Risk Factor Low to high- As return on SIPs depend on the stock market, they are risky in terms of both capital and returns Low – FDs are not prone to risk as they are one of the safest forms of investment
Expense Ratio 0.50-3% including bank fee Zero
Taxation Investment and returns on SIPs are exempted from tax if the investor opts for Equity Linked Savings Scheme (ELSS) funds. Tax is levied on the interest earned from FD at the same rate as the investor’s gross income
Investment goal Whether short or long-term goal, SIPs can be taken for both short and long tenure. It is dependent on the scheme chosen, the frequency of investment, etc. FD serve long-term goal
Suitability Conservative and aggressive investors Conservative investors

Advantages and disadvantages of FD and SIP

Every investment avenue has its own set of pros and cons. Let’s have a look:

Advantages of Fixed Deposit:

  • FD is a completely safe means of investment with a pre-determined rate of interest. Money can grow at a steady rate without market fluctuations.
  • The duration is pre-determined – making it a fixed asset
  • Investor can avail tax benefits

Disadvantages of Fixed Deposit:

  • Low returns: As compared to other investment options, FDs give mediocre returns that are 6-8%.
  • Low liquidity: There is very less liquidity as one cannot withdraw the amount before maturity, and if withdrawn, penalty is charged by the bank
  • Taxation: FDs don’t help save a lot of tax as the returns received are taxable as per individual’s income tax slab

Advantages of SIP

  • SIP is a way to invest in mutual funds by allocating money in equity or debt
  • Returns are usually high, depending on the stock market
  • High liquidity as an individual can withdraw money at any time you want, depending on the scheme chosen
  • An individual can save a good amount of tax by investing in SIP

Disadvantages of SIP

  • There is a lot of risk involved in investing through SIPs as stock market is very volatile and returns can be yielded depending on the market fluctuations
  • It is best suitable for MF professionals

So which is a better option?

To conclude, the decision to invest in SIP or FD best depends on the risk capacity and investment goal of an individual. Keeping in mind their merits and demerits, it is up to you what you choose. If you are eying risk-free, steady investment to grow your money into wealth, FD is definitely a good option. However, if you are ready to take risk and are looking for exponential growth, SIP can serve your purpose of investment. Use this SIP Calculator tool to calculate your returns on investment for your specific time period