Systematic Investment Plan: How does it work?

Systematic Investment Plan (SIP) is a method of investing in mutual funds at regular intervals. In case of mutual funds, individuals have the option to make a one-time lump sum investment. With SIPs, they can invest a particular amount each month throughout the period. Thus, investors can not only save every month but can also create a disciplined savings habit.      

As per AMFI, the total SIP accounts stood at 3+ crore as of January 2020. The total amount invested in SIPs was more than Rs.8,000 crore during this period.  

Best Equity Funds

The popularity of Systematic Investment Plans makes it vital for potential investors to understand their working and shortcomings, if any. A well-informed choice allows investors to choose according to their financial habits and expectations. Factors affecting the working of SIPs are explained below.

Compounding effect

A major advantage of investing in Systematic Investment Plans is that of compounding effect. The interest earned in a single year is compounded on the initial amount of money that was invested. As a result, the interest earned in the following year increases since the principal for interest calculation is also increased.

Rupee cost averaging

Rupee cost averaging allows investors to decide their investment according to prevailing market conditions. Investing regularly based on an assessment of the market conditions and remodelling their investment structure accordingly helps in maximising the revenue generated. Especially during downturns, investors can acquire more of equity shares which can generate higher revenue in the future as the market gets stable and ultimately grows.

Choice of tenor

Investors can easily choose the tenor for which they intend to invest in Systematic Investment Plans. Though it can vary over different financial institutions and the investment option selected, the choice of tenor extends from 1 year and can even go up to 20 years. Depending on the financial goals of an investor, the options and their investment tenor can be selected.

Choice of frequency

Individuals considering to invest in SIPs are also allowed to choose the frequency at which they want to invest. Depending on the financial stability of an individual investing in SIPs, along with his/her financial goal, the number of periodic depositions can also be selected by the individual.

Remodelling and discontinuation

Systematic Investment Plans also allow investors to remodel their investment or discontinue it if they require their funds elsewhere. Investors can remodel their investment sum according to the market conditions to maximise the revenue generated. Furthermore, they also have the option to discontinue their investment and retract the whole sum that was invested.

Easy payment

Multiple payment options are offered on these investments, allowing investors to choose according to their convenience. However, it is important to note that generally, investors have to complete their deposition before the due date. Few online transaction modes can be set up for automatic deposition of the investment sum before the due date.

While multiple advantages are offered on Systematic Investment Plans, it is important to note that these are intricately related to the market conditions. As a result, investors always carry the risk of bearing losses in case there is a downturn in the economic scenario.

Systematic Deposit Plans – A safe savings tool

To avoid any chance of succumbing to losses, customers can consider opting for savings tools. A convenient option in this regard is that of Systematic Deposit Plans, a type of fixed deposit offered by certain financial institutions. Along with the numerous benefits discussed below, customers can also use an SDP calculator to compute the returns on their savings in such policies.

  • Choice of amount: Individuals need to deposit as low as Rs.5,000 to start their investment journey.
  • High-interest rate: The interest rate is higher than that of a savings account and is not market-linked. Furthermore, the interest rate can even go up depending on other factors like the age of investor, existing accounts, etc.
  • Tenor options: Individuals saving regularly in these plans can choose a maturity tenor based on their financial goals ranging between 12 and 60 months.
  • Deposition date: Furthermore, the Systematic Deposit Plan provided by reputed NBFC Bajaj Finance also offers 3 dates as a choice for date of deposition. Investors can select 3rd, 7th, or 12th of the month for the deduction of the deposit amount.
  • Premature withdrawal: After 3 months are completed from the date of activation, investors can withdraw any single deposition or the whole amount in case of financial emergencies. They can calculate the return on the remainder of their deposition using an SDP calculator.
  • Loan option: Individuals investing in SDP can also opt for a loan using the deposition plan as collateral to reduce the interest rate levied on the line of credit.
  • Easy payment: Investors need not worry about their payment since their accounts can be linked via NACH facility which automatically completes the deposition.

Understandably, it is best for individuals who do not have an appetite for risk-taking to consider a Systematic Deposit Plan ahead of a SIP or Systematic Investment Plan. Especially for new professionals who do not yet have savings, it can be a safe option to incorporate the habit of creating savings while not being subject to market risks.

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About the Guest Author

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Gaurav Khanna is an experienced financial advisor, digital marketer, and writer who is well known for his ability to predict market trends. Check out his blog at HighlightStory


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