SYSTEMATIC INVESTMENT PLAN - BASICS :

Generally Systematic Investment Plan ( SIP ) is referred to investment vehicle offered by Mutual Funds allowing them to invest small amounts in periodic intervals instead of single lump sum payment . ( To know about Mutual Fund click here ) . In the scheme a fixed amount of money is paid by the investors through their standing instruction to their bank accounts periodically or through ECS ( Electronic Clearing service ) and invested in a specified mutual fund. The investor is allocated a number of units equivalent to the Net asset value on the date of payment . Every time a sum is invested, more units are added to the investors account. Thus in this strategy , an investor goes on buying the mutual fund in regular intervals for a specific period at different NAV or price . This strategy has twin advantage. First one is , it allows to invest in small amounts to buy a desired mutual fund which helps small investors , middle class . For example , a salaried investor can set standing instruction on monthly basis with installments affordable for him to pay every month . Over the years , he may be able to acquire desired amount of the mutual fund . Second important advantage is , he acquires the mutual funds at different prices depending up on NAV at the date of each remittance . It will help him to average out his investment cost by getting more units when markets are low and lesser units when markets are higher .

MORE INDIANS ARE TAKING SIP ROUTE FOR INVESTMENT

Dated 16.06.2018 : Newspaper report suggests that more and more Indians are are investing through Systematic Investment Plan and the amount collected has reached an all time high of Rs 7,304 crores in the month of May 2018 . Monthly collection of SIP has increased over the years from Rs 1,206 crores in March 2014 , to Rs 2,719 crores in March 2016 to Rs 7,304 crores in May 2018 . Overall SIP collection rose to Rs 67,190 crores in 2017 -18 from Rs 43,921 from the previous year .

It is reported that Equity mutual funds and Balance Mutual funds are the preferred investment channel for the investors .

One of the reasons attributed to increase in mutual funds is the gradual decrease of returns in other avenues of investment like bank deposits , gold and real estate .

Advantages of SIP for a Retail Investor :

1. AFFORDABLE : Makes investment in mutual funds affordable for small investors . One can invest every month a small portion of his savings for purchase of MF
2. DIVERSIFIED :Such purchase of units in MF makes your investment diversified as each mutual fund invests such amount in diversified portfolios. It is equivalent to purchasing various stocks, financial instruments in small quantity by investors themselves . For example if one invests Rs 1, 000 in a mutual fund which invests in 20 large cap stocks , a total of Rs 1,000 gets invested proportionally in 20 stocks which an ordinary investor can never do in stock market in such small quantities due to lot size of investments in each stock .If an investor invests in 5 mutual funds and if each mutual fund invests in 20 different stocks , it is equivalent to investor buying 100 stocks every month . By choosing mutual funds investing in different categories of financial instruments like bonds , stocks or gold etc , one can make his portfolio well diversified .
3. VOLATILITY PROOF : As units are purchased over a period in regular intervals , say a month , units are acquired at various prices prevailing on each day of payment , short term volatility is avoided . Thus cost of investment gets averaged out .

Risks Not covered by SIP :

1. MARKET RISKS :Mutual Funds carry all the investment risk of the class of investment they make in . For example , MF investing in equities will carry risks associated with investment in equities while MF investing in Bonds will carry the investment risks of the Bonds . Hence investment made in MF through SIP will also not escape the associated risks of investment made by individual mutual funds . When purchase price is averaged out during the period of investment , MF will be redeemed on maturity at the price prevailing then . Hence if markets have fallen at the time of maturity , investments made can not escape from the loss .
2. EFFICIENCY RISK : Mutual funds are managed by fund managers of issuing company . Return of investment on MF depends on the efficiency of the funds manager apart from market movement . Hence investment in MF carry efficiency of investment risk also
3. PROFESSIONAL CHARGES : Investment also carries professional charges of AMC and investor has to bear the charges irrespective of the efficiency of the manager .

Alternatives for Systematic Investment Plans :

A small investor has similar opportunities , like SIP , provided to invest his savings in other investment vehicles by Banks and Insurance companies . Commercial banks offer Recurring Deposit schemes ( RD )where in a customer can open a Recurring Deposit account with them , give a standing instruction them to transfer a fixed amount every month for a specified period , say 1 to 5 years . Depositor would get interest rate that is paid on a Fixed deposit similar to the period of investment . Similarly Life Insurance companies offer schemes of paying insurance premium every month where subscription cover both Life Insurance and Long term investment .

TIPS FOR INVESTING IN SIP :

1 Find out the amount of money you can save every month out of your salary / business and amount you can pay every month without default .
2. Allocate specific percentage to various categories of investment options like Recurring Deposit in a bank , Monthly Insurance premium you have to pay . ( Refer our INVESTMENT page to know various options available ) While Recurring Deposit plan gives a fixed income over the years , Insurance premia covers Life Risk.

• . Mutual Fund Investment is a good option for an small investor who wants to invest in diversified markets but has no time to continuously monitor his investment and who has no knowledge of the intricacies of stock market .

3. Carefully study the past performance of AMC before investing . Be aware that past performance is no guarantee for future prospects . Efficiency of MF manager is an important factor in generating revenue for the fund.
4. Invest your allocation to SIP in Mutual funds in at least 5 to 10 different funds , each one investing in different segments . You would spread the risk .
5. Risk of a MF is same as the risk of asset class it has invested . Further they also carry management charges of AMC which will be taken out from the fund irrespective of profitability . If AMC fund managers take bad decisions , risks of the mutual funds may be compounded and it may turn out worse than direct investment . Hence study the objective and class of funds it has invested and the track record of the manager before investment .

6. Set the maturity period of each SIP according to your future requirement of funds for your life goals .

Where to START A SIP ? :

AMC websites

Most fund companies offer their products to investors through their websites . If you are a first time investor, you need to approach the fund house or collection centres to submit the application form. You first download the scheme form from the respective website, fill in your details and submit the same along with the initial cheque, photocopy of PAN card and KYC letter. Once you are assigned a folio number along with the PIN, all subsequent transactions in the folio can be done online using your bank account. However you need to have separate account for each AMC .


Broker platfolio

You can also open SIP account through your broker account for stocks , if the broker offers such a facility. The units purchased will be credited directly to your demat account.

Independent portals

There are also independent web portals—FundsIndia , Fundsupermart , Aditya Birla Money —that cater to mutual fund investors, allowing you to open SIP .