What is SIP? Benefits & How Systematic Investment Plan Works

When it comes to stock market learning and investment planning, it is a must to understand what is SIP (Systematic Investment Plan) and what are the benefits associated with this. Along with this, I’m going to cover types of SIPs, things to consider while going for a SIP, and much more. See you inside!

What is SIP?

A Systematic Investment Plan (SIP) is an investment strategy offered by mutual funds which allow investors to invest regularly in the fund, on a pre-determined day and amount. In other words, SIPs involve investing a fixed amount at regular intervals instead of investing a lump sum amount. This ensures that investors benefit from an approach known as ‘Rupee Cost Averaging’, meaning that they buy more units when the NAV is low and fewer units when the NAV is high, leading to lower average costs per unit.

SIPs are seen as an ideal way for individuals to invest in mutual funds as their disciplined approach forces investors to make regular investments, thereby reducing the risk of procrastination or missing out on potential gains. The minimum amount which can be invested through a SIP is usually Rs. 500/- per month. SIPs are also easy to set up, with the procedure for beginning a SIP being quite simple.

Benefits of a Systematic Investment Plan

1. Cost-effective: Systematic investment plans allow investors to invest small amounts of money regularly. These small investments help to reduce the average cost per unit of the investment.

2. Flexibility: Systematic investment plans provide flexibility in terms of how much you invest and how often you invest. You can start with a small amount and increase or decrease it as your financial needs change.

3. Discipline: Systematic investment plans can help investors maintain discipline by allowing them to invest on a regular basis. This can help to take advantage of market fluctuations and make the most out of investment opportunities.

4. Convenience: Systematic investment plans provide ease of use by allowing investors to create automated transfers without having to manually transfer funds. This helps to make the process of investing more convenient and efficient.

5. Diversification: Systematic investment plans allow investors to diversify their portfolios by investing in various asset classes. This helps to minimize risk and provides more potential for higher returns.

How Systematic Investment Plan Works?

1. Choose an investment option: Choose a systematic investment plan (SIP) that meets your individual goals and financial needs. Determine your risk tolerance, the amount of money you have to invest, and the length of time you plan to hold the investment.

2. Choose a broker: Decide if you want to use a full-service or discount brokerage firm to manage your investments. Research and compare various brokers to determine the best fit for you.

3. Set up the SIP: Contact the broker to set up the SIP and decide how often (weekly, monthly, etc.) you would like to make deposits. Be sure to provide the necessary paperwork, including ID and other necessary documents.

4. Transfer funds: The money to fund the SIP can be transferred from a bank account or transferred from any existing investments you may have.

5. Monitor progress: Monitor the performance of your investments regularly to ensure you are on track to meet your financial goals. Rebalance your portfolio periodically if necessary.

Types of Systematic Investment Plans?

1. Lump-Sum Systematic Investment Plan (SIP): This type of SIP enables the investor to make a one-time, lump-sum investment into a mutual fund. The investor can then decide on an ongoing basis how much money to regularly invest in the fund, for example, monthly or quarterly.

2. Dollar Cost Averaging Systematic Investment Plan (SIP): With this type of SIP, the investor will deposit a fixed amount at regular intervals into a mutual fund, regardless of whether the market is up or down. By investing the same amount consistently over time, the investor benefits from an ‘averaging’ effect, where the cost of their investments is spread out while benefiting from a lower average cost per unit.

3. Trigger-Based Systematic Investment Plan (SIP): This type of SIP allows investors to predetermine a target purchase price and plan to put a fixed amount of money into a mutual fund when the unit prices reach the trigger price. The trigger helps to limit the downside risk of buying at high prices.

4. Time-Based Systematic Investment Plan (SIP): This type of SIP also helps to reduce the downside risk associated with stock markets. In this plan, the investor sets predetermined times for investing rather than relying on the movement of the markets. This means that the investor will buy when the markets are low and sell when the markets are high, reducing the risk of investing in stocks.

What is the Difference Between SIP and Lumpsum?

SIP and lump sum investments are both ways of investing, but they have different advantages. A SIP (Systematic Investment Plan) is where you invest a fixed amount of money on a regular basis into mutual funds or stocks. It helps to average out the cost of investments over a period of time. An example of a SIP would be investing $500 per month into a mutual fund.

A lump sum investment is where you invest a large sum of money into mutual funds or stocks all at once. It allows you to take advantage of any dips in the market that may occur after investing. An example of a lump sum investment would be investing $10,000 into a mutual fund all at once.

Things to Consider While Starting SIP

1. Time horizon: Determine the period you are willing to stay invested in and plan your SIP accordingly.

2. Risk appetite: Choose the appropriate asset class according to your risk appetite and expected returns.

3. Liquidity: Plan your SIP keeping in mind your liquidity needs, so that you can redeem the funds when needed.

4. Initial Investment: Decide on an optimal amount you can initially invest in your SIP to reap the most benefit.

5. Cost: Be familiar with the associated costs for any SIP investments that you make, such as brokerage, entry and exit load, taxes, etc.

6. Monitor: Review your SIP periodically to ensure that it is performing as expected and isn’t lagging behind your expectations.

7. Retirement Planning: Accounting for inflation in your investments will be beneficial in planning for your retirement.

8. Diversification: Consider diversifying your portfolio across different asset classes and sectors to reduce the risk of loss.

5 Best Mutual Funds for SIP in 2023

  1. Aditya Birla Sun Life Small Cap Fund
  2. ICICI Prudential Focused Bluechip Equity Fund
  3. Mirae Asset Emerging Bluechip Fund
  4. IDFC Multicap Fund
  5. Axis Long-Term Equity Fund

5 Best Apps for Direct Investment in SIPs in 2023

  1. Coin by Zerodha
  2. ET Money
  3. Groww
  4. MyCAMS
  5. IndMoney


Q1. What is a Systematic Investment Plan?

A Systematic Investment Plan (SIP) is an investment strategy designed to help you save regularly and systematically over a long period of time. It allows you to invest in mutual funds, stocks, or other investments on a regular basis, generally through automatic deductions from your bank account.

Q2. Are Systematic Investment Plans worth it?

A. Yes. Systematic Investment Plans can be beneficial for investors looking to build wealth over the long term. SIPs allow you to invest regularly and avoid the pitfalls of timing the market. They also provide the potential for higher returns compared to traditional savings accounts due to the compounding of returns.

Q3. How does a Systematic Investment Plan work?

A. With a SIP, you set up regular payments into an investment account with a certain amount each month. Your funds are then used to buy small portions of your chosen investment. This allows you to invest over time and benefit from compounding returns.

Q4. What are the advantages of a Systematic Investment Plan?

A. Some of the main benefits of a SIP include disciplined savings, the convenience of regular payments, higher potential returns due to compounding, reduced volatility in an unpredictable market, and it helps investors stay committed to long-term investment goals.

If you’re looking for a way to invest regularly in mutual funds and reap the benefits of long-term returns, a SIP might be the right option for you. It’s important to remember that just like any other type of investing, SIPs come with certain risks, so always consult a financial advisor before committing to such a strategy.