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SIP - Systematic Investment Plans

Systematic Investment Plan by its natural meaning is making investment in a systematic manner, to generate funds for some future purpose. By systematic investment, it means regular investment.

Systematic Investment Plans popularly called as SIPs are a methodology of investment in mutual funds in small amounts at regular periodic intervals instead of a one time lumpsum investment. A small amount of money is invested on pre fixed dates into mutual fund selected by the investor.

SIP is quite similar to Recurring Deposits of Banks. You can invest at regular intervals (weekly/mothly/quarterly etc.) a fixed amount in the selected mutual fund scheme. Amount will automatically be debited to your bank account and invested in the specified fund.

You have multiple options about the time (frequency), amount, type of scheme etc. Most commonly people use, SIP for monthly investment primarily in Equity Mutual Funds.

How does a Systematic Investment Plan-SIP work?

Lets understand the methodology with an example-

Suppose you start an SIP of Rs. 500 monthly. Now every month Rs. 500 will be debited to your bank account and invested in your chosen mutual fund. Against this Rs. 500, every month you will be allotted units of the fund at the days market price-NAV of the fund. So every month with your monthly contribution additional units will be added at the days market price.

If market is high you may receive lesser units & when markets are down more units will be added to your investment.

Benefits of Systematic Investment Plans-SIPs

There are number of benefits of investment in Equity Mutual Fund through Systematic Investment Plan-

  • Systematic, Regular & Disciplined Investment
Most of us tend to spend the money we have in our Bank Account. Though we all desire to save but we postpone it for a later date. Here Systematic Investment Plans come up as a saviour.  As amount is invested periodically on a regular basis it helps you in controlling your expenditure and thereby inculcating the habit of savings.
  • Rupee cost Averaging /Timing the Market is not required
There is saying that no one can time the market. However, individuals mostly attempt to time the market. Most of the people are not able to invest in falling market. They wait to catch the market at the bottom most level and at the end; they are not able to invest at all. In SIP, investments are made at regular intervals and hence it is beyond individual bias.

This concept of investing a fixed sum at regular intervals is called Rupee Cost Averaging. And SIPs are the best investment plans which take full advantage of it.
  • Power of Compounding
SIP in long run compounds your invested money and generates huge amounts.

For example Rs. 1000 invested per month for 25 years in an SIP, if earns a moderate 15% compounded return, will lead to a corpus of more than Rs. 25 Lacs after 25 years.
  • Log Term Advantage
In long run equity market generates return better than other asset classes. Investing for Long term through SIP helps in generating huge corpus. 

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Log Term Capital Gain on sale/redemption of Shares/mutual Funds

Short Term Capital Gain on sale/redemption of Shares & Mutual Funds

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