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Systematic Investment Plans (SIPs) are increasingly becoming the preferred route for investing in mutual funds, as is evident from the consistent SIP inflows. Indian Mutual Funds currently have about 5.93 crore (59.3 million) SIP accounts through which investors regularly invest in Indian Mutual Fund schemes.
Source: Association of Mutual Funds in India – AMFI
With increasing awareness amongst people for savings, it is high time that the myths concerning SIP investments are debunked. Investors often face a dilemma about investing in SIP or mutual funds. Many investors often ask for historical performance and guaranteed returns under SIP before committing to an investment.
The biggest misconception in investors' minds is that besides mutual funds, SIP is an additional investment option. However, investors must know that a mutual fund is an investment product enabling investors to invest in a wide range of mutual fund schemes. As such, the investors may choose a desired mutual fund scheme which best suits their investment plans and financial goals. On the other hand, an SIP is not a product/scheme, but a feature through which investors can make their investments in a convenient and disciplined manner.
One may invest in mutual funds in a lump sum or through SIP. Lumpsum investing refers to investing in one go, wherein the investor makes a transaction in a single instance. In contrast, an SIP allows the investor to make regular investments with mutual funds.
With the convenience of investing through an SIP, investors often make mutual funds vs SIP comparisons. However, contrary to popular public opinion, SIP is not an investment product but just an investment option to invest in different mutual fund schemes.
Investors can choose between different mutual fund schemes for investment and then opt for SIP in that mutual fund scheme for making regular investments. So, when one asks, what is the difference between mutual funds and SIP, it can be concluded that while mutual funds are the vehicle for the investment journey, SIP is periodic refuelling of the vehicle to keep the investment journey running on track.
One can invest in mutual funds in a lump sum (one-time investment) or through SIP. The difference between SIP and one-time investment is that the investing process is automated under SIP and becomes the combination of several lump sum investments.
Lumpsum investing refers to investing for a single time, wherein the investor applies physically or digitally, makes the payment, and receives mutual fund units once the transaction has been processed. In contrast, SIP helps the investor make consistent investments in mutual funds.
What is a Systematic Investment Plan (SIP)?
As detailed above, an SIP is an investment option wherein the regular investment process is automated. While registering an SIP, the investor can choose the amount he/she wants to invest, the frequency of such investments, and the total time period of investing. Then the SIP registration is completed in Mutual Fund's records and the NACH Mandate i.e. one-time bank mandate is registered by the investor's bank. Post this, the SIP amount opted by the investors is automatically deducted from the investors bank accounts as per the interval opted by the investor and are invested in the specified mutual fund scheme.
In short, once the investor has registered the SIP and added the biller to his/her net banking account, the investment amount is automatically debited from the registered bank account and invested into the specified mutual fund scheme.
Benefits of SIP:
SIPs empower investors with the following benefits:
Rupee Cost Averaging
SIP investing facilitates mutual fund investments to be spread out over a period of time, across market ups and downs. The investments are made at different levels across different periods. When the markets are rising, the portfolio valuation increases, thereby benefiting the investors. Similarly, when the markets are falling, the investors are allotted a higher number of units per SIP investment.
Hence, depending on the market fluctuations, the investor receives fewer or more units allotted. This helps the investors benefit from rupee cost averaging, which means that the cost per unit is averaged with fixed periodic instalments. For example, if one has invested ₹10,000 as the first SIP investment at ₹10 per unit, and then makes the next investment at NAV of ₹8.50 per unit, the cost for allotted units under these two SIP instalments averages to ₹9.25 per unit.
Financial discipline
Since the investments are automatically debited from the bank and continued irrespective of market trends, SIP investing helps with a sense of financial discipline in the investors' lives. As a result, investors can build a healthy investment corpus over time and effortlessly move towards their financial goals with regular investments.
Eliminating of Investing Biases
Investment decisions are often clouded by several investing biases, including emotional bias and timing bias. The market ups and downs may impact the investors' decisions. While fear keeps the investments away when markets are falling, the want for further profits keeps the investors from booking profits at higher valuations.
Some investors believe that one must invest during the falling markets to benefit from lower valuations. Similarly, one also tends to wait for the right time to invest in the markets. Such procrastination is another primary reason for investors delaying their financial plans. Since investments are automated and independent of market movements, SIP investing helps investors eliminate emotional biases. Instead of waiting for the right time in the markets, the focus is on 'time in the markets.'
Staggering the Investments over Period
This is another significant benefit that SIP investing offers. If one wishes to invest in their financial goals in a lump sum, the entire amount must be available upfront. This may not be possible since one tends to accumulate a corpus towards his/her financial goals with regular savings. On the other hand, SIP enables the investors to stagger the investments over a period and thus take baby steps in the investment journey. SIP investing is, therefore, best suited when the investors have regular cash flows and sustained flow of income.
Now that the difference between mutual funds and SIP has been elaborated along with the benefits of SIP, investors can take the first step in their investment journey with a SIP in mutual funds.
Disclaimer:
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
SIP is a feature offered for a disciplined investment of a certain amount on a pre-decided date in a specific mutual fund scheme, regularly over a period of time.