Systematic Investment Plan (SIP) is an investment vehicle offered by mutual funds to investors, allowing them to invest small amounts periodically instead of lump sums. The frequency of investment is usually weekly, monthly or quarterly.
Contents
Overview
In SIP(Systematic Investment Plans), a fixed amount of money is debited by the investors in bank accounts periodically and invested in a specified mutual fund. The investor is allocated a number of units according to the current Net asset value. Everytime a sum is invested, more units are added to the investors account.
The strategy claims to free the investors from speculating in volatile markets by Dollar cost averaging. As the investor is getting more units when the price is low and less units when the price is high, in the long run the average cost per unit is supposed to be lower.
SIP claims to encourage disciplined investment. SIP's are flexible, the investors may stop investing a plan anytime, or may choose to increase or decrease the investment amount. SIP is usually recommended to retail investors who do not have the resources to pursue active investment.
SIP investment is a good choice for those investors who do not possess enough understanding of financial markets. The benefits of SIP is it reduces the average cost of units purchased, as well as consistent investment ensures that no opportunity is missed arising out of the market
In India
In India, a recurring payment can be set for SIP using Electronic Clearing Services (ECS). Some mutual funds allow tax benefits under Equity-linked savings schemes. This however has a lock-in period of three years.