Systematic Investment Plan

We have talked about systematic investment plans (SIPs) several times, but only with respect to ETFs, and there is no post here that talks about systematic investment plans in general, so I thought I’d do a post about the nuances of a SIP.

A systematic investment plan or SIP (as it is more commonly known) is a way to invest in mutual funds regularly.

The idea is for you to set apart a sum every month or quarter, and use that to buy units of a particular mutual fund, regardless of its price. People like such a system because it helps them save regularly and build up an investment.

Setting up an SIP is really easy, and all you need is an account with a stock broker. I will take an example of ICICI Direct, and show you how easy it is to set up an SIP.

All you need to do is log in to your account and go to the “Mutual Funds” tab and click on SIP.

You will then see three drop-downs. One with “AMC” on top, second with “”Fund Category” and third with “Fund Sub – Category”. Say you want to buy SBI Magnum Taxgain; select “SBI FUNDS MANAGEMENT PVT LIMITED”, from the AMC, “Equity” from Fund Category and “Tax Planning” from Fund Sub Category. Click on “Go”, and you will see a list of options with your SBI Magnum Tax gain in it. Choose the Dividend or Growth option and click SIP.

Next you will come to this screen which gives you the options to set up the SIP in terms of days, months, amount etc.

Once done – you will be all set, and as far as setting up a SIP is concerned, it couldn’t get any easier than this. The hard part of course is knowing what to buy.

Benefits of SIP

Before I tout the benefits of SIPs let me state that I don’t get into SIPs because this type of regular investing is not something I am looking at right now.

With that said, let’s take a look at two benefits of  SIPs.

1. Regular saving habit: Perhaps the best benefit of setting up a SIP is that it forces you to set apart some money every month and enforces saving discipline on you.You could argue that this can be done without a SIP also, and you are right, – just that automation enforces a little more rigor.

(Image by Alan Cleaver)

2. Protects you from timing the market: If you have already committed money to a SIP – you will most likely continue to invest regardless of a big fall or huge gains in the market. This in turn will enable you to invest regularly rather than try to time the market, which not many small investors can do successfully.

(Image by Grant MacDonald)

Non benefits of SIPs

I don’t know what else to call them, but I am talking about things that people tout as benefits of SIPs, which in fact are benefits that you gain from SIPs, but are not exclusive to them.

1. Tax planning: Yes, setting up a SIP in a tax planning mutual fund will help you reduce taxes, but if you invest the same amount at one go in the same mutual fund – you will get the same tax benefit. Tax benefit is not something exclusive to a SIP.

2. SIP lead to building wealth: Good saving and investing habits are more likely to help you accumulate wealth in the long run, but there is no guarantee that you will end up doing so. Especially, if you invest in equity mutual funds.

3. Ignore the spreadsheets: I came across more than a couple of websites that had examples of how a person could accumulate more units because of regular investing when compared with someone who buys in bulk. These calculations are just based on the assumptions the respective authors make, and there is no guarantee that you will accumulate more units if you bought units regularly. A lot depends on market gyrations and nothing can be said with certainty.

Conclusion

As almost everything here – the conclusion is for you to decide. This  might work very well for one person, but may not work at all for another. Just keep these factors in mind, while making a decision.

If you are just getting started with your investments then read my investing for beginner series that is currently going on.