What is systematic investment plan and how it is different from mutual funds

By: | Published: December 25, 2017 11:06 AM

Under this investment plan, one needs to regularly put a small amount of money every month, similar to a recurring deposit.

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Systematic Investment Plan or SIP provides a wonderful money saving opportunity to someone who started to earn just recently. Under this investment plan, one needs to regularly put  a small amount of money every month, similar to a recurring deposit. According to Investopedia: “a systematic investment plan (SIP) is a plan where investors make regular, equal payments into a mutual fund, trading account or retirement account, and benefit from the long-term advantages of dollar-cost averaging (DCA) and the convenience of saving regularly.”

SIP differs from mutual funds

As per Investopedia, a mutual fund is an investment vehicle made up of a pool of moneys collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and other assets. You need to put in a big lump sum (one time investment) amount in order to purchase a mutual fund while SIP allows you to make smaller investments (monthly or quarterly). For instance, if you are looking to invest in a MF of Rs 10,000 then you can do it in two ways. Either you can buy the MF putting up front the entire amount in form of one time investment or pay 20 periodic investments of Rs 500 each.

Advantages of SIP

1)Earlier, mutual funds could only be accessed by a rich few, only who could produce one time investment to buy them.

2)With introduction of SIP, mutual funds could also be accessed by an average person with a tight budget. It’s doesn’t cost much to invest Rs 500 or Rs 1,000 on a monthly basis in the SIP.

3)The biggest benefit in making invest in SIP is that it helps you to get into mode of saving. You develop a healthy habit of saving and a monthly SIP of Rs 1000 for example which grows at a rate of 9% can give you around Rs 7 lakh in 10 years.

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