Systematic Investment Plan (SIP)

Systematic Investment Plan (SIP) is just a method of investing in any asset.

The idea is that using SIP, you invest a fixed amount of money at regular periods.

When someone says ‘SIP’, most people think of investment in mutual funds.

This is because most people use SIP for mutual funds only.

SIPs can be an investment in anything - mutual funds, stocks, gold, crypto.

In the case of mutual funds, SIP is automated. That is, you can set up the SIP and the amount will be automatically debited at fixed intervals.

But, automation of SIP is not always there.

May people manually invest the amount in stocks, gold, etc, and call that an SIP investment - which is also correct.

Again, because of mutual funds, many tend to think an SIP is set at one-month intervals.

This isn’t necessary.

SIPs can be set for any interval - it is up to you. It could be daily, weekly, monthly, yearly, every 10 days - whatever you wish.

Though you must note, in the case of most mutual fund platforms, you can automate the SIP only for intervals of a month.

Why do people do SIPs?

There are 2 main reasons why (among several others).

Reason 1:

Rupee cost averaging.

The markets are dynamic. Sometimes they’re up, sometimes they’re down.

And at the same time, it is impossible to time the market - to get the right price all the time.

To beat this, what you instead do is that you invest at fixed intervals (every month, or every week, etc).

So what happens is, over time, sometimes you invest when the price is slightly high, and sometimes when it is slightly low.

This way, you ensure that you never invest when the markets are too high.

This also ensures that you are saved from the risk of any rare spikes when the markets would be extremely overvalued.

This is called rupee cost averaging. This is an entire topic by itself.

Reason 2:

Discipline.

It sounds a bit immature to say people start SIPs to bring discipline but it is true.

Many investors tend to skip investing due to some random expense - procrastination, basically.

By setting up an SIP, you ensure that the money will get invested every fixed day so you don’t skip and miss it.