In the night if you leave the water tap moderately open and water is flowing in small quantity then in the morning the bucket will be full, SIP works on the same principal where a small amount of periodic investment can turn into sizeable portfolio after few years. Full form of SIP is Systematic Investment Plan; it refers to that process where an investor invests fixed amount of money at periodic intervals for many years. In order to understand more about SIP let’s look at some of the important features of systematic investment plan –
- The first and foremost feature of SIP is that an investor has to invest fixed and not the variable amount of money in order to be called it as SIP. Hence for example if an investor invests $60000 in one month and then does not invest after that for many months or years then it is not a systematic investment plan, however, if the same investor invests $5000 for consecutive 12 months then it is systematic investment plan.
- Another important characteristic of SIP is that this is done in the case of equity markets only, hence if an individual makes a periodic investment in a bank or financial institution then it will be not called systematic investment plan.
- Another feature of SIP is that it is done for long term benefits and that is the reason why it is not made for short term like 6 months to 2 years rather it is always made for the long term which may range from 5 to 15 years depending on risk profile and objective of the investors.
- SIP is done by the individuals in anticipation of wealth creation and not for saving purpose, so for example, if you are doing SIP of $100 per month then you are not expecting 4 or 5 percent return rather you are thinking about 15 to 20 percent annualized return over a period of 10 to 15 years.
- Another feature of SIP is that there is no lock-in a period like bonds and fixed deposit and hence investor can stop systematic investment plan whenever one wants it without any penalty and get the redemption amount of the from the mutual fund.
- There is no limit on the number of SIP one can start and hence investor can have multiple systematic investment plans at any point of time.
- Another characteristic of SIP is that the early an individual start it the better are the chances of wealth creation as chances of success for an individual who has started SIP at an age of 20 or 30 years is much higher than an individual who is starting systematic investment plan at an age of 40 or 50 years.
As one can see from the above that systematic investment plan has many unique features which make it quite attractive for young people who want to build wealth for themselves over a period of time.