A Systematic Investment Plan (SIP) is one of the easiest and the most hassle-free ways to invest in the stock market. Since everything is automated, you won’t have to do anything once you’ve set it up except ensure that your account is well-funded each month. The funds are automatically debited from the linked bank account and are invested in the mutual fund of your choice. 

If you’re someone who wishes to invest in an SIP, here’s everything you need to know about this investment vehicle including the various costs associated with it, its components, and the advantages that it provides. 

Components of an SIP 

A Systematic Investment Plan has many components. As a prospective investor, it is important for you to know what they are. Here’s an overview of a few of the most crucial ones.  

Investment amount 

With an SIP, you’re required to invest a certain predetermined sum of money, known as the investment amount, regularly. This investment amount can be anywhere from as low as Rs. 500 to as high as Rs. 10,000 or more. 

Tenure of the SIP

All Systematic Investment Plans, except a perpetual SIP, have a fixed tenure. You’re at full liberty to choose the tenure that you want for your SIP. You will have to make contributions till the expiry of the chosen tenure after which you can withdraw the accumulated corpus. 

Investment fund 

When you invest in an SIP, you get to choose the fund that you wish to invest in. There are different kinds of mutual funds that you can go for - equity, debt, and hybrid being a few of them. 

Frequency of investment 

You don’t always have to opt for monthly Systematic Investment Plans. In fact, you get to choose the frequency. You can choose from daily, weekly, monthly or quarterly SIP investments. 

Advantages of an SIP 

A Systematic Investment Plan offers a host of different benefits. Wondering what they are? Here’s a quick look at a few of them. 

• It utilizes the power of compounding to provide you with greater returns over the long-term. 
• It doesn’t require hefty investment amounts. In fact, you can start an SIP with as little contribution as Rs. 500 per month. 
• It increases the chances of wealth creation by bringing down your overall cost of investment through rupee cost averaging. 
• It is extremely convenient since everything is automated once you set up an SIP. 
• It requires very little knowledge of the stock market and doesn’t require you to extensively analyze or research the market. 

Costs associated with an SIP

Now, before you invest in an SIP, it is crucial for you to get to know what the various costs involved with it are. Here’s a quick look at the various expenses that you will have to deal with. 

Entry load

The entry load is a charge that all mutual fund houses levy when you start an SIP. This charge is used by them to cover the expenses related to the promotion, marketing and distribution of the scheme. 

Exit load

The exit load is a charge that’s levied when you prematurely withdraw the funds from an SIP. This is done to discourage investors from exiting the investment before the expiry of the tenure. The exit load is only applicable if you choose to prematurely redeem your SIP within the first year of its creation. 

Transaction charges

If your SIP amount is above Rs. 10,000, mutual fund houses will levy a fee known as the transaction charge. The maximum amount that you will be liable to pay would be Rs. 150 if you are a first-time mutual fund investor and Rs. 100 if you’re an existing investor. 

Expense ratio

The expense ratio is another major cost associated with an SIP. It is used by fund houses to cover costs related to the management of the mutual fund including the fund manager’s salary, administration fees, distribution fees, and more. 

Conclusion

With this, you must now be aware of all the key things related to a Systematic Investment Plan. Remember, to invest in an SIP, you need an active demat account in your name. If you don’t have one, you can simply visit Motilal Oswal to open a demat account within just a few minutes for free. 

 

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