Systematic Investment Plan - Part II

In part 1 of this series Systematic Investment Plan - Part I, you must have seen the benefits of Systematic investment plan (SIP). SIP is very helpful in a volatile market. Since you invest a fixed amount, you buy more of the security when its prices fall and less when it is more expensive.

In this post, I will explain the formalities to be completed on the ground to establish an SIP for a mutual fund.

All mutual funds define the dates on which you can make the regular investments (typically 1st/7th/15th/21st of every month). If you are a salaried employee, you will realize that you have surplus monthly savings and hence this can become a preferred option for you. Let us say that you receive your salary on the 1st of the month and hence you can make the investment every 1st of the month.
Along with the other details that are required to open the mutual fund, one has to fill the SIP application form and inform the mutual fund that you want to invest on specific date of every month. If that date happens to be a holiday, typically it gets executed on the next business working day.

Almost all mutual funds provide a direct debit facility in the form an Electronic Clearing Scheme (ECS) with the major banks: this means that one can sign an order giving details of the MICR code, bank name etc to be executed by one’s bank that one is giving an authority for the mutual fund company to take a specified sum of money from their bank account on specified dates for a specified period (Typically the period of time is anywhere between 12-18 months and one has to ensure that the SIP continues even after this period by getting in touch with the mutual fund company to keep the SIP alive). In most cases the cheque from where one makes the initial payment is good enough for the details that one needs to provide for the SIP. This saves one the hassle of signing post dated cheques or sending cheques on a periodic basis to the mutual fund.

In case of redemption of the units of the fund, the same account from which the debit is made will be credited reducing the hassle of getting a cheque and then depositing a cheque.