What is the meaning of Systematic investment plan (SIP)

A Systematic Investment Plan, also commonly referred as SIP, is an alternative to investing a lumpsum amount in mutual funds. As a part of SIP, the investor invests a pre-determined amount at fixed intervals. Each instalment is used to purchase units of a mutual fund based on the prevailing Net Asset Value (NAV). Investors can also choose the investment amount and investment frequency (such as daily, weekly, monthly, quarterly, and so on) based on their goals and objectives.

Most Asset Management Companies (AMCs) allow investors to start Systematic Investment Plans (SIPs) with as little as Rs. 100 or Rs. 500. This makes SIP investment plans suitable for most investors. The money invested in mutual funds through SIPs accrues change in valuation based on the market conditions just like lump sum mutual fund investments.

Benefits of investing in SIP investment plan

Now that you know SIP’s meaning in mutual fund schemes, you may be wondering if it is suitable for you. Here are the three benefits you can reap when you invest in SIP mutual funds

Rupee-cost averaging: Each SIP instalment is used to buy and allot mutual fund units to the investor based on the prevailing NAV. If the market is up and the price of units is high, fewer units are allotted to the investor. However, when the market is down and the price of the units is low, more units are allotted to the investor. This is known as rupee-cost averaging in SIP mutual funds, meaning that the cost per unit tends to average out over the long term.

Power of compounding: Since many investors do not have large sums to opt lump sum investment in mutual funds, systematic investment plans can help them to get started with small amounts. Their investments start working – i.e., start generating potential returns right from the first instalment depending on the market movement. Moreover, the investments can also show growth potential thanks to the power of compounding. In contrast, if the investor has to wait to build a big amount to invest in a lump sum manner, the process can take months or even years, which means they can lose out on potentially lucrative investment opportunities.

Builds discipline: Lump sum investments are usually one-off investments as opposed to SIPs where investors invest money regularly into the mutual fund. This means SIP mutual funds help inculcate the habit of saving and investing in investors. Since the investors can choose the instalment amount and frequency, they can decrease or increase the amount and/or change the frequency based on their budget and income. Investors may find it beneficial to use a mf SIP calculator to project their future earnings. This tool can provide insights into potential returns based on various factors such as the invested amount, expected rate of return, and investment duration.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.