What is SIP in mutual fund investment & how does SIP work?

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What is SIP in Mutual Funds?

A Systematic Investment Plan (SIP) is a type of investment that allows you to make small investments in mutual funds at regular intervals. In fact, you can get started with as little as Rs.1000 instalments and decide the periodic interval at which you would like to invest: monthly, quarterly, and so on. Plus, once you set up your SIP in mutual funds, the investment will be automated, and your instalments will be diverted automatically into your chosen mutual fund on the designated date.

SIPs are a suitable option for both novice and experienced investors since they provide discipline to your investment process. SIPs also encourage the practise of consistent saving and investing. You can also benefit from the power of compounding by continually investing a set amount. Over time, compounding can do wonders. Another advantage of SIP investment is rupee cost averaging.

How does SIP work?

Each instalment of your SIP goes into buying mutual fund units based on the prevailing Net Asset Value (NAV). Thus, the number of units you hold increases with each contribution and builds your mutual fund portfolio.

Let’s understand it with an example of Rs.1000 instalments. If the NAV for 1 unit is Rs.10, you will be allotted 100 units for the first instalment. If the NAV rises to Rs. 20, you will be allotted 50 units for the second instalment. Conversely, if the NAV falls to Rs. 5, you will be allotted 200 units for the third instalment. Therefore, by the end of the third instalment, you will have 350 units. This is the principle of ‘rupee-cost averaging’ and is crucial for investors to tide over the potential volatility in the markets.

Types of SIP

Daily SIP A daily SIP investment involves investing a certain amount every day. Due to the higher transaction frequency and potential liquidity issues associated with daily investing, this strategy is relatively less prevalent. Investors that keep a close eye on market volatility and want to profit from minute price changes use daily SIPs. However, daily tracking of assets and returns can be difficult.

Monthly SIP The monthly SIP is a well-accepted and regularly used strategy. It entails making a certain investment on a particular day each month. Because people may match their investments with their monthly income cycles, monthly SIPs are convenient. Investors who receive a monthly paycheck find this option to be attractive.

Weekly SIP A mutual fund weekly SIP requires investing a set amount each week. The balance between daily and monthly SIPs is achieved by this method. By distributing their contributions over several weeks, it gives investors the chance to balance out market volatility. People who look for regular investment possibilities frequently prefer weekly SIPs.

Benefits of Investing in a Systematic Investment Plan (SIP)

Develop discipline: One of the main advantages of SIP investing is that it instils discipline in your approach to investing. You can create a saving and investing habit by committing to a specific investment amount at regular periods. With this methodical approach, you may avoid the temptation to time the market and maintain your attention on your long-term financial objectives.

Flexibility: Another benefit of SIPs that meets the various needs of investors is flexibility. SIPs give you the flexibility to change the investment amount in accordance with your financial capabilities and goals, unlike traditional investing choices. As a result, depending on your financial circumstances, you can change the SIP amount.

SIPs are considered an easy and preferred way to invest in mutual funds. Here are a few of the SIP benefits:

  • Low Entry Level: SIPs have enabled people who do not have large sums for investment to start investing in mutual funds. The entry level is low, and you can get started for as less as Rs.1000.
  • Beginner-friendly: Beginners may find it difficult to read market movements for investing a lump sum in mutual funds. SIP creates a relatively stable way for them to do so. Moreover, an SIP allows you to take advantage of rupee-cost averaging since units are allotted for each instalment based on the prevailing NAV, whether the market is up or down.
  • Power of compounding: You do not have to wait for years to build a large sum to invest in mutual funds. Your money grows with the power of compounding with each SIP instalment. So, get started right now and see your money grow over long term with each instalment.

How to start SIP investment?

Here are the steps you need to follow to start a systematic investment plan:

  1. Define your financial goal linked to your SIP investment.
  2. Select the mutual fund house and mutual fund scheme you want to invest in.
  3. Choose the SIP instalment amount, investment frequency and SIP time horizon.
  4. Set up the auto-debit process from your bank account for SIP contributions.
  5. Check your mutual fund account at regular intervals.

How to customize SIPs?

One of the SIP benefits is the flexibility it offers to mutual fund investors. You can make these customizations to your SIP plans:

  • Fixed SIP: You can change the end date of your SIP. If you do not specify, then your SIP would end in 2099.
  • Perpetual SIP: This is the SIP type where you can keep investing in mutual funds with no end date. You can also ask the fund house to stop the withdrawals whenever you want.
  • Top-up SIP: You can set periodic increments in your SIP instalments as your income grows. For instance, you can increase your SIP contributions by 10% each year.
  • Flexible SIP: This SIP type allows you to change each instalment or skip instalments based on your preference. You only need to inform the fund house in advance based on the terms of the mutual fund.

SIP vs Lumpsum: Where to Invest

You need to have the ability to “time the market” when you want to invest a lumpsum in mutual funds. But if you enter the market when it has peaked, the chances of you losing money on your investment are higher. With SIP investments, you need not worry about timing the market since you will be allotted units in bullish as well as bearish markets. You will be able to benefit from rupee cost averaging. This is why SIPs are for everyone.

By now, you know what SIP is in mutual funds and how it is beneficial for all investors. Also, once you set up the auto-debit process, the SIP instalments get debited from your bank account automatically on the specified dates. Through SIPs, even beginners and people who do not have a lumpsum amount handy can invest in mutual funds. Moreover, SIPs help you build the discipline of investing a fixed sum regularly. The best part is that you get the benefit of investing in professionally managed mutual funds in small instalments.


Why should I choose a Systematic Investment Plan?

Choosing a Systematic Investment Plan (SIP) can be beneficial for disciplined investing and achieving your financial goals in a systematic manner. SIPs allow you to invest a fixed amount at regular intervals in a mutual fund, which helps you to average out the cost of investment and benefit from the power of compounding.

What is the best time to invest in SIP?

There is no defined ‘best time’ to invest in SIP. However, the earlier you start investing in SIP, the better corpus you can build in the long run. Since SIPs help average out the cost of investment, it is beneficial to invest in them regularly to achieve your financial goals in a disciplined manner.

Is SIP a good investment option for long-term wealth?

SIPs can be a good option for long-term wealth creation as they can help create wealth through the power of compounding. They also offer the benefit of disciplined investing and averaging out the cost of investment, which can help reduce the impact of market volatility.

How do I start my SIP investment?

To start your SIP investment, you can choose a mutual fund scheme that aligns with your financial goals, risk appetite, and investment horizon. You can then register with the fund house or a third-party investment platform, or distributors to set up your SIP.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.