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What is SIP in Mutual Funds ? | How Systematic Investment Plan Works
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What is Systematic Investment Plan (SIP) in Equity Mutual Funds?

A lot is being talked about starting a SIP nowadays, but do you know What is SIP? Individuals who are new to investments are not sure of how this entire concept works and how it aids in long-term wealth creation. SIP stands for Systematic Investment Plan (SIP) and is a popular way to invest in mutual funds by investing a predetermined amount frequently – either monthly or quarterly in a particular mutual fund. SIP automatically buys units in your chosen mutual fund scheme on a specific date for a duration fixed by you.

How SIP aids in the creation of wealth?

With a sip investment plan, you can invest as little as 500 rupees per month in mutual funds for a specific tenure. It helps in averaging your investment costs while creating a corpus to reap the benefits of compounding. The effectiveness of compounding is best experienced when you remain invested for a long time, thereby allowing the invested money to earn overtime.

Rahul Gupta wants to retire by the age of 60 years and starts investing in mutual funds through SIP from his 40th birthday. If he invests Rs. 1,000 every month, and Assuming a return of 7%, the total corpus he would have accumulated at the age of 60 years will be around Rs.5,28,000.

Sanjay Singh also wants to retire by the age of 60 but starts investing from the age of 20 years, assuming a return of 7% and an investment of Rs. 1,000, the total amount at the end of 60 years would be Rs. 26,56,436, which is nearly five times what Rahul was able to save at the age of 60 years.

Therefore, a small amount of money that is saved frequently through sip plans for prolonged periods will have an exponential effect on your investment due to the compounding effect.

SIP Benefits

There are many practical advantages for making an investment plan in SIP mutual fund apart from wealth creation.

  • Discipline investing: SIP enables you to treat your investments like other fixed expenses during the month, whether it’s paying rent on your house, purchasing food items, dining out, or paying tuition fees monthly for your children. This ensures your investment plan is on track without much intervention from your end. Moreover, it helps you cultivate the habit of saving when you set a specific amount and make investments each month or every quarter.
  • Flexible: Beginning a SIP plan or closing one is simple and straightforward without complications. Also, there is no penalty for closing the SIP.
  • Variety of schemes: Whatever be your goal, you have a wide range of Mutual Funds schemes to choose from and invest in – be it child education, home purchase, or tax saving sip. Also, you may select the fund that matches your level of risk, investment objectives, or financial objectives.
  • Convenience: For initiating a sip mutual fund investment, you do not have to visit the mutual fund office each month to make payments. All you need to do is fill out an auto-debit or ECS form, and instruct your bank to debit a specific amount every month to buy the mutual fund. It is possible to manage the SIP through the website of the AMC.
  • The minimum capital required is low: You could start a SIP in India for as little as 500 rupees per month.
  • Diversification: Beginning a SIP with an equity-based mutual fund lets you profit from investing in different sectors and companies, thereby spreading the risk among companies’ markets, sectors and sectors.
  • Rupee cost averaging: This concept ensures that your investment capital is well utilized even if the markets are not performing well. Investing through SIP makes sure that more units are purchased when the NAV of the fund is low, thereby leading to higher returns when the marks perform well in the future. For example, let’s consider that you invest Rs. 1,000 every month through SIP in an equity mutual fund. If the NAV of the fund is Rs. 20 you shall receive 50 units since 50*20 = 1000. But, if the market falls and the NAV decreases to 18, you’ll receive 55.55 units. Once the market recovers and NAV increases to Rs.21, you shall get higher returns since you possess more units that were purchased at a lower price. Since SIP follows rupee cost averaging, the chances of generating good returns are possible in the long run.

 

How to start SIP investment?

 Investing in SIP can be done by following the below steps:

  1. Set Your Investment Goals: Knowing why you are starting a SIP investment helps in identifying the financial objectives. This is important because each mutual fund has been made with a particular goal in mind. Set your goals in stone and look for funds that will assist you in achieving your objectives.
  2. Provide KYC Documents: Once you decide to start SIP with an equity mutual fund, approach the fund company or AMC who requires investors to submit their KYC documents such as proof of identity and your address proof and photo to open an account. 
  3. Fill Application: After choosing the desired mutual fund, select the required parameters and input the basic information like Investment tenure, Investment frequency (monthly quarter-, quarterly, semi-annually, etc.), the amount of investment, etc., and activate the SIP mandate with your bank through net banking, for direct debit of payment from your bank account.

The most efficient way to meet your long-term goals is by investing in SIP mutual fund to help you reach your long-term goals, such as retirement, children’s college, wedding, or others. Therefore, SIP is an excellent option to get started making investments with mutual funds. In addition, it helps instill the habit of saving consistently and provides an opportunity to grow your investments in the long term through indirect investment in stock markets.

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