SYSTEMATIC INVESTMENT PLAN: WHAT IS SIP AND HOW DOES IT WORK, ALL YOU NEED TO KNOW

Investors often wonder how to invest in mutual funds. Well, one of the most popular ways of investing in mutual funds is through systematic investment plans or SIP. In this article, we will cover everything you need to know about SIP mode of investment before you invest in mutual funds through SIP.

What is SIP?

SIP is a popular mode of investment that allows individuals to invest in mutual funds in a systematic and disciplined manner. An SIP investor invests a predetermined sum of money in their selected mutual fund schemes at periodic intervals for a given period of time. The periodicity of the intervals can be daily, weekly, monthly, quarterly, or yearly.

How does SIP work?

SIP investments work on the principle of consistent and periodic investments. The SIP investment amount gets auto-debited from your bank account and is used to buy the mutual fund units at the prevailing NAV (net asset value) of the fund. These investments are managed by a team of professional market advisors consisting of a fund manager and its team of researchers and analysts. With each investment, the capital investment amount that is re-invested in the mutual fund scheme gets bigger, and so does the potential returns on the scheme.

Types of SIP

Following are some of the types of SIP in India:

1. Plain SIP or vanilla SIP
2. Flexible SIP
3. Top-up SIP or step-up SIP
4. Trigger SIP
5. Perpetual SIP

Benefits of SIP

Here are a few benefits of SIP investment enjoyed by investors worldwide:

1. Disciplined investing
   SIP investments ensures that an investor regularly invests in the financial markets thereby inculcating a sense of investment discipline among investors. This comes quite handy when building a corpus to reach your financial goals in a timely manner.
2. Rupee cost averaging
   When you invest in the markets at regular intervals, you end up catching the markets at its high and low. As a result, one tends to accrue a higher number of units of a mutual fund scheme when the markets are low as opposed to a situation when the markets are high. This averages out the net cost spent on buying mutual fund units for an investment portfolio.
3. Power of compounding
   SIP investments allow investors to tap the power of compounding that helps investors to realise significant returns on their investments. Are you wondering how? Well, compounding is a concept wherein the profits realised from an investment is re-invested to earn more returns on the investment. Basically, compounding ensures that your money works for you to make more money.
4. Low minimum amount
   Almost everyone and anyone can invest in mutual funds through SIP mode of investment. This is because the minimum amount required to invest in SIP mutual funds is quite low at just Rs 100 per month. This allows investors from all economical backgrounds to invest in the markets and create a better financial future for themselves.