A systematic Investment Plan (SIP) is one of the popular methods to invest in mutual funds and grow wealth over time. This method offers financial discipline and long-term benefits. Also, SIP in mutual funds is a structured approach to investing, allowing investors to contribute a fixed amount at regular intervals. In this article, we will understand SIP, its benefits, and how it works.
SIP Meaning
Systematic Investment Plan or SIP is a way of investing in mutual funds where a predetermined amount of money at regular intervals, such as weekly, monthly, or quarterly. SIP lets you buy units of a mutual fund scheme at different market prices, averaging your overall investment cost. SIP is also known as a disciplined and goal-oriented way of investing, as it helps you to save regularly and achieve your long-term financial objective
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Understanding SIP with Example
Let us assume that you start with an SIP of INR 1000 in a mutual fund scheme ABC. The present NAV is INR 50 and the units you receive is 20. Similarly, every month with every investment based on the NAV units are allocated and added to your portfolio.
SIP functions on the principle of rupee cost averaging. This means you buy more units when the market price is low and lesser units when the market price is high. This reduces the impact of market fluctuations and lowers the average cost of your investment. SIP also benefits from the power of compounding. This means that the returns earned on your investment are reinvested, generating more returns over time, and helping you to accumulate wealth in the long run.
How Does SIP Work in Mutual Funds?
Step 1 – SIP Mandate:
Investors need a mandate, i.e., authorization is given to the banks to debit money automatically to invest in MFs. You can select the Systematic Investment Plan option and follow the below steps -
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Online Method: After selecting the SIP option, mention your preferred date and investment amount. Next, submit mandate forms online through your mutual fund (MF) account.
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Offline Method: Fill out a mandate form along with the application form and mention the investment date and amount. Finally, submit the mandate form to the mutual fund house, Karvy, or CAMS office.
Step 2 – Auto Debit/ ECS:
Once you provide the mandate, the fund house automatically debits your bank account for the specified investment amount. The funds are transferred through ECS (Electronic Clearing Service) to invest in a chosen MF scheme. Subsequently, investment amounts are auto debited at the specified SIP interval to ensure consistent contributions.
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Step 3 – Mutual Fund Units Allotment:
The amount debited from your bank account is used to purchase MF units. MF units are allotted at the closing NAV of the day when the funds are transferred, or the cheque is realized.
Example: If you start a SIP of INR 5000 on the 10th of a month, INR 5000 will be auto debited on the 10th of every month. The amount is used to buy MF units at the closing NAV of the investment day. Finally, the units are added to your mutual fund account with each payment.
Types of SIP
There are different variations of SIP catering to the diverse needs of investors. Some common types include:
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Regular SIP: This is the plain-vanilla version of SIP, which means that investors just have to choose the SIP amount and date; the rest of the process is automated.
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Top-Up SIP: Allows investors to increase their SIP amount at regular intervals.
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Perpetual SIP: Continues indefinitely until the investor decides to stop it.
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Flexi SIP: Offers flexibility in altering the SIP amount based on the investor's financial situation.
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Trigger SIP: Triggers investments based on predefined market conditions.
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Step-Up SIP: Investors can increase their SIP amount periodically.
Understanding these variations helps investors tailor their SIP strategy to align with their investment goals and risk tolerance.
Benefits of Investing Through SIP
The following are the several benefits of investing through SIP:
Affordability: Anyone can start investing in mutual funds with a small amount of money, as low as INR 500, making it affordable for everyone.
Convenience: Invest in mutual funds without hassle, as you can set up an auto-debit facility from your bank account to invest regularly (a one-time process) a mutual fund scheme.
Discipline: It encourages a habit of saving and investing regularly, irrespective of market fluctuations, which is essential for achieving your financial goals.
Rupee Cost Averaging: By consistently investing a fixed amount, investors automatically buy more units when market is at low and lesser units when markets are high, mitigating the impact of market volatility.
Power of Compounding: SIP allows you to benefit from compounding, as the returns earned on your investment are reinvested, generating more returns over time.
Risk Mitigation: Investing over time reduces the risk associated with attempting to time the market, promoting a more stable and less risky investment journey.
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Conclusion
Systematic Investment Plan in mutual funds is an innovative and convenient method for investors seeking a disciplined and strategic approach to wealth creation. SIP is suitable for investors of all age groups and income levels, as it allows you to invest as per your risk tolerance level and financial capacity. Also, it is flexible, as you can choose the type, amount, and frequency of your SIP investment as per your preference. Therefore, SIP is a simple and effective way to create wealth in the long run.
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