Mutual Funds

SIP stands for Systematic Investment Plan. It is a way of investing into a mutual fund scheme.

When you invest in a mutual fund scheme, you have two options which are described below:

So, SIP is when you choose to invest in a mutual fund scheme in installments rather than in one go. For instance, if you want to invest Rs.12, 000 in a mutual fund scheme, you can either invest the entire money at once or you can choose to invest through a SIP of Rs.1000 every month for a year.

Features of SIP-

SIPs have the following common features:

  • The minimum amount of SIP is usually Rs.500 every month
  • You can choose the SIP date when the investment starts and also when the investment should stop
  • SIPs are done through auto debit from your bank account ensuring that the SIP is deposited in the mutual fund scheme on the stipulated date without fail
  • You can choose the SIP investment mode in any type of mutual fund scheme that you want
  • The amount of each SIP us usually fixed and you can choose the amount when starting your SIP

You can opt for step-up SIPs wherein the SIP amount increases annually either by a fixed amount or by a fixed percentage

Benefits of SIPs-

Investing in mutual funds through SIPs is recommended because of the following reasons:

Let’s understand these reasons in details:

  • Affordability – since the minimum amount to start a SIP is as low as Rs.500, SIPs are affordable and accessible for small investors too. You can easily set aside an affordable amount every month to be invested in a SIP without hurting your pockets and get the benefit of market-linked returns.
  • Disciplined investment – once you start a SIP, the contribution becomes automated through your bank account. Moreover, your SIP continues for the period you choose to invest. This helps you in investing in a disciplined manner and inculcate a habit of savings
  • Compounding of returns – returns earned on your SIP investments compound over the investment period. This multiplies the returns and allows you to earn attractive income on your investments
  • Rupee cost averaging – since SIP investments are done at a specified date, you are freed from the task of timing the market for the correct time to invest. This is particularly useful for beginners who are not very well conversed with market dynamics and picking the right time to invest. Through SIPs, the effective NAV of investing into the fund is averaged out and you get the benefit of rupee-cost averaging.
  • Wealth creation – regular investments through SIPs over a long term period coupled with compounding of returns ensure wealth creation as you earn profits on your investments

SIP is, therefore, the best way to invest in a mutual fund scheme. You should, therefore, start a SIP as soon as possible and start investing in mutual funds for wealth creation.