What is SIP in Mutual Funds?

With an increase in financial awareness, there has been a rise in people opting for mutual fund investments. There are two ways to invest in mutual funds: i) a lump sum amount ii) via the Systematic Investment Plan (SIP). From these options, SIPs are quite popular for the affordability that it offers. In this article, we will cover in detail what is SIP in mutual funds.

What is SIP in Mutual Funds?

SIP or Systematic Investment Plan is an investment tool that allows you to invest in mutual funds at a predetermined interval. This can be monthly, quarterly, half-yearly etc. You can start a monthly SIP with a small amount of ₹100.

This increases the affordability and accessibility for small-ticket investors who wish to invest in mutual funds.

How Does SIP Work in Mutual Funds?

When you make a SIP investment in mutual funds, you are allocated specific units of mutual funds based on NAV (Net Asset Value). The SIP amount gets debited from your bank account on the date set by you.

With each investment of SIP, additional mutual fund units get added to your investments based on the current market rate of that fund which is known as Net Asset Value (NAV).

As the returns earned are reinvested, you get the benefit of compounding. At maturity (when you decide to sell mutual fund units), you receive the amount invested along with returns.

Types of Mutual Fund SIPs

There are various types of Mutual fund SIPs. They are as follows: –

Regular SIP

One of the most common types of SIPs is a regular SIP. Here you invest a fixed amount regularly for a fixed tenure. The frequency of the investment can be monthly, bi-monthly, quarterly etc.

Flexible SIP

Flexible SIP gives you the flexibility to bring changes to SIP. You can change the investment amount as well as the frequency of the SIP. The changes need to be informed to the fund house one week before the next SIP instalment.

Top-up SIP

This type of SIP allows you to increase your SIP amount at predetermined intervals. For example, you are investing ₹1000 in an SIP. You put an instruction to increase the SIP amount by 20% every year. This is a good option for salaried individuals as they can get the SIP amount aligned with the salary increase.

Perpetual SIP

A Perpetual SIP is the one which doesn’t have a fixed tenure. You can continue investing until you want. When you want to stop investing you can raise the request to fund houses to stop the SIP.

Trigger SIP

In a Trigger SIP, investment happens only on the occurrence of certain events in the market. This event can be a favourable market movement, NAV reaching a certain level etc.

Rupee Cost Averaging in SIPs

Rupee cost averaging is the concept of averaging the price at which you may buy the units of mutual funds. As per this concept, you invest a fixed amount in SIP every month. You will receive allotment of mutual fund units based on the current NAV.

When the NAV is low you get more units and when the NAV is high you get fewer units. So here, the volatility factor nullifies and averages out your investment. There is no need to time the market.

Pros & Cons of SIPs

Here are some pros and cons of investing in SIP

Pros of investing in SIP:

It helps investors to build financial discipline in investing. As you invest a fixed amount at regular intervals, you develop a discipline in investing.
You can start a SIP investment with as little as ₹100 a month. You don’t need big savings to start an SIP.
The SIP investments are very flexible. You can decide the amount and tenure at your convenience.

Cons of investing in SIP:

SIP doesn’t guarantee fixed returns like recurring deposits. As SIP amount is invested in stocks and debts, the returns fluctuate.
SIP is not suitable for people who don’t have a fixed source of income.
You can’t start and stop SIPs on an immediate basis. It may take time.

Selecting Mutual Funds for SIP

Selecting mutual funds for SIP is not an easy task. Here are a few steps that can help you in the selection of the right mutual fund for SIP.

Define your goal

Firstly, you need to decide the goal before starting an SIP. This could be retirement planning, buying a new house, child education etc. This will help you in choosing the right mutual fund for SIP.

Risk Tolerance

Determine your risk-taking capacity. High-risk takers can invest in equity mutual funds whereas conservative investors can invest in debt mutual funds or liquid funds.

Check the Fund Performance

You should evaluate the performance of the funds you wish to invest in. This will give you an idea of how the fund has performed in the past and make a decision.

How to Start SIP in Mutual Funds?

Here are the steps to guide you on how to start SIP in mutual funds:

Register with AMC or open an account with a mutual fund aggregator such as Dhan.
Submit the details of KYC.
Decide the investment amount and mutual fund scheme.
Select the payment mode and date of SIP.
Submit the details and your SIP will start.

Conclusion

SIP is the best investment route to start investing with a small amount. By regular investment in SIP, you can achieve your financial goals. SIP gives the benefit of compounding and hence can create huge returns in the long run. Assess your risk tolerance and goals and start SIP.

FAQs

How does SIP in mutual funds work?

You can invest in SIP at predetermined intervals. Units of mutual funds are allotted based on NAV and investment amount, and can then be redeemed along with the profit/loss accumulated.

Is SIP better than a mutual fund?

SIP is a type of mutual fund investment. You invest in mutual funds via the SIP route where the amount gets debited from your bank account to invest in a mutual fund of your choice.

Which SIP is best for Rs. 1000 per month?

Some of the best SIPs for ₹1000/month are Kotak Equity Opportunities Fund, Sundaram Focused Fund, Parag Parikh Flexi Cap Fund, etc.

Can I withdraw SIP anytime?

Yes, you can withdraw your SIP anytime.

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Happy Investing 💰

Disclaimer: This blog is not to be construed as investment advice. Trading and investing in the securities market carries risk. Please do your own due diligence or consult a trained financial professional before investing.