How does SIP works in Mutual funds?

A Systematic Investment Plan (or SIP) is an investment mode through which you can invest in mutual funds. As the term indicates, it is a systematic method of investing fixed amounts of money periodically. This can be monthly, quarterly or semi-annually etc. The installment amount could be as little as INR 500 a month and is similar to a recurring deposit. It’s convenient as you can give your bank standing instructions to debit the amount every month.

SIP has been gaining popularity among Indian MF investors, as it helps in investing in a disciplined manner without worrying about market volatility and timing the market. Systematic Investment Plans offered by Mutual Funds are easily the best way to enter the world of investments. Starting early and investing regularly is advisable to minimize the investment amount needed to achieve your goals.

How it Works?

With UTI SIP, your amount to be invested will be periodically auto-debited from your bank account and will be invested into a specific mutual fund scheme. You will be allocated a particular number of units accordingly, based on the current market rate (net asset value or NAV in short) for the day.

If you continue to do this for a long time, you get to invest in the fund during the highs and lows. In other words, you don’t need to time the market to make your investments. Market timing can be a risky proposition as one can invest at the wrong time. SIP investments remove this factor of unpredictability.

Having decided on the investment tenure and frequency, you can choose to automate your investments. Give a standing instruction to your bank to transfer the amount directly from your bank account into the mutual fund SIP of your choice, on a fixed date every month (or quarter) etc.

When the markets are down, you purchase more fund units while you purchase fewer units when the markets are surging. Since NAV of all mutual funds are updated on a daily basis, the cost of purchase may vary from one SIP instalment to another. Over time, the cost of purchase averages out and turns out to be on the lower side. This is known as rupee cost averaging. This benefit is not available when you invest a lump sum.

Benefits of SIP

• Convenience- You can invest in a disciplined and phased manner through an SIP. It gives you the convenience of starting your investment with as low as Rs.100 a month. So, once you pick a good fund, you can give standing instructions to the bank and let the SIP take care of your monthly investments.
• Rupee Cost Averaging- SIP helps you invest in equity funds without having to time the stock market. You invest a fixed amount regularly across stock market levels when you invest in equity funds through the SIP. It helps you buy more equity fund units when the stock markets are crashing and lesser units when markets rise. You will be averaging out the purchase price of equity fund units over time thereby lessening the impact of short term market fluctuations on your investment.
• Power of Compounding- Compounding occurs when the returns you earn on your investments start earning returns. This is a simple concept in theory. But its practical implications are substantial. When you invest regularly through SIPs, your returns get reinvested. Over time, this result in a snowball-effect, that may increase your potential returns manifold. An ideal way to maximise this gain is to invest for an extended period. This also means you may benefit by investing as early as possible.
• Low Initial Investment- You can invest as low as Rs.500 per SIP instalment in equity funds. It helps you start investing for your financial goals without having to wait until you accumulate a lump sum amount. However, it helps if you invest a higher amount through SIP if you want to attain your long term financial goals faster.