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What is SIP & How does SIP Investment Work in India?

What is SIP?

Systematic Investment Plan (SIP) is a simple and convenient method for investing in mutual funds. It provides a way of investing a fixed amount of money in any particular scheme of mutual fund at a pre-defined regular interval of time. If you still wonder what is SIP or what is sip in mutual fund; it can be simply explained as a planned tool for investment in which a particular amount is deducted from the account of the investor and is invested in the mutual fund scheme chosen by the investor. The time interval at which the money is being invested in the mutual funds can be daily, monthly, quarterly or half-yearly.

Among the mutual fund investors, SIP has become very popular gradually because of the investing discipline it instills in an investor. Moreover, you do not need to worry about the volatility in the market and the timing the market when you are investing through SIP mode. You can make an easy entry into the investment market by starting a SIP. It is always advisable to start your SIP investment at an early age to reap the benefit of power of compounding.

Perks of SIP

Now that you know what is SIP or what is SIP in mutual fund, let us have a look at the few perks of an SIP investment.

  • Rupee Cost Averaging
This is one of the best features of SIP investment. SIP is a “way” of investing in a mutual fund in a disciplined manner such that irrespective of the market situation, one keeps investing a particular amount of money at a predefined date. So, if the market is high, you would get lesser number of units and vice versa. In this way, you eliminate the concept of timing the market and keep investing irrespective of the market situation. Thus, the average cost of investing becomes lower than bulk investing at any point in time, because you invest when the market is high as well as low and thus the average cost of units gets spread over time. This helps in smoothening out the short-term fluctuations in the market for the portfolio.

  • Power of compounding

If you continue your SIP investment for a longer period, you will start earning returns on the returns of your investments. This can help you accumulate a healthy corpus over the long term

  • Time- saving investment option

SIP investment is a time- saving option and if you are choosing to carry out all the procedure online, it is even more time saving and convenient.

  • Stress- free

Since the market fluctuations do not hamper SIP investment it is a stress- free option for the investors.

  • Flexible and affordable

SIP is a flexible and affordable investment option as the minimum amount to start a SIP is Rs.500 and you can go on increasing your investment as your income increases with time. Also, there are no charges for starting or stopping a SIP investment.

Now since we have discussed in length about what is sip investment, let’s take a real-life example to see how SIP can be used to achieve different financial goals:

Rohit, a 33-year-old software engineer by profession who lives with his wife and a son. The two most important goals for Rohit are: to save for his son’s higher education and retirement. Rohit has been investing in conventional products like Bank Fixed Deposits in order to achieve these financial goals.

But somehow, Rohit realized that his earnings from the FDs may not be enough for him to achieve his financial goals. The major cause of this shortfall is inflation. The real return he gets on his investments after deducting the inflation rate is very low.

So, what should be Rohit’s approach in order to get high returns but without being affected by the fluctuations in the market? One of the good options here is to invest in an equity mutual fund through a SIP. This will help him in achieving his long-term financial goals and will also induce financial discipline into his life.

Now, let us have a look at how does mutual fund SIP work and how does SIP work in India.

How does SIP work?

As said earlier, SIP functions on the principle of regular investments. Now the question arises how does SIP work in India? By starting a SIP, you are investing a defined quantity of money into mutual funds at pre-defined intervals. Your savings account will be debited with that particular amount of money for your SIP on your instruction.

After the payment of the SIP is done, the AMC, Asset Management Company or the Mutual Fund house shall assign you with a particular number of units from the selected mutual fund scheme of yours. This assignment of units depends on the NAV or the Net Asset Value for that particular day of the scheme which you have chosen. As you go on paying the installment amount for SIP, you go on adding more units of your scheme.

When the market fluctuates, i.e. when the market is up you get less units for your money paid for SIP whereas more amounts of units can be purchased when the market is down. A major feature of SIP is rupee cost averaging. With help of a SIP, you can lower down your investment’s average cost and risk reduction for your investment can be possible by wisely spreading the price of your purchase over time.

How to start SIP investment?

We have answered what is SIP and what is SIP investment. But, before you actually start investing in SIP, you need to ascertain important things like your financial goals, tenure of your investment, your risk appetite, etc.

First, you have to decide about your long-term financial goals. The next important step is to decide on the timeline i.e. by when you would need money to achieve these goals. This timeline once decided will be the tenure for which you will be investing in a SIP. Then, the next vital step is to decide on the amount of money to be invested. You can use a SIP calculator available online to find out the amount of money you need to invest regularly to achieve your goals. Finally, when the amount and tenure are all decided, you can go ahead and consult financial experts to know about the various mutual fund schemes available and choose an appropriate one for you.

In the next step, you need to submit your KYC. If the online method of submission is being selected then you can submit the details digitally as well. Mandatory documents like PAN card, address proof, and an identity proof need to be submitted along with the KYC (Know your Client) form. Post this, you will have to complete the IPV procedure i.e. In-person verification. You can again do this in two ways i.e. by visiting the office and submitting the necessary documents or by attending a video conference call using a webcam. This is a part of the KYC process for authentication.

Once your KYC is complete, you need to submit the mutual fund application form along with the cheque of your investment amount and the SIP form at the nearest office of a mutual fund house, distributor or an agent. Moreover, you can start your own SIP online as well. You can get details on all plans and schemes on websites like IndiaNivesh and you can easily start the SIP online, provided your KYC is already done. Else, it needs to be completed first, before starting to invest.

SIP is a great and extremely convenient way to start investments in mutual funds. Once you completely understand the basics, you can easily realize your different financial goals with help of SIPs.



Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.