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What is SIP Investment & How SIP Works? Meaning, Benefits

Last updated on November 12th, 2023 at 11:37 am

SIP (Systematic Investment Plan) is a method of investing a fixed sum of money at regular intervals (weekly, monthly, quarterly, etc.) into a mutual fund scheme. It is a way to invest in mutual funds in a disciplined and systematic manner.

With SIP, an investor can invest a small amount of money at regular intervals instead of investing a lump sum all at once. This allows investors to invest in mutual funds with small amounts of money at regular intervals, regardless of market conditions. SIP helps investors to average out the cost of investment over a period of time, which is also known as Rupee Cost Averaging.

SIP is a popular investment option for individuals who want to start investing in mutual funds but do not have a large lump sum of money to invest all at once. It is also a good option for those who want to regularly invest a small amount of money over time, rather than making a large investment all at once.

What is SIP Full Form

SIP stands for Systematic Investment Plan. It is a method of investing a fixed sum of money at regular intervals (weekly, monthly, quarterly, etc.) into a mutual fund scheme. It is a way to invest in mutual funds in a disciplined and systematic manner. With SIP, an investor can invest a small amount of money at regular intervals instead of investing a lump sum all at once.

Types of SIP

There are two main types of SIPs:

Regular SIP: A regular SIP is the most common type of SIP. It is set up for a fixed period of time, usually 6 or 12 months, and the investor makes fixed contributions at regular intervals (weekly, monthly, etc.).
Flexi SIP: A flexi SIP allows an investor to increase, decrease or stop their SIP contributions at any time. This type of SIP is useful for investors who want more flexibility and control over their investments. For example, if an investor receives a bonus, they can increase their SIP contributions for that month or if they are facing financial difficulties, they can decrease or stop their SIP contributions.

Additionally, some mutual funds providers also offer other types of SIP such as

Trigger SIP: Under this type of SIP, the investor sets a target NAV and when the NAV reaches that target, the SIP investment starts automatically.
Step-up SIP: Under this type of SIP, the investor increases the SIP amount at regular intervals.
STP (Systematic Transfer Plan): Under this type of SIP, an investor transfers a fixed amount of money from one mutual fund scheme to another at regular intervals.

It’s important for an investor to understand the different types of SIPs available and choose the one that best suits their investment goals and risk tolerance.

How does SIP Work?

Here’s an example of how a SIP works:

An investor decides to start a SIP with a mutual fund scheme.
They choose to invest $100 per month.
The mutual fund company takes $100 from the investor’s bank account on the same date each month and uses it to purchase units of the mutual fund scheme.
The value of these units will depend on the NAV (Net Asset Value) of the mutual fund scheme on that day.
The investor’s units will be credited to their account with the mutual fund company.
The value of the investor’s investment will go up or down based on the performance of the mutual fund scheme.

SIP is a good way to invest a small amount of money regularly over time. It helps investors to average out the cost of investment over a period of time, which is also known as Rupee Cost Averaging. This means that if the market is low, the investor will buy more units, and if the market is high, the investor will buy fewer units. This averages out the cost of the units over time and may help to reduce the impact of market volatility on the investor’s returns.

What is the Difference Between SIP and Lumpsum?

SIP (Systematic Investment Plan) and lumpsum are two different ways of investing in mutual funds. The main difference between the two is the way in which the money is invested.

A SIP allows an investor to invest a fixed sum of money at regular intervals (such as weekly, monthly, or quarterly) into a mutual fund scheme, whereas a lump sum investment is a one-time investment of a large sum of money into a mutual fund scheme.

Here are some key differences between SIP and lumpsum investment:

Timing: With SIP, an investor can start investing with a small amount and can increase the investment amount over time, whereas with lumpsum, an investor needs to have a large sum of money upfront to make the investment.
Cost Averaging: SIP helps investors to average out the cost of investment over a period of time, which is also known as Rupee Cost Averaging. This means that if the market is low, the investor will buy more units, and if the market is high, the investor will buy fewer units. This averages out the cost of the units over time and may help to reduce the impact of market volatility on the investor’s returns. On the other hand, Lumpsum investments can be affected by market volatility.
Discipline: SIP helps investors to invest in a disciplined and systematic manner, whereas lumpsum investment requires the investor to have discipline and the resources to make a large investment all at once.
Flexibility: SIP is more flexible as it allows an investor to start with a small amount and increase or decrease the amount over time, whereas lumpsum investment requires a large sum of money upfront.

It’s important for an investor to understand the pros and cons of both SIP and lumpsum investment and choose the one that best suits their investment goals and risk tolerance.

Things to Consider While Starting SIP

When starting a SIP, there are several things an investor should consider:

Investment Goal: An investor should have a clear investment goal in mind before starting a SIP. This will help them to choose the right mutual fund scheme and determine the appropriate investment amount and frequency.
Risk Tolerance: An investor should assess their risk tolerance before starting a SIP. Different mutual fund schemes have different levels of risk, and an investor should choose a scheme that is appropriate for their risk tolerance.
Time Horizon: An investor should also consider their time horizon, or the length of time they plan to keep their investment. Longer-term investments typically have a higher potential for returns, but also a higher level of risk.
Investment Amount: An investor should decide on an appropriate investment amount and frequency. They should also consider their financial situation and ensure that they can afford to make regular SIP contributions.
Fund Selection: An investor should research and choose a mutual fund scheme that aligns with their investment goals and risk tolerance. They should also consider the fund’s past performance and the reputation of the fund manager.
Review and Rebalance: An investor should review their SIP investments regularly and rebalance their portfolio if necessary. They should consider factors such as changes in their financial situation, changes in the mutual fund scheme’s performance, and changes in the market conditions.
Tax implication: An investor should also be aware of the tax implications of their SIP investments. They should consult with a financial advisor or tax professional to understand the tax implications of their SIP investments and how they may be affected by changes in tax laws.

It’s important for an investor to take the time to consider these factors before starting a SIP. This will help them to make a well-informed investment decision and increase the chances of achieving their investment goals.

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Which Are the Best SIP funds?

It is difficult to say which SIP funds are the “best” as it depends on an individual’s investment goals and risk tolerance. However, some mutual funds have a good track record of performance and have consistently delivered good returns over the years. It’s important to note that past performance of a mutual fund does not guarantee future performance.

Here are some mutual funds that have a good track record and are popular among investors for SIP:

HDFC Equity Fund
ICICI Prudential Bluechip Fund
SBI Bluechip Fund
Axis Bluechip Fund
Kotak Standard Multicap Fund
Reliance Small Cap Fund
Mirae Asset Large Cap Fund
Invesco India Contra Fund
DSP Midcap Fund
Nippon India Small Cap Fund

It’s always recommended to conduct thorough research, consult a financial advisor, and consider your risk tolerance before investing. It’s also important to review your investments regularly and make adjustments as necessary.

How to Start a SIP

To start a SIP (Systematic Investment Plan) investment, you will need to follow these steps:

Choose a mutual fund scheme: Select a mutual fund scheme that aligns with your investment goals and risk appetite.
Open an account: You will need to open a mutual fund account with the fund house or with a distributor. The process typically involves filling out an application form and submitting KYC (Know Your Customer) documents.
Set up the SIP: Once your account is open, you can set up the SIP by choosing the frequency (monthly, quarterly, etc.) and the amount you want to invest.
Start investing: Your chosen amount will be deducted from your bank account automatically on the specified date and invested in the mutual fund scheme.

Note: it’s always advisable to do your own research and consult a financial advisor before investing, and also to check the scheme’s performance, management and expense ratio before investing.

SIP Investment FAQ

Here are some frequently asked questions (FAQs) about SIP investments:

Q. What is a SIP?

A SIP, or Systematic Investment Plan, is a method of investing a fixed sum of money at regular intervals (weekly, monthly, quarterly, etc.) into a mutual fund scheme. It is a way to invest in mutual funds in a disciplined and systematic manner.

Q. How does SIP work?

A SIP works by allowing an investor to invest a fixed amount of money at regular intervals (such as weekly, monthly, or quarterly) into a mutual fund scheme. The investor can choose the frequency and amount of their SIP contributions. The mutual fund company takes the money from the investor’s bank account on the same date each month and uses it to purchase units of the mutual fund scheme.

Q. What are the benefits of a SIP?

SIPs offer several benefits, including the ability to invest small amounts of money regularly over time, the ability to average out the cost of investment over a period of time (Rupee Cost Averaging), and the ability to invest in a disciplined and systematic manner.

Q. What are the different types of SIPs?

The two main types of SIPs are regular SIP and flexi SIP. Regular SIP is set up for a fixed period of time, usually 6 or 12 months, and the investor makes fixed contributions at regular intervals. Flexi SIP allows an investor to increase, decrease or stop their SIP contributions at any time.

Q. How do I start a SIP?

To start a SIP, an investor needs to choose a mutual fund scheme and fill out a SIP form, which is usually available on the mutual fund company’s website. The investor will also need to provide their bank account details and set up a standing instruction for the SIP contributions to be deducted automatically.

Q .Is SIP better than lumpsum?

Both SIP and lumpsum have their own advantages and disadvantages. SIP allows an investor to invest small amounts of money regularly over time, whereas lumpsum requires a large sum of money upfront. SIP helps investors to average out the cost of investment over a period of time, whereas lumpsum investments can be affected by market volatility. An investor should choose the investment option that best suits their investment goals and risk tolerance.

Q. How often should I review my SIP investments?

An investor should review their SIP investments regularly, for example, at least once a year. They should consider factors such as changes in their financial situation, changes in the mutual fund scheme’s performance, and changes in the market conditions.

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