Guide to Mutual Funds
Systematic Investment Plans (SIP)
After we have covered the different types of mutual funds, it is now time to discuss the different ways to invest in mutual funds. Basically, there are two ways of investing in a mutual fund – a lump sum and a systematic investment plan. Lump-sum is easier to understand – you put in all the investible funds in one go and purchase units of a specific scheme at the prevailing NAV.
On the other hand, if you invest a fixed amount at regular intervals (weekly, monthly, etc.) for a certain period – you will be opting for the systematic investment plan route, more commonly termed as SIPs.
How do SIPs Work?
In a SIP, the investment is spread over a certain period, rather than investing in one go. At regular intervals, on a specific date chosen by you, a certain amount will be directly debited from your account and invested in a scheme of your choice. This is known as the SIP installment. You will be allotted units based on the NAV of the day the installment is debited. The most common interval for SIPs installments is monthly i.e. on a chosen date (for example – the 10th) every month a chosen sum of money is invested in the scheme.
Hence, for investing via the SIP route, you do not need a large sum of money. You can invest as low as ₹500 per month. The minimum amount allowed for SIPs is indicated in the offer document of the scheme. You can calculate and estimate your returns on your SIP investments through our SIP Calculator.
SIPs can be done in almost all kinds of mutual funds.
Who is it Ideal For?
SIPs are ideal for salaried individuals for whom investing a certain sum every month from their salary is convenient. However, it is not restricted to salaried individuals only. Anyone looking to benefit from the volatility of the market can choose to invest through SIPs.
Benefits of SIPs
1. Rupee Cost Averaging
The first and the most significant benefit of SIPs is rupee cost averaging. When you invest through the lump sum route, you invest all your money at the closing NAV of a particular day. So, you do not take advantage of the ups and downs of the market during a particular period.
However, in a SIP, you invest in several days throughout the year. Thus you invest at various NAVs through the duration of your SIPs. On some of those investment dates, the market will be low and on some days it will be high. Hence, you buy at various market levels – which brings down your average NAV. This is known as rupee cost averaging.
2. Power of Compounding
If you plan to make a lump sum investment, you have to wait for the fund to accumulate. However, in a SIP, a small sum is invested regularly. Thus, there is no waiting period. Every rupee you have is invested in the market and works for you. Hence, they keep compounding – thus giving you higher returns.
3. Investment Discipline
By investing through the SIP route, you develop a habit of investing. This is very important in the long run. You will not forget to invest or spend the money on something else.
SIPs are very convenient, especially for a beginner investor or someone who lacks knowledge of markets. You do not have to track the market or time your investment.