What is SIP Investment & How SIP Works?

Systematic Investment Plans or SIPs are one of the most popular ways of investing in Mutual Funds. SIPs help inculcate financial discipline and build wealth for the future. With SIPs, you can start small and gradually build a corpus in a systematic and planned manner.

What Is A SIP?

A SIP is a systematic approach to investing and involves allocating a small pre-determined amount of money for investment in the market at regular intervals (usually every month)

The SIP route is the preferred way of investing in stocks and Mutual Funds because it allows you to participate in the market while managing risk better.

How do SIPs work?

SIPs work on the following two principles-

• Rupee Cost Averaging
  
  SIPs can help you escape market volatility by eliminating the guessing game of market performance. Regular investing ensures that the average purchase cost is evened out in the long run.
  
  When the markets rise, you get fewer units, and when the markets fall, you receive more units. This minimizes your risk and ensures you acquire investments at a lower average cost per unit.

• Compounding
  
  Saving a small sum of money regularly for long periods of time can have an exponential impact on your investment because of the effect of compounding. The following examples illustrate that:
  
  ‘A’ starts investing for his 60th birthday at the age of 40.
  
  Assuming returns of 7% and a monthly investment of Rs. 1000, his total corpus at the end of 20 years will be Rs. 5,28,000.
  
  ‘B’ starts investing for his 60th birthday at the age of 20.
  
  Assuming returns of 7% and an investment of Rs. 1000 per month, his total corpus at the end of 40 years will be a staggering Rs. 26,56,436 -- almost 5 times the corpus accumulated by A.
  
  Regular investments spread over longer durations yield greater returns and profits.

ADVANTAGES OF INVESTING IN SIP

Financial Discipline: The regularity of SIPs breeds financial discipline. It encourages forced savings and helps you build a corpus without cramping your lifestyle.

Flexibility: SIPs provide greater flexibility in investing. You can increase or decrease the amount of investment at any time.

Convenience: SIPs are a hassle-free mode of investing. You can easily do it online with a one-time set of instructions. You SIPs will automatically start getting accumulated.

Lower risk: Lump sum investments may expose you to greater capital risk. A SIP spreads your investment over time and reduces the risk to capital and will help you navigate volatility better.

Read more about Equity Linked Savings Schemes (ELSS) here.

Looking to apply for a Mutual Fund Investment? Click  here to get started now!

* Mutual Funds are subjected to market risks. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action.