Mutual funds, of late, have emerged as one of India’s most popular investment vehicles. They allow you to invest as per your financial goals and risk appetite. For example, if you plan to invest for your long-term goals and can take a little risk, you can park your money in an equity mutual fund scheme.
Another benefit of mutual funds is that you can invest via two methods – Systematic Investment Plan (SIP) and Lump Sum. While the lump sum method allows you to make one-time investments, the SIP method enables you to make regular investments at fixed intervals.
Opting for the SIP investment mode can help you gradually build wealth over time and achieve your long-term financial goals. The SIP inflows are constantly rising in India, with August 2024 witnessing a record high of Rs. 23,547 crores.
In this article, you will delve into the essentials of mutual fund SIP, including its meaning, working, benefits, and how to start a SIP, among other details. Keep reading.
What is SIP in mutual fund?
SIP stands for Systematic Investment Plan. It is a disciplined approach to investing which allows you to invest fixed amounts at pre-determined intervals in a mutual fund investment plan of your choice. It is an easy and flexible way to build wealth over time while managing risk and taking advantage of market volatility.
The frequency for SIP investments can be monthly, quarterly, semi-annually, or annually. By investing in SIP mutual funds, you buy units at different prices, depending on the fund’s NAV (Net Asset Value) on the investment date.
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How SIP Works?
When you sign up for a SIP investment, a fixed amount is automatically debited from your bank account on a pre-determined date every month (given that you’ve opted for a monthly SIP). This amount is then used to buy mutual fund units as per the fund’s market value on that day. This approach allows for rupee cost averaging, where you will buy more units when prices are low and fewer units when prices are high.
Over time, this consistent investment can result in substantial capital accumulation, thanks to the power of compounding. For example, suppose you decide to start a monthly SIP of Rs. 5,000 in a mutual fund scheme. The table below depicts the number of units you can accumulate within six months:
| Month | Investment Amount | NAV | Units Purchased | Total Units |
| 1 | Rs. 5,000 | Rs. 100 | 50 | 50 |
| 2 | Rs. 5,000 | Rs. 120 | 41.66 | 91.66 |
| 3 | Rs. 5,000 | Rs. 110 | 45.45 | 137.11 |
| 4 | Rs. 5,000 | Rs. 90 | 55.55 | 192.66 |
| 5 | Rs. 5,000 | Rs. 80 | 62.5 | 255.16 |
| 6 | Rs. 5,000 | Rs. 75 | 66.66 | 321.82 |
As per the above illustration, you can accumulate 321.82 mutual fund units in six months, with an average NAV of Rs. 93.22 (30,0000 \ 321.82).
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What are the Benefits of SIP?
Below are the benefits of making SIP investments in mutual funds:
Disciplined Approach to Investing
SIPs instil financial discipline by encouraging regular investments. With consistent investing, you can plan your financials accordingly and achieve long-term goals.
Rupee Cost Averaging
One of the significant advantages of investing through SIP is rupee cost averaging. You buy fewer units when the markets are bullish and higher units when the markets are bearish, thus averaging out your cost. Also, it eliminates the need to time the market.
Power of Compounding
When you invest in SIPs over the long term, you stand to benefit from the power of compounding. Known as the eighth wonder of the world, it allows you to amplify your returns and create a large corpus over time.
Flexibility
SIPs are one of the most flexible modes of investment. You have the liberty to choose your investment amount, frequency, and date. With SIP apps like HDFC Sky, you can even stop or pause your SIP in the case of a financial crunch.
No Upper Limit
Several Asset Management Companies (AMCs) allow you to start a SIP with as low as Rs. 100 per month and no upper limit. It means that you can invest as much as you want to achieve your long-term financial goals.
Common Questions About SIPs
Below are a few common questions investors ask about SIP:
What is Monthly SIP?
When an investor chooses to invest a fixed sum of money in a mutual fund scheme every month, it is known as the monthly SIP. Over time, this consistent contribution accumulates into a sizeable investment.
What is ‘One Time’ in SIP?
‘One time’ in SIP is a feature that allows you to make a lump-sum contribution into a SIP account without committing to regular monthly investments. You can use this feature to take advantage of market dips or when you have surplus cash available for a one-time investment.
Can We Change SIP Amount Every Month?
No. You are usually not allowed to change your investment amount in the middle of a SIP. However, you can delete the current SIP and start a fresh one if you wish to change your SIP amount.
Does Units Matter in MF SIP?
Yes. The units represent your share in the mutual fund, and the number you receive depends on the fund’s NAV on the date of investment. When the NAV is low, you receive more units, and when it’s high, you get fewer units.
Can We Earn Monthly Income from One-time SIP?
Yes. By opting to redeem your mutual fund units through a Systematic Withdrawal Plan (SWP), you can earn regular income through your SIP investments.
What is the Best Way to Start a SIP?
The best way to start a SIP is through an SIP app. It involves the following steps:
Choose a mutual fund scheme: Research and select a mutual fund scheme that aligns with your financial goals and risk tolerance. This could be equity, debt, or hybrid mutual funds.
Select the SIP amount, frequency, and date: Next, determine the SIP amount, frequency, and date. While most investors prefer a monthly SIP, you can choose weekly, quarterly, or other intervals.
Sign-up for auto-debit: You can then sign up for an auto-debit mandate to start your mutual fund SIP. It will allow the AMC company to debit the SIP amount from your bank account automatically.
To Conclude
SIP is a great way to invest in mutual funds, offering benefits such as rupee cost averaging, flexibility, disciplined investing, and power of compounding. With the help of the HDFC Sjky SIP Investment App, HDFC Sky, you can begin investing from today for long-term financial growth. Click here to start your SIP now!