What is SIP? How Does it Work?


When you invest in a mutual fund scheme, you have the option to invest through SIP. Now, you must be wondering what is a SIP investment plans or a systematic investment plan?

Well, it is a systematic way to invest money. When you choose to invest in mutual funds through an SIP, you invest money at regular intervals. You get the liberty to select the amount you want to invest during your investment horizon. SIP helps you to inculcate the investment discipline.

The Working of a Systematic Investment Plan

An SIP investment is easy and flexible. When you choose to invest in an SIP, the money gets debited from your account automatically and gets invested in the opted mutual fund scheme. When your money gets debited get some additional units of the fund on the basis of market price for the day.
Every time that you invest money in the mutual fund scheme, some units are allotted to you at the current market rate. Hence you get to invest in the mutual funds.

It is hard for investment experts to predict market performance due to market ups and downs. Volatility plays a key role and this makes it difficult to keep an eye on the movement of the market. This volatility is what makes the investors worry about their investment. Many investors have suffered losses due to market volatility.

This is where the SIP plans come to the rescue. It and instils confidence in the mind of the investors.
The SIP investment plans, not only allows regular investments but let’s one invest in a disciplined manner. The amount gets debited from the investor’s account every month and he/she is able to invest a small amount each month through an SIP. This becomes a habit and it does not strain the investor financially.

Understanding Rupee Cost Averaging

When the market is volatile, most of the investors aren’t confident about investing their money in the market. They want to make sure that they are able to time their investment.
When an investor opts for a rupee cost averaging, then he/she is immune against the market volatility for up to a certain limit. Since the investor invests in the market on a regular basis, he/she buys units at both the times i.e. when the price is less and when the price is high.
This enables him/her to achieve a lower average purchase cost.

Understanding the Power of Compounding

Compound interest offers immense benefits. As per the compounding rule, the earlier that you start to invest the more time you give your money to grow. This is one major benefit of investing through a systematic investment plan.

Benefits of a Systematic Investment Plan

Here are the benefits of an SIP:
– It enables you to save in a disciplined way. It is essential for having a successful portfolio. when you invest using an SIP, you save on a regular basis. This helps you to accomplish your financial goals.
– SIP gives you flexibility and which is important from a long-term perspective. The investors can discontinue their investment whenever they want.
– SIP offers long-term gains because of the power of compounding and because of rupee-cost averaging. The investments let you earn attractive returns in the long term.
– SIP investment is very convenient and is hassle-free. You can decide when the SIP amount will get automatically deducted from your bank account.

An SIP is a great way to invest in the market by the retail investors who cannot take out the time or have the knowledge to track the market regularly. This makes it an ideal investment tool. Those who are just starting to invest in mutual funds, SIP is the best bet.

Parting Words

When one steps in the mutual fund world, the challenge that every investor faces is how to start investing. Either they can invest a lump sum amount or opt for a systematic investment plan. The benefit of investing through an SIP outweighs that of investing a lump sum if one is not capable of judging the correct entry price. So SIP is the preferred option for the new investors.

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