What Is SIP & How Does It Work?
Systematic Investment Plans are suitable for people who have regular cash flow or a fixed salary
SIP stands for Systematic Investment Plan. The SIP refers to investing in mutual funds regularly with a fixed amount of money in a disciplined manner. Depending on your financial goals, you can invest a fixed amount regularly in various mutual fund schemes using a SIP. Through a Systematic Investment Plan, you can create long-term wealth by investing a small amount of money. Systematic Investment Plans are suitable for people who have regular cash flow or a fixed salary. In addition, you can establish a regular saving and investing habit with a Systematic Investment Plan. Aside from that, if you start a Systematic Investment Plan early, you can leverage the power of compounding over a longer investment horizon. This article explains what SIP is and how it works.
How SIP Works in Mutual Funds?
The SIP works in three stages. Here's how it works;
Stage 1: Applying for the SIP
To invest through SIP, investors must give a mandate (authorisation to invest via SIPs). The mandate can be granted online by selecting the "Systematic Investment Plan" option when investing. When you apply offline, you must submit a mandate form and your application. You must also indicate the date (for which the money will be invested) and the amount on the form. You can submit the mandate forms online through your mutual fund account. You must submit the mandate to the mutual fund house's office for the offline method. You can also choose the frequency of your SIP investment, such as monthly, weekly, biweekly, or even daily.
Stage 2: Auto Debit/ ECS
Upon receiving a mandate, the fund house automatically debits your bank account for the specified investment amount. Funds are then transferred through ECS (Electronic Clearing Service) for investment in a mutual fund scheme. The subsequent investment amounts will also be auto-debited at the intervals you indicate in your Systematic Investment Plan. As a result, you won't miss any payments.
Stage 3: Allotment of Mutual Fund Units
The amount debited from your bank account is used to purchase units of the mutual fund. The mutual fund units are allocated to you based on the closing NAV on the day the money was transferred or the check was realised.
A SIP calculator estimates the return on mutual fund investments made through SIPs. An SIP calculator is designed for new potential investors who have just started investing in mutual funds. Nevertheless, the actual return from mutual funds varies according to several factors. The SIP calculator does not consider the exit load and expense ratio (if any). It is a tool that allows you to calculate the SIP amount required to achieve your financial goals, based on an expected annual return.
Benefits of SIP Investment
SIP investment offers the following benefits.
Power of Compounding
Over the course of time, a systematic investment plan will compound returns. In other words, if you invest through a Systematic Investment Plan, the earnings are reinvested into a mutual fund scheme. Consequently, when the returns are reinvested, the compounding effect is at work, which contributes to further wealth accumulation.
A systematic investment plan involves investing a set amount every month. In this way, investing a small amount at a time rather than a large sum at once is easier. Investing any amount that's comfortable for you and using SIPs over time will help you build a significant corpus.
Lower Average Costs
As you invest consistently over time, you gain more units when prices are low and fewer units when prices are high. In turn, this reduces your average investment cost.
A SIP allows you to invest your money in a convenient manner. The process does not require extensive market research or proactive responses to market movements. Small investors can invest their capital easily this way.
Brings Financial Discipline
If you opt for a SIP in mutual funds, you have to invest a specific amount regularly. This brings a sense of discipline to spend money on saving for future expenses. Your financial discipline is growing and you are planning consciously for future financial needs. As a result, discipline helps you make logical decisions and invest prudently.
Investing in mutual funds through a systematic investment plan is a disciplined and convenient way to build wealth over time. You can use the SIP app for mutual fund investment. A SIP mandate is initiated, and auto-debit or ECS is done for regular fund transfers. Finally, mutual fund units are allotted based on investment amount and prevailing net asset value (NAV). SIPs are a flexible, well-structured investment method that allows individuals to steadily achieve their financial goals. It is an appropriate investment strategy for those seeking to take advantage of compounding, mitigate market volatility, and cultivate financial discipline.
Note: Views and opinions contained herein are for information purposes only and should not be construed as investment advice/ recommendation to any party or solicitation to buy, sale or hold any security or to adopt any investment strategy. It does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The recipient should exercise due caution and/ or seek professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein.
Statutory Disclaimer: Axis Mutual Fund has been established as a Trust under the Indian Trusts Act, 1882, sponsored by Axis Bank Ltd. (liability restricted to Rs. 1 Lakh). Trustee: Axis Mutual Fund Trustee Ltd. Investment Manager: Axis Asset Management Co. Ltd. (the AMC). Risk Factors: Axis Bank Limited is not liable or responsible for any loss or shortfall resulting from the operation of the scheme. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The AMC reserves the right to make modifications and alterations to this statement as may be required from time to time.
Past performance may or may not be sustained in future.
Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
This article is a paid publication and does not have journalistic/editorial involvement of Hindustan Times. Hindustan Times does not endorse/subscribe to the content(s) of the article/advertisement and/or view(s) expressed herein. Hindustan Times shall not in any manner, be responsible and/or liable in any manner whatsoever for all that is stated in the article and/or also with regard to the view(s), opinion(s), announcement(s), declaration(s), affirmation(s) etc., stated/featured in the same.