Systematic Investment Plan - Basic Knowledge

 

SIP - Systematic Investment Plan

1. What Is a Systematic Investment Plan (SIP)?

                Systematic Investment Plan (SIP) is a method of investing in mutual funds where an investor selects a mutual fund scheme and invests a fixed amount at regular intervals (e.g., daily, weekly, monthly, or yearly).

SIP investment involves investing a small amount regularly, leading to higher returns compared to a lump-sum investment.

2. How Does SIP work?

                After applying for one or more SIP plans, the amount will be automatically debited from your bank account and invested in the purchased mutual funds at regular intervals. You will receive units of mutual funds based on the mutual fund's Net Asset Value (NAV).

                When you invest in a SIP plan in India, additional units are added to your account based on the market rate. With each investment, the reinvested amount increases, resulting in greater returns on your investments. It is up to the investor to receive the returns at the end of the SIP’s tenure or regular intervals.

Let's comprehend this with an example.

Suppose you want to invest in a mutual fund and have set aside 1.5 Lakh Rupees for the investment. Now, there are two ways to make this investment. Either you can make a one-time payment of Rs 1.5 lakhs in the mutual fund, also known as a lump sum investment, or you can choose to invest via a Systematic Investment Plan (SIP).

You need to start an SIP of a set amount. Say Rs 500. Then Rs 500 will be deducted from your account and auto credited to the mutual fund you want to invest in, at a certain fixed date every month. This will continue till the period (minimum 3 years to get a reasonable return).