What Is SIP & How does SIP Work?

What is a Systematic Investment Plan (SIP)?

Although different people interpret SIP in different ways, SIP investment meaning is pretty simple. You can invest in a mutual fund scheme in two ways – lump sum and SIP. Lump-sum investment is when you invest a specific amount (let’s say INR 10,000) at one go and do not invest anything after that, or at least if you do not wish to. You have no obligation to invest the same amount every month. You can also make more than one lump sum investment a month.  

In contrast, a Systematic Investment Plan or SIP is an organized way of investing in capital or secondary markets. You need to select the amount and the frequency of investment. The amount and the frequency remain the same throughout (unless otherwise instructed by you). Generally, you can open a SIP account with a measly ₹500. However, from the date of the SIP account opening, you have to pay the same amount every month, as long as you do not close the account or stop investing. Alternatively, you may choose the quarterly or the half-yearly mode.

Systematic Investment Plan (SIP) in a mutual fund investment method through which one can invest a specified sum in a Mutual Fund portfolio at regular intervals. SIP has grown in popularity among Indian mutual fund investors because it allows them to invest in a structured way without having to worry about market volatility or market timing. Mutual Funds' Systematic Investment Plans are by far the finest method to get started in the world of investing.

How SIPs Work?

With SIP, you may gradually invest a certain sum in mutual funds on a monthly or quarterly basis over time, averaging out the investment costs and taking advantage of compound interest. As long as you continue to invest, your money will grow over time because to the magic of compounding. And besides, it is your timing in the market, not market timing, that enables you to build money to support your aspirations in life. Using postdated checks or the ECS (auto-debit) feature, an investor can invest a predetermined set amount in a plan every month or every three months, depending on his convenience. Investors must complete an application form and a SIP mandate form, on which they must select the SIP date i.e. the day on which the sum shall be invested. Future SIPs will be automatically charged by a standing order or post-dated checks. The Mutual Fund / Investor Service Center office or the Registrar & Transfer Agent's closest service center are both acceptable places to deliver the documents and checks. The sum is invested at the Net Asset Value (NAV) as of the check's realization date.

Advantages and Disadvantages of Systematic Investment Plans

Here are the top advantages of SIP investment:

●  Rupee-Cost Averaging – You can achieve better rupee-cost averaging since SIP spreads out your net yearly investment amount. Simply put, you get more units when the NAV is low and fewer units when the NAV is high. 

●  The Power of Compounding – SIP lets you exploit the power of compounding to reap rich dividends. Since you invest every month, the initial amount gets rolled over the next month and adds to your capital.

●  Minimum Investment, Maximum Profit – You can invest as little as ₹500 per month in a SIP account. Perhaps no other investment instrument (except Post Office Recurring Deposit) allows such a low investment amount. Hence, you can deposit a low amount and create a large corpus. 

●  Convenient Investing – SIP is more convenient than other investment options since you do not need to transfer money every month. You may issue post-dated cheques or give standing instruction to your bank, and the SIP amount gets automatically deducted from your account every month or quarter.  

Now we shall understand the following disadvantages of investing in mutual funds through SIPs:

● Limited options of SIP dates: For a SIP in Mutual Fund you need to decide a date in advance when you like to do your SIP and give an auto-debit mandate for the same. Most MFs have limited options.

● SIP can only invest pre-defined fixed amounts: Sometimes you may believe that the markets are undervalued or that you have more money than usual and wish to invest more, but SIP only allows you to invest a predefined fixed amount. The same applies to wanting to invest less; you are unable to do so.

● Lack of funds can lead to investment disruption: A low balance in the investor's bank account may cause the cheque or ECS (Electronic Clearing Service) instructions to be dishonored.

Why should you invest in SIP Mutual funds?

Here are the top reasons why you should invest in SIP in mutual funds:

● Your investment amount is increased by the returns it generates if you choose the growth option when you start your SIP. The compounding effect that arises from this ultimately produces much bigger profits.

● SIPs shield investors from making the same emotional errors that fund managers do while managing assets.

● AMFI and SEBI have implemented a number of strict rules that each mutual fund scheme and AMC must follow in order to protect the interests of investors. This ensures transparency of funds.

● From the comfort of your home, you may follow your SIP, track the fund, change to a different plan, stop your SIP, start a new SIP, and even redeem your units.

● The majority of investors struggle to continue investing for an extended length of time after they begin. SIPs by their very nature increase your investing journey's discipline.

How to Choose Best SIP Mutual funds?

● Define your objective: Examine your objectives before choosing a fund for your investment. Do you intend to save money aside for retirement, a trip, or a down payment on a home? You should estimate how much money you'd need to reach your goals based on what they are. Then, you may determine how much you should invest each month and what kind of returns you should anticipate.

● Comparing various funds: Create a list of each of the top competitors once you have chosen the type of fund for which you want to begin a SIP. Make sure they adhere to your list of demands. Compare their past results, fund goals, fund management backgrounds, expense ratios, and other important factors. This will assist you in locating the ideal SIP mutual fund for your objectives.

● The AUM of the fund: The market value of the whole fund or the assets held by the fund is known as AUM, or Assets Under Management. It serves as a gauge of the fund's performance. The trading value increases as AUM increases. Simply put, this shows how many investors have already made investments in the corpus and what kinds of activities they will be dealing with.

● The fund's track record: The fund house you choose must be respectable and well-known. In most circumstances, if your fund firm is reputable, it's a good sign for its performance and returns.
Liquidity and ratings: Look over the schemes and avoid ones that have risks like volatility and poor liquidity. Look for funds with excellent rankings recognized by CRISIL-rated funds. The funds with rankings 1-3 are the best.

How to customize your SIPs?

You may decide to change your SIP installment amount or frequency when doing the yearly investment review and rebalancing process. Additionally, you could choose to alter the SIP plan while still using the same fund company. Many AMCs provide a SIP update option in such circumstances. You must fill out a form for SIP amendment or provide an instruction to modify the SIP instruction.The application should be sent to the nearest ISC or AMC office. The request must explicitly state both the old SIP command and the new updated instruction. You can also do this through the broker or your demat/trading account online. However in the online mode, you cannot raise the quantity of an existing SIP. You must make new SIP investments with the same folio number in your existing fund without disrupting the existing SIP investment. Alternatively, you can cancel the prior SIP by completing the SIP cancellation and then making a new purchase with the higher amount.

Therefore, you must start a new SIP for Rs. 500 and maintain existing SIPs if you currently have one going for Rs. 1000 and wish to raise the investment to Rs. 1,500. You must terminate your current SIP and initiate a fresh SIP with the lower amount if you wish to lessen your SIP contribution. Please go into your account and visit the portfolio to cancel SIP. All of the SIPs that are currently active are listed. Your future transactions won't be executed if you select the order that you want to cancel. Please be aware that if you terminate a SIP, your current investment won't be liquidated. The sum that has been invested in the fund will stay there. 

SIP lets you create a large corpus for fulfilling your future financial goals. Remember the SIP investment meaning and process as discussed in this article and grow your capital systematically. 
5paisa makes your investment journey simple and straightforward. You can decide your investment goals and pick a fund that best suits your objectives. For example, you can scan the top funds in tax-saving, children’s future, retirement, long-term growth, etc., categories and choose the best fund for SIP investment. Visit 5paisa to move into the next step of investing.