What is SIP? A Complete Guide to SIP Investment in Mutual Funds

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3 May, 2023

9 mins read

If you are looking for a smart and convenient way to invest in mutual funds, you might want to consider Systematic Investment Plan (SIP). SIP is a method of investing a fixed amount of money at regular intervals in a mutual fund scheme of your choice. SIP allows you to benefit from the power of compounding and the discipline of regular saving. In this blog post, we will explain what SIP is, how it works, what are its benefits and how to start a SIP investment in mutual funds

What is SIP?

SIP stands for Systematic Investment Plan. It is a mode of investing in mutual funds that allows you to invest a fixed amount of money at regular intervals, such as monthly, quarterly or any other frequency as stated in the scheme features. For example, you can start a SIP of Rs. 5000 per month in a mutual fund scheme for a period of 10 years. Every month, Rs. 5000 will be deducted from your bank account and invested in the mutual fund scheme. You will get units of the scheme at the prevailing NAV (Net Asset Value) on the date of investment.

How does SIP work?

SIP works on the principle of rupee cost averaging and compounding.

Rupee cost averaging means that you buy more units when the NAV is low and less units when the NAV is high. This averages your purchase cost per unit over time.
Compounding means that your returns are reinvested along with your principal amount, which may increase your wealth over a period of time. .

Moreover, as you invest regularly over a long period, your money grows due to compounding. Compounding means earning returns on returns. For example, if you invest Rs. 5000 every month for 10 years at an annual return of 12%, your total investment of Rs. 6 lakh will grow to Rs. 11.61 lakh at the end of 10 years due to the compounding of interest.

Here’s how it works: In the first year, your investment of Rs. 60,000 (Rs. 5000 x 12 months) will earn interest of Rs. 7,200 (Rs. 60,000 x 12% = Rs. 7,200). This interest is then added to your principal investment, bringing the total value of your investment to Rs. 67,200 at the end of the first year.

In the second year, your investment will continue to grow as you make additional monthly contributions of Rs. 5000. The interest earned in the second year will be calculated on the new principal amount of Rs. 127,200 (Rs. 67,200 + Rs. 60,000), resulting in interest earnings of Rs. 15,264 (Rs. 127,200 x 12% = Rs. 15,264). This interest is then added to your principal investment, bringing the total value of your investment to Rs. 142,464 at the end of the second year.

This process continues for each subsequent year, with the interest earned being added to the principal investment and the new principal amount being used to calculate the interest for the following year. Over time, this compounding effect may lead to growth in the value of your investment.

Note: The above illustration is provided for educational purposes only. Actual returns on investment may vary and are subject to market conditions.

What are the types of SIP?

There are different types of SIPs available for investors, depending on their preferences and goals. Some of the common types are:

Regular SIP: This is the most common type of SIP, where you invest a fixed amount at regular intervals in a mutual fund scheme.
Step-up SIP: This type of SIP allows you to increase your investment amount periodically, such as every year or every quarter. This helps you boost your savings and returns over time.
Perpetual SIP: This type of SIP does not have a fixed end date. You can continue investing through SIP until you decide to stop the same.
Trigger SIP: This type of SIP allows you to set a trigger for your investment, such as a specific date, NAV, index level or event.

How to start a SIP investment in mutual funds offline?

To start a SIP investment in mutual funds, you need to follow these steps:

Choose a mutual fund scheme that suits your risk profile, investment objective and time horizon.
Determine the amount of money you wish to invest on a regular basis, whether it be monthly or quarterly, or as specified in the scheme’s features. Also, decide on the duration of your investment.
Fill up an application form and provide your KYC (Know Your Customer) details.
Provide a mandate to your bank to deduct the SIP amount from your account on a specified date every month or quarter.

How to start a SIP investment in mutual funds online?

Starting a SIP investment in mutual funds online is very easy and convenient. You can follow these simple steps:

Choose an online platform or app that allows you to invest in mutual funds. You can also use the official website or app of the mutual fund house you want to invest in
Register yourself by providing the required details and KYC documents.
Choose a mutual fund scheme that suits your risk profile, investment horizon and financial goal.
Enter the amount and frequency of your SIP and select a start date.
Link your bank account and complete the payment process using net banking, UPI or debit card.
You will receive a confirmation message and an email with your SIP details.

If you want to know more about SIP and how it can help you, visit our website https://tatamutualfund.com/services/sip or contact our customer care team.

Disclaimer: The views expressed in this article are personal in nature and are in no way trying to predict the markets or to time them. The views expressed are for information purposes only and do not construe to be any investment, legal, or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management Pvt. Ltd. will not be liable in any manner for the consequences of such action taken by you. Please consult your Mutual Fund Distributor before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund. The view expressed are based on the current market scenario and the same is subject to change. There are no guaranteed or assured returns under any of the schemes of Tata Mutual Fund.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.