How does SIP Work?

Investments have become an integral part of financial planning. Initially, it used to be just savings, but now the quest to earn higher returns have led to mutual fund investments.Systematic Investment Plan, also known as SIP is one such way of investing in mutual funds which has been largely opted by investors worldwide. Experts claim that SIP is one of the most effective ways of investing, especially for retail investors. If you are unsure about SIP, you have come to the right place. This article will focus on the working of an SIP investment.

What is an SIP?

SIP is a mere tool to invest in mutual funds online. Under this method, you invest a pre-determined amount in your preferred mutual fund schemes at regular intervals. The periodicity of investments can be daily, weekly, monthly, quarterly, annually, etc. SIP is a disciplined mode of investment that helps in accumulating substantial wealth for your future.

When can you start an SIP investment?

If it’s an open-ended mutual fund scheme, you can start an SIP whenever you want. All you need to do is fill an application form along with the SIP mandate and presentit to the point of acceptance. It usually takes around 10-30 days for the bank to register your mandate and start with it.

How do SIPs work?

SIPs work like any normal recurring investments, where a specific amount is auto-debited from your bank account and invested in the desired scheme. Once the amount is deposited, you acquire a certain number of units of the scheme. The number of units acquired depends on the Net Asset Value (NAV) of that particular scheme for that day.

SIP allocates additional units of the scheme with each instalment. As the NAV of the scheme is not constant, with the same SIP amount you mightpurchasemore units when the market is low and fewer units when the market is high.

Can you change the SIP amount?
You can increase or decrease your SIP amount, by first cancelling your existing SIP mandate and then providing your bank with the revised one. Mutual fund houses do not charge any penalty for stopping the SIPs.

Can you invest inlumpsum in a scheme in which I have an SIP running?
Yes, you have the option to add a lumpsum amount to the same mutual fund scheme in which you are running an SIP. It does not affect your SIP investments.

However, mutual fund experts advise staying invested for a long durations. SIPs provide optimum returns when invested for longer duration say 10 years or more. Experts also recommend linking your SIP investments to a long-term goal. This ensures that you do not fret over the current market scenario and stay invested for a longer duration. You can also avail the services of an SIP calculator to get an estimate on your SIP returns. This will help you to plan your finances in a more efficient manner. Happy investing!