What is SIP in Mutual fund?
Systematic Investment Plan, commonly known as SIP, has become one of the most popular investment strategies among investors looking to invest in mutual funds. SIP is a method of investing in mutual funds regularly, which enables investors to invest a fixed amount of money at regular intervals. This strategy has gained popularity among investors as it offers them several benefits.
In this article, we will discuss what SIP is and how it works in mutual funds.
What is SIP in Mutual Fund?
SIP or Systematic Investment Plan is an investment strategy that allows investors to invest a fixed amount of money at regular intervals in mutual funds. With SIP, an investor can invest a small amount of money, as low as Rs. 500, every month or quarter into a mutual fund scheme.
The amount invested in the mutual fund is deducted automatically from the investor’s bank account. The investor can choose the date of the month or quarter on which the amount will be debited from their bank account. The amount invested in the mutual fund is used to buy units of the fund as per the prevailing Net Asset Value (NAV).
How does SIP work?
SIP in mutual funds works in a simple manner. The investor needs to follow these steps to start investing in mutual funds through SIP:
- Choose the mutual fund scheme – The investor needs to choose the mutual fund scheme they want to invest in. They can choose a scheme based on their investment goals, risk appetite, and investment horizon.
- Determine the investment amount – The investor needs to decide the amount they want to invest every month or quarter through SIP. The amount can be as low as Rs. 500.
- Choose the SIP date – The investor needs to choose the date on which they want the amount to be debited from their bank account every month or quarter.
- Start investing – Once the investor has completed the above steps, they can start investing in the mutual fund through SIP.
Benefits of SIP in Mutual Funds
SIP in mutual funds offers several benefits to investors, which include:
- Disciplined investing – SIP ensures that investors invest regularly in mutual funds, which helps inculcate a disciplined approach to investing.
- Rupee cost averaging – With SIP, investors buy mutual fund units at different NAVs. This helps in reducing the overall cost of buying mutual fund units over the long term, as the investor gets more units when the NAV is low and fewer units when the NAV is high.
- Flexibility – SIP allows investors to choose the amount they want to invest, the date of investment, and the mutual fund scheme they want to invest in, providing them with flexibility.
- Power of compounding – SIP in mutual funds helps investors to benefit from the power of compounding. As the investment grows, the returns generated on the investment also grow, resulting in a higher corpus in the long run.
SIP in mutual funds is a simple and effective investment strategy that helps investors to invest regularly in mutual funds. It offers several benefits to investors, such as rupee cost averaging, disciplined investing, flexibility, and the power of compounding. However, investors must choose the mutual fund scheme carefully, keeping their investment goals and risk appetite in mind, and invest for the long term to reap the benefits of SIP in mutual funds.
FAQs – Frequently Asked Questions
Q: What is SIP in mutual fund?
A: SIP stands for Systematic Investment Plan, which is a mode of investing in mutual funds where investors can make small, regular investments at fixed intervals.
Q: How does SIP work in mutual funds?
A: In SIP, investors can choose to invest a fixed amount of money at regular intervals, such as weekly, monthly, or quarterly. The amount is deducted from their bank account automatically and invested in the chosen mutual fund scheme.
Q: What are the benefits of investing through SIP in mutual funds?
A: Some benefits of investing through SIP in mutual funds include disciplined investing, rupee cost averaging, power of compounding, and flexibility to change investment amounts.
Q: Can I stop or pause my SIP in mutual funds?
A: Yes, investors can stop or pause their SIP in mutual funds at any time by giving a written request to the mutual fund company.
Q: How long should I continue my SIP in mutual funds?
A: The ideal tenure for SIP in mutual funds depends on an investor's financial goals and investment horizon. However, it is recommended to continue investing for the long term to benefit from the power of compounding.
Q: Can I switch or transfer my SIP in mutual funds?
A: Yes, investors can switch or transfer their SIP in mutual funds from one scheme to another within the same fund house or across different fund houses.
Q: Is SIP in mutual funds suitable for first-time investors?
A: Yes, SIP in mutual funds is an ideal investment option for first-time investors as it helps them inculcate the habit of saving and investing regularly in a disciplined manner.
Q: How much should I invest through SIP in mutual funds?
A: The amount to be invested through SIP in mutual funds depends on an investor's financial goals, risk appetite, and investment horizon. One can start with a small amount and increase the investment amount over time.
Q: Are there any tax benefits of investing through SIP in mutual funds?
A: Yes, investing through SIP in certain mutual fund schemes such as Equity Linked Savings Scheme (ELSS) offers tax benefits under Section 80C of the Income Tax Act, 1961.
Q: How can I start investing through SIP in mutual funds?
A: To start investing through SIP in mutual funds, investors need to have a bank account, a Permanent Account Number (PAN), and a Know Your Customer (KYC) compliant account with the mutual fund company. They can then choose a mutual fund scheme and start investing through SIP via online or offline mode.