5 min read • Published 5 Feb 25
What is SIP in Mutual Fund? Everything You Need to Know
Table of Contents
A mutual fund accumulates the capital of several investors and purchases various assets. There are two ways for mutual fund investment- lump-sum investment or SIP. SIP meaning states that it is a method of investing in mutual funds.
SIP full form is a systematic investment plan (SIP). It provides investors the avenue to invest by regularly making a fixed investment at predetermined intervals.
The money an investor invests purchases “units” of the mutual fund. The amount of units they receive is determined by the market price of each unit at the time purchased (known as the Net Asset Value or NAV).
When the NAV is less, investors purchase more; when the NAV is high, they buy less. This is known as rupee cost averaging, and it helps to mitigate the impact of market swings.
Understanding SIP Meaning through its Working
Here is an example to understand how a SIP investment operates.
Assuming the investment per month to be ₹500 and the time frame for investment as five months, the schedule listed below shows how SIP helps in avoiding market volatility through regular investment.
Prices per unit and units purchased are all assumed figures to stimulate a market behaviour.
| Month | Investment (₹) | Price per unit (₹) | Units purchased |
| 1 | 500 | 50 | 10 |
| 2 | 500 | 40 | 12.5 |
| 3 | 500 | 20 | 25 |
| 4 | 500 | 25 | 20 |
| 5 | 500 | 20 | 25 |
| Total | 2500 | 155 | 92.5 |
Average cost per unit= 2500/92.5= ₹27.03 (approximately)
Although the market price per unit went on fluctuating on an average the cost remained at ₹27.03 which is lower than most of the prevalent market prices. Since, the per month investment remained same at ₹500, when the market price increased, less units were purchased and when the market price decreased more units were purchased. Thus combating market volatility.
Understanding What is SIP Investment through Features
SIP full form in mutual fund is Systematic Investment Plan. The salient features of SIP which make it attractive to numerous investors are listed below.
- Regular Intervals for Investments
By giving an investor the option to select from a variety of investment periods, SIP encourages a consistent attitude to saving and investing. This consistent investment trend helps to establish a systematic investing habit and makes rupee cost averaging easier.
- A Constant Sum of Investment
The initial investment value for a SIP is set. Although an investor may make additional commitments, it’s crucial to remember that an investor cannot lower the SIP value without cancelling the current plan and starting a new one.
- Ability to Pause Investments
The ability to momentarily halt investing is a feature of SIP mutual funds that may be very helpful in times of financial difficulty. When the pause period is over, the SIP immediately restarts. It is best to check with the mutual fund provider to see if this pause provision is available.
- Modifiable Intervals
An investor can modify payment intervals online or by sending an application to the appropriate mutual fund house.
- Possibility for Cancellation
SIP gives investors the freedom to end the plan whenever they choose. The SIP cancellation form can be submitted to the appropriate mutual fund provider or it can be completed online.
Types of SIP
There are a variety of SIPs offered by mutual fund houses. Top-up SIP, Flexible SIP and Perpetual SIP are the most common types.
- Top-up SIP
When the investor’s income or potential investment amount increases, the top-up SIP gives them the choice to raise their SIP investment regularly.
- Flexible SIP
The Flexible SIP plan allows investors to choose how much they can invest. According to cash flow requirements or goals, an investor may raise or reduce the instalment.
- Perpetual SIP
With a perpetual SIP scheme, the investor can continue making investments irrespective of any mandate period.
Benefits of a SIP
For people wanting to invest in mutual funds in a methodical and structured way, a systematic investment plan (SIP) is a smart option with several benefits. Some of them are listed below.
- Investing with Discipline
By mandating consistent payments of a predetermined amount, SIP encourages disciplined investment. This strategy urges people to refrain from trying to forecast the market’s volatility. It makes it possible to develop a dependable, continuous saving and investing habit, which is essential to building long-term wealth.
- Cost Effectiveness
Because of its modest minimum investment level, SIP makes investing in mutual funds available to a wide range of individuals. Additionally, dividing the investment into consistent, smaller chunks reduces the impact of market volatility. Compared to other approaches, the costs of investing in mutual funds through SIP are also comparatively cheaper.
- Strength of Compounding
SIP makes use of compounding’s immense strength. Frequent investments over a long period enable the earnings and the initial investment to grow. A rise in yield is the result of this compounding impact.
- Diversification
SIP in mutual funds makes it possible to have a diverse portfolio. By efficiently distributing investment risk, this diversification lowers susceptibility to market fluctuations.
Considerations Before Investing
Below is a detailed explanation of all the parameters that determine the right time for SIPs in mutual funds.
- Consistent Revenue
Before starting a SIP, an investor must ensure having a reliable source of income so that they can easily commit to contributions. Examine the financial status to make sure there is money left over after necessary costs for stress-free investment.
- Financial Goals
An investor has to specify their investing goals and match them with their SIPs to achieve those goals.
- Appetite for Risk
To choose the right asset allocation amongst debt, equity, and hybrid SIPs, an investor must evaluate their level of risk tolerance.
Conclusion
SIPs contribute to the development of future wealth and financial discipline. Because they provide the possibility of accumulating wealth through consistent investments over a lengthy period, SIPs are ideal for the long run.
They are an instrument for reaching long-term financial objectives because they let investors take advantage of compounding power and even out market swings. However, to make the best of investments, an investor should keep their risk appetite and financial goals in consideration.
Q: Can SIP suffer loss?
Yes, it is possible for SIP investment in mutual funds to suffer losses when the market does not deliver a good performance and the underlying assets are losing value. However, when market recovers, investments in the mutual fund can start treading a project trajectory.
Q: Is SIP better than fd?
SIPs seek greater returns, whilst FDs concentrate on capital preservation. FDs are for cautious investors. SIPs are for investors who are willing to take on moderate risk. An investor may make a one-time payment on an FD or make tiny, recurring payments on a SIP.
Q: Is SIP 100% safe?
SIPs do not eliminate market risks. They assist in averaging investment costs through rupee-cost averaging. Investors need to understand that SIPs are vulnerable to mutual fund risks and market fluctuations.
Q: Can I withdraw SIP anytime?
Yes, some mutual fund houses permit withdrawals before maturity. However, early withdrawals might result in exit loads, especially if they are within a year. Some mutual fund houses deduct a cancellation charge for premature withdrawals. It is important to check the mutual fund documents before investing.
Q: What is the 8-4-3 rule in SIP?
To find out when an investor can double their money, the 8-4-3 rule is applied. According to this general guideline, money rises consistently during the first eight years, then accelerates for the next four, and then experiences a snowball effect for the final three years.
