Many people want to invest in equities markets, but lack of knowledge and market volatility prevents them. As a result, investing through mutual funds in India is seen as a prudent decision. Furthermore, with the SIP facility available to investors, you can be disciplined in financial planning. However, few people are aware of the service, and the most frequently asked question is, "How does SIP work in mutual funds?"
In this article, we will attempt to answer the queries related to SIP, so keep reading.
What is SIP?
A Systematic Investment Plan (SIP) is a service that allows you to invest a fixed amount on a regular basis in mutual funds in India. A disciplined approach to market participation helps in risk management. SIP allows an investor to invest a specified amount in a preferred mutual fund at specified intervals. The predetermined sum can be as little as Rs. 500, and the pre-defined intervals can be weekly/monthly/quarterly/semi-annually/annually, depending on convenience.
SIP allows investors to buy units in their chosen plan on a set date using post-dated cheques or an auto-debit feature. The plan is based on the premise of investing regularly to create wealth over time through the law of averages and compounding impact. Moreover, the investors can use the SIP calculator to estimate their expected returns.
How Does SIP Works In Mutual Fund?
When you invest with a SIP, you invest a set amount of money over a set period. This sum allows you to purchase a specific number of fund units. The number of units received is determined by the scheme's current Net Asset Value (NAV) for the day.
You can also select to automate your payments after deciding on the investment tenure and frequency. By instructing your bank, a specific amount will be transferred directly from your account to the particular mutual fund in India on a predetermined day each month or as preferred. The best part is that you can calculate your investment's expected returns by using a SIP calculator available online.
What Are the Advantages of SIP?
Some of the benefits of investing in mutual funds through SIP are given below.
- Financial Discipline: Investing in mutual funds regularly fosters the habit of financial discipline. It encourages you to save more, which allows you to build a corpus in the long run. You can also invest in schemes based on your risk tolerance. If you are risk-averse, debt funds are the way to go.
- Flexibility: You have the option to increase or decrease your contribution at any moment. Furthermore, initiating or terminating a SIP is simple and incurs no penalty.
- Convenience: Investing in SIP is very convenient. You can efficiently perform it online with just one-time instructions.
- Rupee Cost Averaging: Investing in SIPs on regular basis allows you to maximise your purchasing power. For example, when the market is high, your fund NAV is high, and you receive fewer units; but, when the fund NAV falls, you receive more units. As a result, your average purchase cost is less than the scheme's current NAV.
- Achieve Your Life Goals: Because of the power of compounding, long-term investment creates a sizable corpus. This will assist you in accomplishing all of your life objectives.
If you understand how mutual fund SIP work, you can begin your smart investment by making regular periodic payments in your preferred scheme.
