What is SIP mutual funds? How it Works?

What is SIP mutual funds? How it Works?

A lot of people want to invest in mutual funds and because they have surplus capital lying idle, they end up making a lumpsum investment. What these investors do not understand is that they end up exposing their entire investment sum to market volatility right from the beginning of the investment cycle. If you are investing in equity funds, making a lumpsum investment doesn’t make sense as if the markets turn volatile after you invest your entire investment portfolio will get affected.

The best way to beat market volatility is by opting for a Systematic Investment Plan.

What is Systematic Investment Plan?

A Systematic Investment Plan is a simple and easy way of investing in mutual funds. The introduction of SIP has made mutual fund investing a hassle free process. What SIP does is that it gives retail investors a leeway to save and invest a fixed sum at periodic intervals in mutual funds. Investors can continue investing in mutual funds via SIP till their investment objective is accomplished.

How does a Systematic Investment Plan work?

Once you decide which mutual fund scheme to invest in, the next thing to do is decide a SIP sum. Remember that the SIP sum cannot be lesser than the minimum investment SIP mentioned in the Scheme Information Document (SID). Once you automate SIP transactions, every month on a predetermined date the fixed SIP sum is debited from the investor’s savings account and investors receive units in quantum with the sum invested. An investor must be KYC compliant in order to invest in mutual funds via SIP.

Benefits of SIP investing

The best part about SIP investing is that retail investors do not need to time the market. Through SIP, they can enter mutual funds anytime. Anytime is a good time to invest in mutual funds via SIP. The overall investment cost is averaged out through rupee cost averaging. When the NAV of the mutual fund scheme is low, investors receive more units. When the markets normalize, and the NAV increases investors receive lesser units. That’s because the SIP sum remains constant but fluctuation in the NAV determines whether the investor will receive more or less units. This is known as rupee cost averaging, an investment technique that allows investors to benefit from falling markets.

SIPs are ideal to inculcate the discipline of regular investing. Once you automate SIP transactions you do not have to worry about manual investments. The predetermined sum is debited every month and you receive units. This is good for long term investing and ensures that investors save and invest till their investment objective is accomplished.

There is no upper limit for SIP which means you can invest as much as your risk appetite allows you to do so. SIPs are flexible which means that investors can start or stop their SIPs at any time. Investors can even increase their SIP sum, skip a month’s SIP, and continue investing in the following month without having to pay any penalty or fine.

Long term investing in mutual funds via SIP may even pave the way for power of compounding. The compounding effect in mutual funds is known to come into effect only if one continues to invest in mutual funds via SIP for seven to ten years.  When your initial investment sum earns interest and when this interest starts earning profits of its own, compounding seems to come into effect.

Investors can even refer to SIP calculator, a free online tool that lets you draw a rough estimate on the capital gains that you may earn through SIP investing.

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