Systematic Investment Plan (SIP) is an investment tool that allows investors to invest small amounts of money at regular intervals in mutual funds. It is a popular investment option among investors who want to achieve their long-term financial goals. In this article, we will explain what is SIP in mutual fund and how it works.
What is SIP in Mutual fund and How it works?
What is SIP in Mutual Fund?
Investing in mutual funds can seem like a daunting task for beginners. SIP in mutual funds makes it easy for investors to start investing by allowing them to invest small amounts of money at regular intervals. SIP is a mode of investment in mutual funds that enables investors to invest a fixed amount of money at regular intervals, usually monthly, quarterly, or annually.
SIP in mutual fund is an automatic investment plan that deducts the predetermined amount from the investor’s bank account and invests it in the chosen mutual fund scheme. The amount invested through SIP is usually small and affordable, making it easier for investors to accumulate wealth over time.
How SIP is Different from Mutual Fund?
A mutual fund is an investment vehicle that pools money from multiple investors and invests it in various financial instruments such as stocks, bonds, and money market instruments. SIP is a mode of investing in mutual funds that enables investors to invest small amounts of money at regular intervals.
What Types of Mutual Fund SIP available in India?
How does SIP Work in Mutual Fund?
Step 1: Choose the Mutual Fund Scheme
The first step is to choose the mutual fund scheme that you want to invest in. You can choose from a range of mutual fund schemes, such as equity funds, debt funds, balanced funds, and others.
Step 2: Decide the Amount and Frequency of Investment
The second step is to decide the amount and frequency of investment. You can choose the amount you want to invest in the mutual fund scheme and the frequency of investment, such as monthly, quarterly, or annually.
Step 3: Open an Account with a Mutual Fund Company
The third step is to open an account with a mutual fund company. You can do this by visiting the website of the mutual fund company or by visiting their office.
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Step 4: Start Investing in SIP
The last step is to start investing in SIP. Once you have opened an account with the mutual fund company, you can start investing in SIP by providing your bank details and setting up the auto-debit mandate.
How SIP Helps in Rupee Cost Averaging?
Rupee cost averaging is a strategy of investing a fixed amount of money at regular intervals to reduce the impact of market volatility on the investment. In SIP, investors buy mutual fund units at different prices at different points in time. This helps in averaging out the cost of investment, reducing the impact of market volatility on the investment.
For example, suppose you invest Rs. 5,000 in a mutual fund scheme through SIP every month for six months. The unit price of the mutual fund scheme varies as follows: Rs. 50, Rs. 55, Rs. 48, Rs. 52, Rs. 60, and Rs. 58. Here, you would have accumulated 535 mutual fund units by the end of six months. The average unit price of the mutual fund scheme would be (50+55+48+52+60+58)/6 = Rs. 53.83. Thus, by investing through SIP, you would have bought the units at different prices, which would have averaged out the cost of investment.
What are the Benefits of SIP in Mutual Fund?
SIP in mutual fund offers several benefits to investors, such as:
a. Disciplined Investing: SIP in mutual fund helps in disciplined investing by investing a fixed amount of money at regular intervals, which helps in accumulating wealth over time.
b. Rupee Cost Averaging: SIP in mutual fund helps in rupee cost averaging, reducing the impact of market volatility on the investment.
c. Flexibility: SIP in mutual fund offers flexibility in terms of the amount and frequency of investment, allowing investors to invest as per their convenience.
d. Compound Interest: SIP in mutual fund helps in earning compound interest, which helps in accumulating wealth over time.
e. Diversification: SIP in mutual fund allows investors to diversify their investment portfolio by investing in different mutual fund schemes.
How to Invest in SIP in Mutual Fund in India?
Investing in SIP in mutual fund is easy and can be done in the following steps:
Step 1: Choose the Mutual Fund Company
The first step is to choose the mutual fund company that you want to invest in. You can choose from a range of mutual fund companies such as SBI Mutual Fund, HDFC Mutual Fund, ICICI Prudential Mutual Fund, and others.
Step 2: Choose the Mutual Fund Scheme
The second step is to choose the mutual fund scheme that you want to invest in. You can choose from a range of mutual fund schemes such as equity funds, debt funds, balanced funds, and others.
Step 3: Open an Account with the Mutual Fund Company
The third step is to open an account with the mutual fund company. You can do this by visiting the website of the mutual fund company or by visiting their office.
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Step 4: Choose the SIP Amount and Frequency
The fourth step is to choose the SIP amount and frequency. You can choose the amount you want to invest in the mutual fund scheme and the frequency of investment, such as monthly, quarterly, or annually.
Step 5: Set up Auto-Debit Mandate
The last step is to set up the auto-debit mandate. You can provide your bank details and set up the auto-debit mandate to start investing in SIP.
SIP vs. Lump Sum Investment
SIP and lump sum investment are two modes of investing in mutual funds. SIP allows investors to invest small amounts of money at regular intervals, while lump sum investment allows investors to invest a lump sum amount at once.
Which is Better SIP or Lump Sum?
SIP and lump sum investment both have their advantages and disadvantages. SIP is better for investors who want to invest small amounts of money at regular intervals and want to benefit from rupee cost averaging. Lump sum investment is better for investors who have a large amount of money to invest and want to benefit from immediate returns.
Also Read: Mistakes to avoid while investing in SIP
FAQs about SIP in Mutual Fund
Q1. What is the minimum amount required to invest in SIP in mutual fund?
A1. The minimum amount required to invest in SIP in mutual fund varies from mutual fund company to company. It can range from as low as Rs. 500 to as high as Rs. 5,000.
Q2. Can I increase or decrease my SIP amount in mutual fund?
A2. Yes, you can increase or decrease your SIP amount in mutual fund as per your convenience. Most mutual fund companies offer this facility to investors.
Q3. Can I stop my SIP in mutual fund anytime?
A3. Yes, you can stop your SIP in mutual fund anytime as per your convenience. However, it is advisable to consult with your financial advisor before stopping your SIP.
Q4. What are the tax implications of investing in SIP in mutual fund?
A4. The tax implications of investing in SIP in mutual fund depend on the mutual fund scheme and the investment tenure. Equity mutual funds held for more than one year are taxed at 10% on long-term capital gains exceeding Rs. 1 lakh, while debt mutual funds held for more than three years are taxed at 20% with indexation benefits.
Q5. Can I switch from one mutual fund scheme to another through SIP?
A5. Yes, you can switch from one mutual fund scheme to another through SIP as per your convenience. Most mutual fund companies offer this facility to investors.
Conclusion:
SIP in mutual fund is a popular mode of investing in mutual funds that offers several benefits to investors. It helps in disciplined investing, rupee cost averaging, flexibility, compound interest, and diversification. Investors can easily invest in SIP in mutual fund by choosing the mutual fund company and scheme, opening an account, choosing the SIP amount and frequency, and setting up the auto-debit mandate. While SIP and lump sum investment both have their advantages and disadvantages, SIP is better for investors who want to invest small amounts of money at regular intervals and want to benefit from rupee cost averaging. Overall, SIP in mutual fund is a great investment option for investors who want to accumulate wealth over time.
References:
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“Systematic Investment Plan (SIP) in Mutual Funds” by Securities and Exchange Board of India (SEBI): https://www.sebi.gov.in/sebi_data/faqfiles/1335442727567.pdf
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“The Advantages and Disadvantages of Investing in Mutual Funds” by The Balance: https://www.thebalance.com/the-advantages-and-disadvantages-of-investing-in-mutual-funds-4160833