What is SIP in Mutual Fund?

This is an essential article, those who have heard about mutual funds must have heard about SIP. SIP stands for Systematic Investment Plan. SIP is one type of method to invest your money in the stock market through mutual funds.

Today in this article we will learn everything about SIP, what is SIP? What is the meaning of SIP? How does SIP investment work? How can you average the cost of money through SIP investment? How can you take advantage of the power of compounding? We will learn about the key features of SIP. Lastly, we will know why we should invest in SIP.

What is SIP?

The full form of SIP is a Systematic Investment Plan. You can consider it as a means through which you can invest in any mutual fund scheme. You can easily invest in any fund flexibly and smartly through SIP investment. Due to these features, the SIP investment plan is very popular.

Now let’s delve into Systematic Investment Plan and understand SIP in a better way.

Through the SIP investment plan, you can invest regularly in the stock market through mutual funds.
Through this investment, you can invest as much as you want, from ₹10 to ₹500 or thousand rupees or ₹5000.
You can invest this pre-determined amount weekly, monthly, or annually.
Because of this free determined mindset, this amount for your week or month becomes a habit for you. And with the help of good habits, you can create good wealth.

How does SIP work?

We have understood well what is SIP. So let us now know how this SIP works.

The way SIP works is very easy. To work on SIP, you must pay attention to some things very well.

1. Choose a flexible predetermined Amount and interval

First of all, you have to decide how much money you have to invest. Suppose you have to invest ₹ 10000 here. Now how will you invest this ₹ 10000? You have to decide whether you will invest weekly, monthly, quarterly, or annually.

Auto-debited from your account

We assume that you want to invest ₹ 10000 monthly. Choose your favorite mutual fund and invest ₹ 10000 in it every month. Now that you have chosen a mutual fund, every month ₹10000 will be deducted from your account. And this money will keep getting deposited in your mutual fund scheme.

Allocated a certain number of units

As soon as your money gets invested in the mutual fund, the mutual fund will buy shares of the company from the share market with your money and you will be given some units of the mutual fund in exchange for that ₹10000. In simple language, this is called Unit Allotment. These mutual fund units represent the real investment in the mutual fund market.

Benefits of Rupee cost average and the power of compound

Every month when you invest money and the mutual fund goes to invest that money in the market, the prices will also be different every month. Due to this your purchase will be at different prices in the market. Due to this, investors get the benefit of the Rupee Cost Average. And when you start investing only through investment then you will also get to know the power of compounding.

Rupee Cost Averaging

Suppose you plan to invest your SIP investment of ₹10000 directly in stocks instead of mutual funds. And the stock in which you invest, suppose the price of that stock is 10000 rupees. Now when you invest in mutual funds sip, then in return of ₹10000, you will get 10 shares of that stock worth 10000 rupees.

Now suppose next month when you go to invest, it is possible that at that time the price of a stock of that company may be ₹2000. Then you will get 5 shares of that company in return of just investment.

And now suppose that in the third month, the share price of the same company falls from ₹2000 to ₹500. Then in the third month, you will get 20 shares in return for investment.

Here you can see a big pattern, the amount you get every month is fixed. But because of this fixed amount of yours, when the market goes down, you get the same share at a lower price and your purchases increase. And when the market goes up, you get the same share at a slightly higher price, and your purchases reduce a little.

And because of this, you get this advantage that even if the price keeps rising or falling, your cost of shares keeps getting averaged, whether the market goes up or down, your average buying price keeps getting balanced. And this is what we call Rupee Cost Averaging in technical terms.

Power of Compounding

To understand the compounding of power, we have to tell you a story. The story of two friends. Let’s know the story of Suresh and Naresh.

Suresh and Naresh are very good friends. They both completed their studies together. At the age of 25, both of them started working. Both had the same qualities. But there was a difference between them in one thing. Suresh was a carefree type of boy. Who spends his money on food and drink. And Naresh was a boy of a calm nature. Naresh was not so interested in eating, drinking, and having fun these days. He used to think a lot about his future.

When Suresh turned 35, he became a little worried about his future. Then he started investing ₹ 10,000 every month in mutual funds. And he did this investment for 20 years. By investing ₹10000 every month for 20 years, he invested 24 lakhs in mutual funds. For now, let us assume that he got a return of at least 7% every year for 20 years. After investing ₹10000 every month for 20 years, he collected a whopping 52.4 lakh rupees by adding 7% interest.

On the other hand, Naresh, who was a calm boy, was very worried about his future. When he started earning at the age of 25, from that time onwards, he also started investing ₹10000 every month in mutual funds. Naresh also invested ₹10000 every month for 50 years. This means that Naresh invested 10 years more than Suresh and he invested 36 lakh rupees in 30 years.

Naresh was also getting a return of 7% annually. But he invested for 10 years more than Suresh. And now Naresh has Rs 1.22 crore at the age of 55.

Now you can see that by investing just 10 years more, Naresh did much more than Suresh with the help of a mutual fund SIP. And through this only you can understand the power of compounding.

Key features of SIP

Let us now know about some of the features of this investment. So that you people get more information about why you should invest in mutual funds through SIP or what is SIP investment.

SIP investment is always open-ended. This means that you can withdraw your money whenever you want.
Here you do not have any tenure fixed. This means that you have to keep the money for at least 2 years or 3 years. You do not have to make any commitment. You can keep your money for as many years as you want.
Suppose you have chosen a tenure. You have given a commitment of 5 years to your mutual fund company that we will not withdraw our money before that. If you want, you can deposit your money even after 5 years or you can withdraw your money even 5 years earlier. And if you want, you can increase the commitment of 5 years.
You can invest for as long as you want with the help of mutual fund SIP.
After the tenure is over, you can withdraw your money partially or completely whenever you want.
You can increase or reduce your investment amount whenever you want. Let’s say you invest only ₹10,000. It is possible that due to any reason, your expenses have increased in one month, then you can invest ₹5000 instead of 10,000 in a month and in the next month, if you want, you can equalize that ₹5000 by investing ₹15,000 in place of 10,000 in the next month. If you do not equalize that money in the second month, then it is also okay.

Due to all these features, investment is very beneficial for those people who earn monthly income and get a salary from the company every month. Because these people do not want to put their money at high risk by buying shares of any company directly in the stock market. And mutual fund is such a medium through which we can invest our money in the stock market. And the manager of the mutual fund invests our money in the stock market by applying his strategy.

Some disadvantages of SIP

There are three disadvantages in the features of Mutual Fund SIP.

To invest in Mutual Fund, you have to create a demat account. Some companies charge annual maintenance charges for creating a demat account and some do not.
In every fund of Mutual Fund, you will see two things – exit load and expense ratio. Every fund has a different expense ratio and exit load. It can be from 0.1% to 2%.
You are not going to get any benefit in short-term mutual fund investment. Because mutual fund works on a compounding method. The longer you keep your money in a mutual fund, the more money you will get at the time of exit.

Why do you invest in SIP?

It will help you maintain market volatility. It means that you don’t have to see any fluctuations in the market. The fund manager will manage it.
Your finances are just investments that are kept in discipline.
You will get the benefit of compounding interest in any investment. Through which the money keeps growing twice as fast.
You can invest here with as little money as possible. You can start investing with as little as ₹10.
There is no time period for investment that you have to invest only for 1 year, you have to invest for 2 years. You can invest for as long as you want.

Conclusion

Systematic Investment Plan (SIP) is an effective and flexible investment tool that allows regular and small investments. Through SIP, investors can invest a fixed amount in mutual funds at a fixed time as per their choice. This investment method gives the investor the benefit of rupee cost averaging, which means that the investment continues to be made at an average cost despite the market volatility. Apart from this, SIP also helps in taking advantage of the power of compounding, which can lead to a spectacular growth in the investment amount in the long run.