Have you heard the term SIP but are confused about what is SIP and how to start? Are you thinking of investing in SIP but don’t have a clear idea about it? Today, instead of saving some money at home, many youths and adults want reliable investments for better financial planning. This can be done well with a SIP (Systematic Investment Plan), which requires little sources of earnings or is salaried. But, as a beginner, you might be distracted between SIPs and Mutual Funds. In both mutual funds and SIPs, the investments are made in the share market.
SIP is usually done with less investment for a particular time and is considered a method of investing money in a mutual fund. Similarly, in a mutual fund, you pay the lump sum amount for a time to get higher profits. Let’s read this blog to learn what SIP is exactly, how it works when to invest, and what benefits you get from it.
Learn What Is SIP Through Example
The term “what is SIP” has a simple definition: a disciplined approach to investing in a mutual fund scheme. It means depositing a fixed amount on a regular basis for specific time intervals in a mutual fund scheme you choose.
Let’s learn the meaning of SIP with this example. Suppose you plan to start an SIP of Rs. 5,000 in a mutual fund named B, with approx. Monthly return of 12% p.a.
| Month | Investment Amount (Rs.) | Cumulative Investment (Rs.) | Estimated Monthly Return @12% p.a. (Rs.) | Estimated Total Value (Rs.) |
| January | 5000 | 5000 | 50 | 5050 |
| February | 5000 | 10000 | 101 | 10,151 |
| March | 5000 | 15000 | 152 | 15,303 |
| April | 5000 | 20000 | 204 | 20,507 |
| May | 5000 | 25000 | 256 | 25,763 |
So, the above illustration states that a fixed amount is invested regularly, and then the interest is compounded, which aids in continuous growth regardless of the market’s performance.
What Are The Different Types Of SIP?
There are many types of SIPs that you can opt for and invest a particular amount at a durable time. Here are the main types of SIPs that you can choose to invest in.
- Fixed SIP
- Top-up SIP
- Perpetual SIP
- Flexible SIP
How Does SIP Work?
With a clear definition of what is SIP, you must be excited to know how it works. Well, An SIP function is similar to a recurring investment, where the amount is auto-debited from your bank account and invested in the mutual fund of your choice. Once the amount is deposited, the rest of the process is done in the scheme you choose, where you get a certain number of units of the mutual fund scheme to invest.
You can invest either weekly, monthly, quarterly, or according to a given plan. However, the most desirable frequency is set monthly, which allows you to invest from your salary. You can start a SIP at any time whenever you have a fixed method of earning while providing detailed KYC documents.
What Are The Benefits Of SIP?
After understanding what is SIP and how it works, let’s read about the benefits of investing in SIP.
- Investing in SIP helps to inculcate saving habits from your regular earnings.
- It is the disciplined approach of investing as you treat SIP like other fixed expenses like buying kitchen utensils,
- This is the best investment plan because it provides flexibility regarding the starting or closing of SIPs, and there is no penalty for foreclosure.
- SIP can be started with a low investment amount, that is, Rs.100 or Rs 500.
- It provides diversified investment where you can invest in various companies or sectors that spread risk across them.
- SIPs help achieve long-term goals, as you invest a fixed amount at a certain time without worrying about market fluctuations.
How Is SIP Different From Mutual Fund?
SIP is a Systematic Investment Plan, a method of investing in a mutual fund in which you invest a fixed amount of money at regular intervals (typically monthly or quarterly). Similarly, a mutual fund is a form of investment in which an authorized fund house, such as a bank and asset management company, collects money from you and trades in securities.
Summing Up – Things To Consider Before Opening an SIP Account
The process of SIP is clear and only benefits when you start at an early stage for a long interval of time. So, the above explanations about what SIP is have now made you clear, and now you can make up your mind about investing in it as per your earnings. However, there are some things that you must consider before starting SIP, like financial goals, fund selection, past performance risk tolerance, time, cost analysis, SIP amount, and regular monitoring. These will help you start without any query, and you can make a better profit.
