People who are new to the various investment policies always ask: what is SIP and how it works? Well, it is a popular investment method in India, and many people are making money from it. If you want to invest small amounts of your income or savings to increase its value over a certain period of time, then investing in SIPs can be the best way to achieve that. Here, we will understand what is SIP and how it works so that you can make better investing decisions and secure your future.
Understand What Is SIP?
The full form of the SIP is a Systematic Investment Plan, which is a method of investing in mutual funds. In SIP, you can choose mutual funds that seem promising to increase the value of your investment, and you can decide how much money you want to invest at certain intervals.
People usually invest in SIPs at one-month intervals, but you can also invest on a daily, weekly, or quarterly basis. According to the Securities and Exchange Board of India (SEBI), you need to invest a minimum amount of Rs 500 in SIP.
Explore How SIP Works
When you want to invest in SIP plans, you need to choose a mutual fund scheme that suits your investment goals. Once you select a mutual fund scheme to invest in, you have to decide on the SIP amount and frequency.
After fulfilling all the requirements, the SIP amounts that you have decided to invest in will automatically be deducted from your bank account every month or on your selected date. The units of your mutual fund scheme will also be credited to your account according to the Net Asset Value (NAV) of your scheme on your selected date.
If you invest in mutual funds in this process, then your return on investment (ROI) can increase by a higher margin over long periods. SIP is also popular because it reduces risk factors and helps you not get influenced because of market ups and downs.
The two main reasons that ensure lower risks and higher ROIs are rupee cost averaging and compounding. Let’s understand these factors to have a better understanding of what is SIP and how it works.
The rupee cost averaging helps you buy fewer units of your selected scheme when the NAV is higher. Similarly, it helps you buy more units when the NAV of your selected scheme is lower. It helps you create a balance during market ups and downs.
Compounding is also a main factor that helps you get higher profits in the long run. Simple interests only provide you profit on your capital investments, but compounding helps you make a profit from your profits as well.
Final Thoughts
SIP can help you become rich if you invest in the right scheme and for longer periods. For your convenience, we have explained what is SIP and how it works so that you can start investing your money in the right place. So, analyze your investment goals and choose the right asset management company (AMC), mutual fund scheme, duration, and amounts, and start investing in SIPs.
