What is SIP and why should you Invest in it?

16 May 2023

Most of us may not have detailed idea what is SIP in mutual fund. SIP full form for Systematic Investment Plan, is an investment strategy in which an investor regularly invests a fixed amount of money in a mutual fund scheme. This blog provides a brief overview of SIP, its potential benefits, how it works, and why it can be a good investment option for long-term wealth creation.

What is SIP investment?

SIP investment is a method of investing an amount periodically in a mutual fund scheme of your choice. SIPs can be made either monthly, quarterly, or yearly, and the amount can be as low as ₹100 per month. This investment approach is designed to help investors avoid timing the market and take advantage of disciplined investing, eventually resulting in compounding.

SIPs offer several benefits, such as averaging out the cost of buying units, disciplined investing, flexibility, and convenience. If planned properly and in advance, they may prove to be a great option for long-term wealth creation and help in achieving financial goals such as buying a house, saving for retirement, or children's education.

In the rest of this blog, we will explore how SIPs work, the potential benefits of SIPs, how to invest through SIP, the different types of SIPs, the difference between SIP and lumpsum, and factors to consider while investing by way of SIP. By the end of this blog, you will comprehensively understand SIP meaning and how it works. This can help you to make informed investment decisions for your financial future.

How does SIP work?

Since we now know SIP meaning, we will try to understand how it works. As an investor, one needs to understand thoroughly their goal of investment and also their own risk appetite. Once this is clear, one has to research and find a sync in investment ideology with a particular scheme. Once the investment options are finalized, define the period and the frequency of investment, which can be say on a monthly basis. The investment is deducted automatically from the investor's bank account at the predefined frequency and invested in the mutual fund scheme. The invested amount is used to purchase units of the mutual fund scheme at the prevailing Net Asset Value (NAV). Over time, this strategy helps in averaging out the cost of investment and reduce the impact of market volatility on the overall returns.

Benefits of SIPs:

In the ever-evolving markets, SIP still continues to be a popular investment choice because of the benefits that it offers. Below is the list of potential benefits of SIP investment.

Power of Compounding:

Theoretically, the power of compounding in SIP refers to where the generated returns, if any, on the invested amount are reinvested and added to the investment amount, and over time, this, in a way, grows the investment portfolio.

Rupee Cost Averaging:

SIP enables investors to benefit from rupee cost averaging, which refers to the practice of investing a fixed amount at regular intervals, irrespective of market conditions, which averages out the cost of investment and helps reduce the impact of market volatility on the investment returns over time.

Flexibility:

SIP offers flexibility in terms of the amount to be invested and the duration of the investment, allowing investors to customize their investment strategy as per their financial goals and risk appetite. Many mutual funds now offer the option of Smart SIP the investment amount differs based on market valuations.

How to invest in SIP?

Complete your KYC: To invest in mutual funds, one needs to complete their KYC. KYC can be done while investing by providing pan card details & address proof like an Aadhar card, and such other details as may be requested at the time of making the investments.

Identify your financial and investment goals: Determine your investment goal and the amount of money that needs to be invested regularly. It is important to choose an SIP that suits both your investment goals and risk appetite.

Select the suitable Mutual Fund Scheme: Based on selected investment goal, choose a mutual fund scheme that aligns with your financial objectives, risk tolerance, and investment horizon. You can evaluate mutual fund schemes based on their performance history, asset allocation, and fund manager expertise. Investors can also invest to save on tax by investing in various mutual fund schemes. However, it must be understood that past performance is no guarantee of future returns.

Select the investment frequency: Decide on the frequency of your investment and the amount to be invested. You can choose to invest in SIP monthly, quarterly, or annually at your convenience. Besides, an investor can also decide on what should be the investment amount and how much return it can help generate. Here, he can take the help of an SIP calculator, which is essentially a simple tool to estimate the returns of investment

Once you have completed these steps, you can initiate your SIP investment by submitting the necessary documents/details and providing your bank account details to start investing in the chosen mutual fund scheme.

Different types of SIP:

Since we now know what SIP is, the benefits of SIP investment, and how it works, we will try to understand the various types of SIPs available. Below is the list:

Fixed SIP:

In this type of SIP, the investor invests a fixed amount of money at regular intervals, such as monthly, quarterly, or annually.

Top-up SIP:

This type of SIP allows investors to increase their investment amount at regular intervals. For example, an investor may start with a monthly SIP investment of ₹5,000 but can choose to increase it by 10% after a year.

Perpetual SIP:

This type of SIP allows investors to invest in mutual fund schemes for an indefinite period of time. The investor can choose to stop investing at any point in time.

Flexible SIP:

This type of SIP allows investors to invest varying amounts at different intervals. For example, an investor may choose to invest ₹10,000 one month but only ₹5,000 the next month.

What is the difference Between SIP and Lumpsum?

SIP & Lumpsum are the two most popular ways of investing in mutual fund schemes. SIP full form for Systematic Investment Plan, is a method of investing a fixed amount of money at regular intervals. At the same time, Lumpsum, also known as, One-time purchase, refers to investing a large sum of money in one go.

Factors to consider while investing via SIP

SIP investment requires careful consideration of several factors to make it a fruitful choice. Here are the most important factors to consider while investing through SIP:

Performance of the Scheme: Analyzing the performance/past performance of a mutual fund scheme is critical before investing in it. Investors should check the fund's track record in terms of returns, volatility, and consistency. A scheme's performance can also be analyzed as regards to its benchmark index. However, it must be understood that the past performance may or may not be sustained in future, and the scheme performances may vary depending upon the market conditions.

Analyze the risk appetite: All investments come with some level of risk, and SIP is no different. Hence, it is important to understand the risk involved in the scheme before investing. Investors should evaluate the fund's risk profile based on factors such as asset allocation, portfolio composition, and the fund manager's investment style. This analysis can help investors determine whether the risk-reward trade-off is acceptable for them.

Identify the goal and duration: The primary purpose of investing via SIP is to achieve a financial goal, such as buying a house or saving for retirement. Hence, investors must determine their financial goals and the time horizon for achieving them. This information will help them choose a scheme that aligns with their investment objectives and matches the investment duration.

To sum up, what is SIP investment? SIP is a long-term investment option, and investors may invest in a fund that syncs essentially with their investment goals and risk profile. Investing via SIP requires discipline and patience, and investors should not get swayed by short-term market movements. By considering the above factors, investors can make informed decisions, and it can help them achieve their investment goals. An investor should always keep in mind that mutual fund investments are subject to market risks, and past performance is not a guarantee of future returns.

Frequently Asked Questions:

How much money do I need to start an SIP?

One can start with SIP basis their own risk appetite and the ability to invest. The minimum SIP instalment is based on the mutual fund scheme selected. It can start from as low as ₹100 per month.

Can I stop or change my SIP investment at any time?

An investor can stop or modify the SIP as per their requirements at any point in time. The user can login to their mutual fund account like Kotak Mutual fund account through their credential and select the SIP which needs to be cancelled.

What is power of compounding?

Theoretically, compounding means the returns generated, if any on investments gets added back to the investment amount. So the interest earned if any, is then calculated on the new investment amount which is the originally invested amount along with the returns earned, if any on the same.

What is the difference Between SIP and Lumpsum?

How does SIP compare to other investment options?

Systematic Investment Plan (SIP) offers several advantages that set it apart from other investment options. Unlike lump-sum investments, SIP allows investors to spread their contributions over time, making it accessible to individuals with varying financial capacities. It promotes disciplined investing by encouraging regular contributions, which can help mitigate the impact of market volatility through rupee-cost averaging. SIP also provides the potential for compounding returns, as each installment gets invested, potentially earning returns and contributing to the overall growth of the investment.

Moreover, SIP is flexible and can be started with a relatively small amount, making it suitable for long-term financial goals like retirement planning or wealth accumulation. When compared to other options, such as one-time investments or trying to time the market, SIP's systematic and disciplined approach can be a more reliable strategy for achieving financial objectives over the long term.

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The document includes statements/opinions which contain words or phrases such as "will", "believe", "expect" and similar expressions or variations of such expressions, that are forward looking statements. Actual results may differ materially from those suggested by the forward looking statements due to risk or uncertainties associated with the statements mentioned with respect to but not limited to exposure to market risks, general and exposure to market risks, general economic and political conditions in India and other countries globally, which may have an impact on services and/or investments, the monetary and interest policies of India, inﬂation, deﬂation, unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or prices etc.

Past performance may or may not be sustained in future. Kotak Mahindra Asset Management Company Limited/ Kotak Mahindra Mutual Fund is not guaranteeing or forecasting any returns/future performance. SIP does not guarantee of any profit/loss in declining/upward markets. Investors may consult their financial advisors and /or tax advisors before making any investment decisions.

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