Systematic Investment Plan or SIP is an efficient and disciplined mode of investing in mutual funds. It is a facility that can be used for all open-ended mutual funds.
SIP investing involves investing pre-determined amount of money, consistently at pre-determined intervals (weekly, monthly, quarterly etc) in mutual funds of your choice.
For example, an investor decides to invest a sum of INR 10,000 every month to purchase units of a large cap mutual fund, Aditya Birla Sun Life Frontline Equity Fund for SIP investing. This means that the investor commits to invest this fixed sum in the selected fund on a fixed date (say the 1st of every month). Investors of course, have the choice to pause, discontinue, enhance or reduce this SIP amount after completion of minimum SIP amounts as per the selected scheme.
SIPs are preferred choice of investing as it allows investors to invest as per their affordability, at intervals of their choice. It is a useful way to slowly but steadily accumulate a sizeable corpus in mutual funds.
How does SIP work?
An investor decides the mutual fund scheme, SIP amount and frequency of SIP.
- Thereafter, at every SIP date, the SIP amount is auto-debited from the investor’s bank account
- In return, the investors receive equivalent units of the selected MF scheme.
- The number of units received is determined basis the NAV prevailing for the selected scheme on the date of SIP.
- In this manner, every month (week or quarter), the investor gets more and more units of the scheme.
Let us illustrate this with an example.
Investor A decides to invest INR 10,000 each month in the ABSL Frontline Equity Fund (Growth Direct). He begins the SIP on 1st January 2022; his SIP investments are as follows:
At the end of a year, the investor has accumulated an investment corpus – getting more units when NAV is lower and fewer units when NAV is higher. This ultimately averages out the cost of investment, eliminating the hassle of timing the market.