How Does Mutual Fund SIP Work?

by My Finopedia Run Your Finance Smoothly

SIP Scheme is an investment option where instead of putting a lump sum amount into mutual funds, the investors can invest a certain amount of money in mutual funds over a while. The investors can start SIPs at just INR 500 per month. SIP returns help them to accumulate wealth over a large period. 

Once you apply for one or more SIP mutual fund plans, the amount is deducted from your registered bank account and invested in your mutual fund schemes. After making the first payment, you have the option to set the biller for auto-payments at the predetermined time intervals in the future. At the end of the day of the payments, the units of mutual funds are allocated to your account depending upon the NAV of the mutual funds.

When to invest in a SIP?
SIP Schemes can be started anytime the investing objectives of clients are matched with suitable schemes and associated risks. The plan must suit the long-term goals of the investors. So, there is no better day to start SIP than today, the sooner the better. 

Types of Systematic Investment Plan (SIP)

There are 3 types of SIP Schemes you can start-

Perpetual SIP 
This SIP scheme allows the investors to make investments without an end to the mandate date. Here the investor has the option to withdraw the amount invested as per his choice. Generally, a SIP carries an end date after 1 Year, 3Years or 5 years of investment. 

Top-up SIP
As the name suggests, in this SIP scheme you have the option to increase the amount of investment periodically. Such increment could be due to an increase in income, promotion, or availability of additional corpus. Such funds are really helpful in making the best out of investment opportunities where the best and high-performing funds at regular intervals are available at lower prices. 

Flexible SIP
Flexible SIP Schemes allow investors to increase or decrease the amount of investment as per/her choice. The investor can invest as per his own cash flow needs or preferences.

Benefits of investing in SIP
There are multiple SIP benefits over investing in Lumpsum. We have listed some of them as follows-

Disciplined investment: SIPs allow you to make periodic investments in a scheme that helps you to accumulate surplus or plan out for future events like retirement, foreign trips, children’s education & marriage. These plans help people who aren’t well-versed in the financial world and don’t have enough time to analyze the market movements from time to time. You can simply consult your financial planner and choose the right SIP scheme suitable for your financial needs. The sum would get auto deducted from your bank account so you don’t need to worry about on-time payments. 

The rupee cost averaging factor: Every person who knows about the existence of financial markets is aware of its volatility. In SIP schemes, you make a fixed amount of investment each month into the schemes. Sometimes, prices are up or sometimes they fall. So, by making periodic investments you can reap the benefits of rupee cost averaging which allows you to take advantage of such volatility. In simpler words, you can buy more units when the prices are low and buy lesser units when the prices are high, thereby averaging out the value of each unit which lowers your average cost per unit. 

Power Of Compounding: To avail the benefit of the power of compounding one has to start early and invest regularly, a delayed investment will lead to a greater financial burden to meet the required goals, at an early stage a less investment is needed whereas more investment is needed at a later stage to accumulate the same planned corpus. Small amounts invested slowly over some time accumulate into a large corpus as the returns get compounded over the years.

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About My Finopedia Junior   Run Your Finance Smoothly

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Joined APSense since, June 2nd, 2022, From New Delhi, India.

Created on Aug 20th 2022 05:59. Viewed 81 times.


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