What is the Meaning of SIP in Mutual Funds?

In recent times, mutual fund investment has emerged as a promising investment avenue for all types of investors. Whether you are investing for a shorter period or a longer one, mutual funds investment promises excellent returns along with numerous other benefits. That is what makes them way ahead of other conventional investment channels such as fixed deposits, post offices, recurring deposits, LIC, stocks, and others.

And, when it comes to investing in mutual funds, one of the most widely used terms is SIP. What does it mean? How it works? How to use the SIP calculator? If you have been facing these types of queries while investing in mutual funds, this post will help you get the most insightful information about SIP

What does SIP mean?

The full form of SIP is a Systematic Investment Plan. In general, it refers to a way of investing in mutual fund plans. This type of mutual fund investment involves investing a fixed amount of money regularly which can be monthly, quarterly, semi-annually, or annually.

SIP investment is found to be a great choice for investors who are willing to deposit a fixed amount of money every month. Investing in a SIP can help investors achieve their different types of investment objectives such as  Financial Stability after Retirement , children’s education, daughter’s marriage, home purchase, car purchase, etc.

How SIP works?

If you are looking to invest in mutual funds through SIP, it is necessary to acquaint yourself with some important points in regard to its working.

You can invest your money in SIP in four steps no matter which mutual fund scheme you choose to go with. Let’s get to know those four steps.

Choose a mutual fund plan

First and foremost, you need to choose a mutual fund plan to kick off your SIP investment voyage. You can choose a mutual fund scheme given your investment objective, available money, and several other factors that tend to affect your investment.

Decide the investment frequency

The next thing to do is to pick an investment frequency you are easy to pursue long-term. For a majority of investors who either run a small business or do a job, the monthly investment is a feasible choice. However, it is entirely up to you how you decide to invest the money – monthly quarterly, semi-annually, or annually.

Setup SIP

After selecting the mutual fund scheme and the investment frequently, you need to make some setup of SIP before investing. For example, KYC is necessary for first-time investors. Submit the bank details, agree to SIP conditions, and complete other formalities for a smoother SIP investment journey.

Automatic SIP debit and unit allotment given the applicable NAV

After you set up the things mentioned above, the SIP money will be debited automatically on the chosen date from your registered bank account. It is necessary to keep that money in your bank account to avoid SIP failure. This can also cost you a penalty for NACH failure. The secret to getting good returns from SIP is to invest consistently.

You will be acknowledged as soon as the money gets debited from your bank account. You will also get to know the no. of units that have been allotted to you given the existing NAV. As NAV changes every day, the no. of allotted units may be different every month.

Benefits of SIP Investment

An opportunity to start small: Investing in an SIP plan can do wonders if you start investing smaller amounts when your income is low. Choose any mutual fund scheme and start investing smaller amounts. The best thing about SIP investment is that you can start the one with an amount as low as Rs. 500.

Invest early: If you understand the power of compounding interest rates, you can easily understand that the sooner you start investing, the better returns you can expect to get. Don’t focus on making great savings but make the best out of what you already have.

Easy to sustain: SIP investments allow high levels of customization to investors from the investment frequency to amount, plans, and fund houses. This ultimately helps the investors in making changes to their SIP investments given their financial situation.

Automatic investments: If you are a disciplined investor, SIP allows you to automate your investments without worrying about lag or delay in your investment. Every month, the chosen SIP amount will be debited from the bank account with a notification sent to your registered email ID and phone number.

Benefit from Rupee Cost Averaging: One interesting benefit of the SIP investment plan is rupee cost averaging. Your average cost of investing decreases as you invest, and your returns level out. Your investments get better the longer you make them.

Types of SIP

As of now, you must have a thorough knowledge of SIP from its meaning to its working, and benefits. Now, let’s get to know the different types of SIP that are available to choose from.

Fixed SIP

Fixed SIPs are the most elementary format of SIPs. Just choose an investment amount along with the date when you want the money to be debited. The remaining things will be done automatically.

Top-up SIP

Top-up SIPs are found to be a wonderful choice for investors who have plans to increase their SIP contributions sporadically. If you are confident that your income will gradually grow over time, you can go with a top-up SIP plan.

Perpetual SIP

In general, perpetual SIPs are fixed SIPs that come without a term. Unless you ask the fund house to restrict SIP withdrawals, the amount of the SIP payment will be deducted from your bank account once to join.

Flexible SIP

A flexible SIP plan awards flexibility by enabling investors to modify the details such as investment amount per contribution or miss a few instalments. There are mainly two reasons why an investor may choose to alter the contribution amount or miss a SIP investment. First, the contributions made through SIP are attuned considering the market’s typical outlook. In the case of higher market value, the monthly contributions through SIP would go down and go up once markets regain their lost momentum.

What is a SIP calculator?

A SIP calculator is a web-based tool that can be accessed on a laptop or a mobile device. This tool helps investors to determine the estimated returns on their SIP investments made over a while. This is an easy-to-use tool as it enables the person to know the expected return on investment (ROI) in just a few seconds.

How to use the SIP calculator?

Using the SIP calculator is very easy. You just need to enter the investment amount, investment frequency, investment duration, and expected returns. The SIP return calculator determines the returns on the basis of the compound interest formula. The compounded interest is the main reason why mutual fund returns are so lucrative.

The formula that is used in a SIP calculator is defined below:

FV = P [ (1+i)^n-1 ] * (1+i)/iFV = Future worth or the amount that is expected at maturity.

P = Amount you plan to invest through SIP

i = Compounded rate of return

n = Investment tenure (months)

r = Expected rate of return

The Conclusion

In today’s fast-paced world, mutual fund investment emerges as the most preferred investment tool for all types of investors in India. Though mutual fund investments come with their level of risk, investors can choose from different mutual fund schemes that match their risk and investment specifications. Whether you have just started earning or you want to leverage the power of compounding by investing in stock markets, mutual funds are the best way to go.

FAQs

Are SIP investments safe?

SIP is considered just a way of investing in mutual funds. The safety of SIP investment largely depends on the chosen mutual fund scheme as every scheme has its risk levels.

Are SIP investments tax-free?

No. SIP investments are not tax-free. An investor is supposed to pay tax on the profits made on its mutual fund investments. Do note that every mutual fund scheme has its tax criteria that you must understand while choosing a mutual fund plan.

Can I stop SIP?

Yes, you can choose to top the SIP whenever you want. You just need to visit the investment platform and follow the instructions given for the cancellation of SIP.

Is there any maturity time for SIP investment?

No, there is no maturity date with SIP investments. However, the longer you invest, the better returns you can expect to get.