SIP Meaning: A beginner’s guide to SIP

Have you been wanting to invest in SIP mutual funds but don’t know what it really is? Don’t worry because this article will explain you the SIP meaning and tell you exactly how SIP works. Read this article further to also know how you can start investing in SIP.

What is SIP?

SIP or Systemic Investment Plan as the name suggests allows you to invest in mutual funds in a systemic way. There are primarily two ways of investing in mutual funds; with a lump sum amount and through SIP. Systemic Investment Plan gives you control over how much money you can afford to spend on investing in mutual funds. It also enables you to choose the frequency of the investment like weekly, quarterly, monthly, yearly, etc. This gives investors the freedom to customize their investment through SIP and gain good returns from mutual funds.

How Does SIP Work?

Systemic Investment Plan (SIP) enables you to invest money in a weekly, quarterly, monthly and yearly frequency. The minimum amount that you can invest is INR 500 with no maximum limit. The investment grows according to the market movement over a period of time. The longer the investment the better the returns. This works on the compounding effect of interest that enables you to high returns on longer investments.

How to Start SIP Investment?

You can start investing in SIP by following the steps given below:
  1. Firstly, you need to complete your Know Your Customer (KYC) which is a mandatory requirement to start investing in Mutual Funds. For KYC, you have to submit your identity proof, address proof and a passport-size photograph.
  2. After you have finished the KYC, there is an In-Person Verification (IPV) that needs to be done. Many funds houses also enable you to carry out the IPV via video call.
  3. Now, you can look for a fund house where you want to start the SIP and create a new account on their website. Your bank details will be required to complete the registration process.
  4. Once you have successfully created an account, you can log in and choose the mutual fund scheme of your choice and start investing.

You can also choose to do this entire process via eKYC which requires you to have an Aadhaar card. In eKYC, you have to enter your Aadhaar number and authenticate it by entering the One-Time Password (OTP) sent to your phone. All of your basic information present in the UIDAI database will be pre-filled on the form. But the setback of using eKYC is that it limits you to invest only INR 50,000 in one financial year.

Benefits of Investing in SIP

       I.            Convenient For Investors

Systemic Investment Plan makes investing convenient by deducting the concerned amount directly from your account on a specific date. According to the frequency chosen by you, the deductions will take place without you having to keep a tab on it.

    II.            Power of Compounding

Compounding is where interest earned on your principal amount gets accumulated and starts earning interest as well. You earn better returns over a long period because the interest keeps getting compounded and accumulates to earn more interest. The trick here is to hold your SIP investment for a long duration to take advantage of the power of compounding.

 III.            Minimal Risks

SIP enables you to stop your investment in case of unfavorable conditions like the fund manager of a well-doing fund changes or you cannot afford to invest your earnings anymore. Compared to a lump sum investment where you input a huge amount altogether at once, SIP consisting of monthly investments gives you more flexibility over discontinuing the investment.

IV.            Rupee Cost Averaging

To understand Rupee Cost averaging, you have to understand NAV or Net Asset Value. NAV is the value for which you buy or sell a mutual fund unit minus the liability value per unit. There is a difference in NAV when you buy a mutual fund scheme by investing via lump sum and SIP.

Example: Let’s assume you buy 300 units for INR 60,000 in December by investing a lump sum amount. During this period the NAV is 200. But on the other side, your friend bought 100 units for INR 20,000 through SIP when the NAV was 200 in December. In January, the NAV rises to 250 which leads to your friend to buy 80 units for INR 20,000. But in February, the NAV goes down to 100 which earns your friend 200 units for INR 20,000.

So, now if you compare both your investments, you gained 300 units for your investment of INR 60,000 whereas your friend gained 380 for the same amount because of the fluctuation of the market. You bought 300 units for the cost of INR 200 per unit but due to rupee cost averaging, your friend was able to buy 380 units for INR 157.89. This is the benefit of rupee cost averaging that you can take benefit of through SIP investment.
SIP Meaning: A beginner’s guide to SIP SIP Meaning: A beginner’s guide to SIP Reviewed by Pravesh Kumar Maurya on July 11, 2019 Rating: 5

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