A systematic investment plan (SIP) is a method of investing in mutual funds in a disciplined manner. It allows investors to invest a fixed amount of money at regular intervals, typically monthly or quarterly, into a mutual fund scheme of their choice. Here’s how SIP works:
- Setting up the SIP: The first step is to choose a mutual fund scheme that aligns with your investment objectives and risk profile. You can then set up a SIP by providing a mandate to your bank to automatically deduct the fixed investment amount from your account at the chosen intervals.
- Allocation of Units: Once the SIP amount is deducted, the mutual fund house allocates units of the chosen scheme based on the prevailing net asset value (NAV). The NAV represents the value of each unit of the mutual fund scheme, which is calculated by dividing the total value of the scheme’s assets by the number of units outstanding.
- Compounding: SIPs allow for the power of compounding to work in your favor. The compounding effect helps to generate higher returns over the long term. The investment made through SIPs is spread over a longer period, which helps to average out the cost of buying units of the mutual fund scheme.
- Redemption: You can redeem your investment in the mutual fund scheme after the lock-in period, which varies depending on the type of scheme. The redemption amount is based on the prevailing NAV of the scheme at the time of redemption.
SIPs are a popular investment option for investors who want to invest in mutual funds but may not have a lump sum amount available for investment. It also helps investors to stay disciplined in their investment approach by investing regularly over a longer period.