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What is SIP Investment & How SIP Works?

SIP investment is a disciplined and accessible approach to wealth creation through mutual funds. Read below to explore everything about SIP.

  • 3,122 Views | Updated on: May 13, 2024

Key takeaways

  • A Systematic Investment Plan is a financial strategy that allows you to invest a fixed amount of money at regular intervals, typically monthly.
  • In a perpetual SIP, there is no fixed end date. Your investments continue indefinitely until you decide to halt them, providing you with long-term flexibility.
  • Flexible SIPs offer the convenience of adjusting your investments according to your preferences or cash flow.
  • A Systematic Investment Plan (SIP) operates by making regular and reliable investments, much like setting up a recurring bank deposit.

Imagine a way to grow your money effortlessly, where you invest a little each month and watch it multiply over time. You can turn your imagination into reality with Systematic Investment Plans (SIPs). SIP investments are like planting seeds that grow into money trees, providing you with financial security and freedom.

What is SIP?

A systematic Investment Plan is a financial tool that allows you to invest a fixed amount of money at regular intervals, typically monthly. Think of it as setting aside a portion of your income for your future self. This amount is then invested in mutual funds, which are managed by professional fund managers.

SIP investment

Types of SIP

As your income grows, you can leverage various SIP enhancements to boost your investments:

Top-Up SIP

As your financial success unfolds, you have the option to augment your investments through Top-Up SIP. With this strategy, you can periodically increase the amount of your SIP contributions.

For instance, you can start with a SIP of ₹3,000 per month and raise it by ₹1,000 every six months. This means that after six months, your SIP will increase to ₹4,000, and then to ₹5,000 after the subsequent six months, and so forth.

Perpetual SIP

In a perpetual SIP, there is no fixed end date. Your investments continue indefinitely until you decide to halt them, providing you with long-term flexibility.

Flexible SIP

Flexible SIPs offer the convenience of adjusting your investments according to your preferences or cash flow. While a fixed initial amount is determined at the outset, it can be modified to accommodate changing circumstances. This flexibility is particularly valuable when managing your SIP online.

Trigger SIP

Tailored for experienced investors, Trigger SIP allows you to set triggers that automatically shift your investments to another scheme in response to market volatility. This sophisticated SIP variant empowers you to adapt to changing market conditions with ease.

How Does SIP Work?

A Systematic Investment Plan (SIP) operates by making regular and reliable investments, much like setting up a recurring bank deposit. These investments are automatically deducted from your bank account through standing instructions, and you are allocated a corresponding number of mutual fund units. The quantity of units you receive is determined by the current Net Asset Value (NAV) of the chosen scheme.

When you opt for a SIP through SEBI (Securities and Exchange Board of India) registered mutual funds, a team of skilled fund managers takes charge of your investments, and you incur a nominal fee as outlined in the Scheme Information Document for the specific scheme.

Selecting a Mutual Fund

The first step in setting up an SIP is selecting a mutual fund scheme that aligns with your financial goals, risk tolerance, and investment horizon. There are various mutual funds available in the market, such as equity funds, debt funds, hybrid funds, and more. Each has its own risk-return profile, so it’s important to choose one that suits your needs.

Choose Frequency

SIP allows investors to choose the frequency of their investments. Most investors opt for a monthly SIP, but you can also choose to invest quarterly or semi-annually, depending on your convenience and financial planning.

Setting Up Auto-Debit

To ensure a hassle-free investing experience, you need to authorize your bank to auto-debit the predetermined SIP amount from your bank account on the chosen date. This automation ensures that you invest consistently without manual intervention.

NAV-based Allotment

When your SIP amount is deducted from your bank account, it is used to purchase units of the chosen mutual fund scheme at the prevailing Net Asset Value (NAV). NAV is the per-unit market value of a mutual fund scheme and fluctuates daily based on the performance of its underlying assets.

Portfolio Diversification

SIP allows investors to diversify their portfolio by investing in multiple asset classes or sectors through various mutual funds. This diversification helps spread risk and potentially improves returns.

How SIP Works for Rupee Cost Averaging?

NAV (Net Asset Value) in SIP/ mutual funds keeps fluctuating throughout the year. To ensure you don’t end up paying higher prices, rupee cost averaging is implemented.

Your purchase is spread across a span of a few months/ year to ensure (instead of investing a whole chunk in one go) you don’t end up investing all your money in a high-price season.

Rupee cost averaging, in a way, ensures that you automatically buy more units when the NAV (Net Asset Value) is low and fewer units when the NAV is high.

For example, an investor starts a SIP in a mutual fund with an initial investment of ₹10,000 and continues to invest ₹5,000 every month. The mutual fund’s unit price fluctuates each month, and we will calculate the number of units bought, the total invested amount, and the average unit cost for each month. This table spans over six months for simplicity:

Month

Investment Amount (₹)

Unit Price (₹)

Units Bought

Total Invested (₹)

Average Unit Cost (₹)

First

10,000

50

200

10,000

50.00

Second

5,000

55

91

15,000

54.95

Third

5,000

48

104

20,000

52.63

Forth

5,000

52.50

95

25,000

52.63

Fifth

5 ,000

45

111

30,000

53.29

Sixth

5,000

60

83

35,000

56.03

Conclusion

SIP investment is an excellent way to start your journey towards financial independence and achieving your long-term goals. By contributing regularly, leveraging rupee cost averaging, and harnessing the power of compounding, SIPs offer an effective and convenient way to build wealth over time.

All it takes is a basic understanding of the process and the capacity to commit to regular investments at predefined intervals. They serve as a valuable tool to help you accumulate savings towards achieving a financially secure future.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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