Thought an SIP was just a Rs 500 investment tool? Think again!

Is SIP a mutual fund? Is SIP a category of mutual funds? Every new investor might have had a learning curve with this or is still having one. We deep dive into what a Systematic Investment Plan is, and what its benefits are.

“I think I first heard about mutual funds during the later years of high school. Then, I started hearing about SIP through the investor initiative advertisements run by SEBI on TV but was unclear on what it was. I thought it might be a specific kind of mutual fund,” says Sarthak Gupta, a 25-year-old economist at the mining company BHP. “Later on during college, I learnt from one of my professors that SIP is just a mode of investment in mutual funds.”

Like Gupta soon learnt, an SIP is not the synonym for a mutual fund, neither is it a category of mutual funds. An SIP is a mode through which you can invest in several mutual fund schemes. The other mode is referred to as a lump sum investment, where you buy units of a scheme as and when you have the money. Generally, equity funds and/or hybrid funds will allow an investor to use SIP to invest. It is popular because it is light on the pocket and an automatic mandate makes it simpler, a thing crossed off the to-do list.

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How does a SIP help?

1. 1. It’s easy on the pocket: SIPs allow investors to invest with amounts as low as Rs 100 or 500 at regular intervals. This can help you build discipline without burning a hole in your pocket.
   2. Rupee Cost Averaging: Rupee cost averaging seeks to balance out the market movements, so your money buys more units of a scheme. When you invest a fixed amount of money at regular intervals, it ensures that you buy more shares of an investment when prices are low and less when they are high. So, there is an averaging of sorts, not requiring you to time the market like a trader.
   3. Power of Compounding: An SIP lets you periodically increase your investment amount by a fixed amount. And what’s more, the returns are calculated not only on the amount you invested but on to the previous returns as well. The returns are compounded, which is quite a USP for this mode of investment.

How does SIP work?

Once you select an SIP mandate, the amount is automatically debited from your bank account for that fund. Be mindful that not all SIPs you have chosen will have the same debit date. It is advisable to keep funds in your account during the debit cycle, otherwise, the investment is not made and it will be tried again next month. You are allocated the units of mutual funds depending on the NAV (net asset value) of that day and cut-off timings for them.

With every SIP, additional units are added to your account depending on the market rate. This increases your investment amount ever so often, maximising returns.

How can you invest?

A number of fintech platforms offer direct mutual fund schemes to investors. Almost always, there are a couple of steps to be followed. After you have selected the scheme you want to invest in, you will need to complete a KYC process and allow an auto-debit mandate from your primary bank account.

If the next question on your mind is should you invest in this tumultuous time, Sahil Arora, director and Group Head, Investments, Paisabazaar.com, thinks this could be a boon for investors. “Continued contribution to equity fund SIPs for the long term will help you benefit from rupee cost averaging by buying more units at lower costs during major and minor market corrections during the SIP tenure,” Arora says. “Investors may even top up their SIPs with lump sum investments during major market corrections, like the one we witnessed during the months of March and April this year. This will decrease their average investment cost and may even help in achieving their financial goals sooner,” he adds.

All images: Courtesy Getty