What Is Mutual Fund SIP?

Mutual fund systematic investment plan (SIP) is one of the most popular investment options for retail investors in India. As on 31st January 2023, total SIP accounts in India stood at 6.22 crores (source: AMFI). Monthly SIP investments are now Rs 13,000 crores. Around Rs 13,856 crores was invested in mutual fund schemes through SIP in January 2023. In this article, we will discuss what is SIP and why should you invest in SIP.

What is Mutual Fund SIP?

Systematic Investment Plan or SIP is a mutual fund facility through which you can invest a fixed amount at regular intervals e.g., weekly, fortnightly, monthly, quarterly etc in an open-ended mutual fund scheme. The SIP amount gets auto debited from your bank account every month or any other interval chosen by you and gets invested in a mutual fund scheme selected by you based on prevailing NAV (Net Asset Value)

How is NAV applied in SIP?

Each SIP instalment will have a different Nav, therefore, the total number of units you acquire will be different for each SIP instalment. The benefit, when you invest in SIP is that you acquire units at different price points, known as NAV, and thus, you benefit from rupee cost averaging.

Why invest in SIPs?

• You can start investing with small amounts (Rs 500 or Rs 1,000). Since your regular investment amounts (SIP instalments) in SIP are relatively small, your overall risk is lower compared to lump sum investments.
• SIPs can help instil fiscal discipline in spending and savings. Savings not invested, often gets spent on discretionary or non-essential expenses. By starting a SIP, you will be able to invest your savings for your long-term financial goals.
• Since you can start investing in SIPs with relatively small amounts, you can start your investment journey early in your working careers and invest for long tenures. Longer is the investment tenure higher is the power of compounding. Compounding is profits made on profits re-invested. Compounding makes your investment grow exponentially over long investment tenures.
• SIPs are ideal for your long-term financial goals because wealth creation is higher over long investment tenures. You can plan your long-term life stage goals like children’s education, children’s marriage, retirement planning etc with mutual fund SIPs.
• SIPs make market timing irrelevant because you are investing at various price levels (NAV) through SIP. You are less likely to make impulsive decisions based on behavioural biases if you are investing through SIP.

How to make the best use of SIPs?

• You should start investing in SIPs early in your working careers to maximize the power of compounding.
• You should ensure that you have sufficient balance in your savings bank account on the dates you

invest in SIP. There is no penalty if your SIP transaction fails due to insufficient balance, but if three consecutive SIP transactions fail, then your SIP will stop, and you may have to start your SIP again. Financial advisors recommend you choose a SIP date close to your salary credit date, so that you have sufficient balance on the SIP dates.

• You should be disciplined in your SIPs and not make decisions based on behavioural biases. You should not stop your SIPs if market stops falling. You can take advantage of corrections through Rupee Cost Averaging in SIPs by acquiring units at low NAV.
• As your income / salary increases, you can opt for SIP Top-up facility to increase your SIP amounts at certain intervals e.g., half yearly, annual etc. SIP Top-up can help your reach your goal faster or create more wealth.