A Systematic Investment Plan (SIP) is a smart and hassle free mode for investing money in mutual funds. SIP allows you to invest a certain pre-determined amount at a regular interval (weekly, monthly, quarterly, etc.). A SIP is a planned approach towards investments and helps you inculcate the habit of saving and building wealth for the future.
SIP works on the principle of regular investments. It is like your recurring deposit where you put in a small amount every month. It allows you to invest in a MF by making smaller periodic investments in place of a heavy one-time investment.
How does it work?
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Easy to set up
Investor can fill the application form along with the SIP NACH mandate and submit it to the point of acceptance. It generally takes 21-30 days for the bank to register your SIP mandate and start it. Some fund houses allow you to choose any day of the month for the SIP, while others have specific days like 1st, 7th, 10th etc. on which you can run your SIPs.
What happens when you miss a SIP instalment?
The fund house does not penalize you for missing a SIP instalment but if it happens continuously for three times, it would cancel your SIP. If you are aware of the insufficient balance, you can stop the SIP to avoid bank charges. It takes around 10 days if you submit the request through the online channel and about 30 days if you prefer the old paper form format. You will have to re-start your SIP again when you are financially comfortable.
Alternatively, you can also opt to pause your SIP by submitting a request with the fund house. This will stop your instalments temporarily for a short period and will automatically start it after that.
When should you invest in mutual funds through SIP?
SIP is beneficial as long as markets really are volatile or going down after you invested. If at all, the markets turn bullish and start rising, SIP won’t be beneficial and may give fewer returns compared to lump sum investments. SIP is a simple concept and hence very powerful.
Benefits of investing in SIP
- Power of compounding.
Compounding is about earning interest by reinvesting the interest earned. The magic of compounding can turn a small amount invested regularly into a very large corpus. Investment experts say that it is always better to start investing early with a small amount than waiting for a large sum to start investments.
- Rupee-Cost Averaging.
With volatile markets, most investors remain confused about the best time to invest and try to ‘time’ their entry into the market. Since you are a regular investor, your money fetches more units when the price is low and lesser when the price is high. During volatile period, it may allow you to achieve a lower average cost per unit.
- Discipline.
SIP trains you to become a disciplined investor. Once you begin SIP, every month you have got to contribute certain money in mutual fund and that habit is cultivated. The one basic rule of investing is to always maintain a focused and dedicated approach towards investment. Investing in SIP allows users to maintain a monthly investment scheme which is far easier to maintain in the long run rather than investing a lump sum amount each year.
- Convenience.
SIP presents a very convenient way of investing. It is only required to submit a filled up enrolment form along with a cheque, which is to be deposited on the date requested by the mutual fund. Thereafter, units will be credit to your account & a notification will be sent out for the same.The investor can send a onetime instruction to his or her bank to allow auto debit of the investment amount each month from his or her savings bank account allowing systematic investments without worrying about missing out on any monthly investment.