Understanding the Concept of Systematic Investment Plan (SIP)
Understanding the Concept of Systematic Investment Plan (SIP)

Understanding the Concept of Systematic Investment Plan (SIP)

3 minutes, 44 seconds Read

Investors can buy or sell individual securities like bonds, stocks, derivatives, and commodities. However, some investors might find it challenging to build a diverse portfolio by themselves. Such investors can choose mutual funds to invest in diversified portfolios. Not to forget, mutual funds also allow investors to build long-term wealth and manage risks. With the arrival of affordable Systematic Investment Plans (SIPs), mutual fund investments have increased significantly in India.

Investors must be familiar with how SIPs work, especially retail investors. SIP investment plans can help purchase mutual fund units without a huge trading capital. Read on to understand the concept of SIPs and how they work.

Demystifying Mutual Funds SIP

You might know that mutual funds are investment vehicles that pool money from many individuals. The money collected from different investors is used to build a diverse portfolio. Instead of purchasing individual assets, investors buy a basket of securities through a mutual fund. Mutual fund portfolios can consist of equities, money market instruments, bonds, cash equivalents, and other assets. Mutual fund schemes are offered by AMCs (Asset Management Companies) in India.

Many popular banks have AMCs as their subsidiaries in India. You don’t need to worry about the Demat account opening procedure to invest in mutual funds, as they aren’t mandatory. However, Demat accounts are essential tools for portfolio tracking and safe storage of electronic securities.

To invest in a mutual fund scheme, you must purchase its units. Mutual fund units are created by AMCs, based on the Assets Under Management (AUM) and fund popularity. The entire mutual fund portfolio is divided into tradable units. Investors can directly purchase or sell mutual fund units based on the current market price or NAV (Net Asset Value).

Another way of investing in a mutual fund scheme in India is through SIP. A SIP allows you to invest a regular amount in a mutual fund scheme at regular intervals. When market conditions aren’t favourable, investors will end up purchasing fewer mutual fund units through SIPs. SIP investment plans are perfect for investors wanting to benefit from cost averaging.

Read Also: How to Use a Demat Account and Start Currency Trading Online in India

Demystifying the SIP Types in India

Investors can find different SIP types in India. These SIPs are designed to cater to diverse investment needs. Here are some types of SIPs in India for investors:

  • Regular SIP: You will invest a fixed amount every month, quarter, or year with a regular SIP.
  • Top-Up SIP: The investment amount increases after each instalment with a top-up SIP. For instance, one can step up their SIP investment by INR 1,000 after each instalment.
  • Flexible SIP: A flexible or Flexi SIP allows investors to alter their investment amount as and when required.
  • Perpetual SIP: Investors are required to choose their tenure before starting SIPs. However, investors can choose an indefinite tenure through a perpetual SIP. A perpetual SIP will stop only when the investor wants.
  • Trigger SIP: A trigger SIP works until a preferred event occurs. For instance, a trigger SIP might continue until a specific NAV is achieved. After the trigger event occurs, the SIP can be switched or redeemed.
  • Multi-SIP: A multi-SIP allows you to invest in multiple schemes of the same AMC.

Read Also: The Power of SIP Calculator: Making Informed Investment Decisions

Demystifying the Pros of SIP Investments in India

Here are the benefits of investing in mutual funds through SIPs:

  • Regular Savings: You will know the amount to invest in a mutual fund via SIP in advance. It will prompt you to save a fixed amount every month, quarter, or year.
  • Cost Averaging: SIPs allow you to purchase more mutual fund units when NAV is low. Similarly, fewer units are purchased when NAV is high.
  • Affordable Options: SIP options are affordable, especially for retail investors. You can find SIPs starting from INR 500 per month in India.
  • Compounded Returns: Your returns through SIPs will be re-invested in the mutual fund scheme. It will help investors build substantial wealth.
  • Enhanced Liquidity: You can redeem your SIP investments as and when required for most funds.

Read Also: The Power of SIP Calculator: Making Informed Investment Decisions

Conclusion

SIP investment plans are perfect for individuals with fixed savings or low trading capital. SIP options start from INR 500 and 1,000 per month in India. Anyone can invest in mutual funds through SIPs with the help of AMCs. Choose your SIP option and invest today! Read more blogs on our website.

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