Understanding SIP Investments: A Beginner’s Guide to How SIP Works

SIP or Systematic Investment Plan is a way to invest in mutual funds. It is a simple method where you invest a predetermined amount regularly, and it is considered a great way to grow your wealth over time. Many financial experts and investment gurus worldwide have corroborated that a SIP investment plan is one of the best ways to start your investment journey and take your first step towards accomplishing long-term financial goals. 

If you are a first-time investor and not sure what it is or how it works, then this beginner’s guide is just for you. Read on!

 

 

What is SIP?

As mentioned earlier, SIP is a medium to invest in mutual funds of your choice. By starting an SIP, you invest a small amount in different funds at regular intervals. It could be monthly, weekly, quarterly, etc, as per your financial capacity and financial goals. SIPs are also highly flexible. You can change the investment amount and the period based on your changing financial situation and goals. 

SIPs help you accumulate wealth over time by reducing the risk and averaging the market volatility. Whether you are an experienced investor or just taking your first step in the world of investment, smart SIP planning can help you progressively achieve your long-term financial goals without worrying about the market conditions or timing of your investment. 

 

Understanding the Workings of an SIP

Now that you know what SIP is, you must also know how it works. You can think of an SIP investment as a recurring investment, where a small amount is automatically debited from your bank account periodically and is invested in mutual funds of your choice. 

Once the amount is deposited, you get a certain number of units of the mutual fund where you have invested. And the number of units of funds you get depends on the NAV (Net Asset Value) of that specific scheme on that specific day. The NAV is essentially the per unit price of the fund you purchase. 

The SIP mutual fund allows you more units of the scheme with every investment. As the NAV of the scheme keeps changing every day, with the SIP amount, you may buy fewer or more units depending on whether the market conditions are high or low. 

 

Benefits of investing in SIP

Now you know what SIP is and how it works. So, it will help to understand its benefits as well. Which include:

 

• Be disciplined with investments

Investing in a SIP is a wise investment for all who want to invest in mutual funds in an organised manner. Since you invest a small amount regularly, the SIP investment plan allows you to develop the habit of disciplined investing. 

As you keep investing through different market conditions, with the power of compounding, you will have a better chance of accumulating a significant corpus that you can use to secure your future needs. 

 

• Cost efficient

Investing in mutual funds through a SIP plan makes it a cost-effective option for a broad spectrum of investors. This is because SIP plans have a minimum investment threshold, and you can invest a small amount as low as Rs. 500 per month and contribute towards your goal. 

 

• Manage home loan repayment

Yes, you heard it right. You can easily fund your home loan EMIs (equated monthly instalments) by investing in mutual fund SIPs. However, it requires a strategic approach. Since home loan tenure lasts up to 20 years or more, you must repay a significant amount of interest and the principal amount. 

The potential returns from a mutual fund SIP can let you manage the monthly home loan repayment obligations. The key is to start SIP before taking the home loan. Also, you must choose the lender carefully. 

It is advisable that you apply for a home loan with reputed lenders like India Shelter, which offers the loan at competitive interest rates and for an extended period of up to 30 years. This gives you enough time to manage your repayment without compromising your other financial goals. 

 

• Flexibility

SIP gives you immense flexibility in terms of choosing when you want to start, stop, increase or decrease the investments. You can change your contribution amount or start an additional SIP based on your changing financial conditions and needs. 

 

Things to consider before investing in SIP

Before you invest in any instrument, you must do your due diligence with regard to your goals, financial conditions, etc., and SIP is no different. Here are a few important things you must consider before you start your investment journey in mutual funds. 

 

• Risk-taking capacity

Risk-taking capacity or risk tolerance is essentially understanding how much money you can afford to invest in high-risk funds with the hope of getting higher returns. This, in turn, will help determine appropriate asset allocation between debt funds (relatively lower-risk investments), equity funds (high-risk funds) and hybrid (a combination of debt and equity investment) funds.

 

• Investment horizon

You must decide the period for which you want to stay invested. You can decide this based on your short-term and long-term objectives and liquidity needs. 

 

• SIP amount

You must determine the maximum amount you can afford to invest in mutual funds based on your existing income, expenses, and other financial commitments. You can start investing a small amount initially, and over time, as your financial conditions improve, you can increase the contribution.

 

Conclusion

In a nutshell, investing in mutual funds through SIP is a great way to allow your savings to grow over time. The earlier you start investing and the longer you stay invested in the market, the better your chances of accumulating a larger corpus. 

You can use the SIP calculator to know the expected returns on your investments and make an informed investment decision accordingly. So, start investing in SIP now and fulfil your long-term goals.