SIP Explained: What They Are & How They Work

by Belle

If you’ve been hearing about SIP in discussions about investments, you’re likely wondering what it means and how it works. SIP is a popular method for investing in mutual funds. While it is often discussed as an easy and reliable investment strategy, understanding the basics can help you decide if it’s the right choice for you.

In this blog, we’ll explore what SIP stands for, how it works, and the tools you might find useful, such as the SIP calculator, to support your investment journey.

What is SIP?

SIP stands for Systematic Investment Plan. It allows individuals to invest a fixed amount of money in mutual funds regularly, instead of making a one-time lump-sum investment. You can choose to invest a specific amount every week, month, or quarter in a mutual fund scheme.

One of the key benefits of SIP is that it allows you to invest steadily over time, which might help mitigate the impact of market fluctuations. The strategy is often associated with a concept called rupee cost averaging, which helps smooth out the potential volatility of markets.

How Does SIP Work?

Understanding how SIP works is essential before you decide to invest. When you invest in SIP, you choose a fixed amount to invest regularly. For example, you may decide to invest ₹1000 each month into a mutual fund. Each month, this amount is automatically deducted from your bank account and invested in the mutual fund of your choice.

Here’s where things get interesting:

  1. Rupee Cost Averaging: When the market is down, your fixed investment amount buys more units, and when the market is up, your investment buys fewer units. This approach helps lower the average cost of your units over time, potentially reducing the risk of market volatility.
  2. Compounding: As you continue investing through SIP, the returns generated from your investments can themselves earn returns. Over time, this can lead to wealth accumulation, particularly if you start early.

SIP Calculator: A Tool to Plan Your SIP

To estimate how much your SIP could grow over time, you can use a SIP calculator. This online tool allows you to input the amount you plan to invest, the duration, and an expected rate of return to help you understand how much your investment could be worth in the future.

For example, if you decide to invest ₹5000 every month for 10 years, and you expect an annual return of 12%, a SIP calculator will give you an estimate of how much your total corpus might grow.

It’s important to note that the returns from SIPs are not guaranteed, as mutual fund investments are subject to market risks. However, a SIP calculator can give you a rough idea of what to expect based on historical performance and estimated returns.

Why Should You Choose SIP?

SIP has gained popularity as a strategy for investing, especially among those new to the market. Here are some reasons why it might be worth considering:

Affordability and Flexibility 

With SIP, you may not need a large amount of money to start investing. You can begin with as little as ₹500 per month, and increase the amount later, at your convenience.

Less Risky than Lump-Sum Investments 

When you invest a large sum of money all at once, you expose yourself to the risk of market timing. SIP spreads your investments over time, which could potentially reduce the impact of market fluctuations.

Discipline 

SIP encourages a disciplined approach to investing. It automatically deducts the amount you’ve chosen at regular intervals, so you need not have to worry about remembering to invest.

Long-Term Growth 

Over time, SIP investments may yield higher returns due to the power of compounding. Staying invested for a longer duration could potentially help you grow your wealth.

Tax Benefits

Certain SIPs, particularly those invested in Equity Linked Savings Schemes (ELSS), might offer tax deductions under Section 80C of the Income Tax Act. This could potentially help you reduce your taxable income.

How to Start Investing in SIP?

Getting started with SIP is fairly simple. Here’s a quick guide to help you begin:

Choose the Mutual Fund Scheme 

The first step is to select a mutual fund scheme that suits your risk appetite and investment goals. There are various categories like equity funds, debt funds, hybrid funds, etc. You might consider seeking advice from a financial advisor to select the one that aligns with your objectives.

Select the SIP Amount and Frequency

After choosing the fund, decide how much you want to invest and how often you want to contribute. Whether you prefer a monthly or quarterly contribution, it’s important to choose an amount that you can afford.

Register with a Fund House or Broker:

You can sign up directly with a mutual fund company or use a broker. There are several online platforms and investment app that make this process easier.

Link Your Bank Account

For the automated deduction, you’ll need to link your bank account to your chosen platform. This ensures that your SIP contributions are made on the selected date.

Monitor the Performance

Monitor your SIP investment regularly and track your investment’s progress. Many platforms and demat apps provide dashboards where you can see how your SIP is performing and make adjustments if necessary.

Conclusion

SIP is one of the popular methods of investing that offers a disciplined, flexible, and affordable way to build wealth over time. It’s beneficial for long-term goals, such as retirement or education, as it allows you to invest consistently without worrying about market fluctuations. While returns are not guaranteed, SIP can offer the benefit of rupee cost averaging and compounding, which help smooth out market volatility over time.

Using tools like the SIP calculator can help you estimate the potential growth of your investment, and having a demat app will help you manage your SIP investments more efficiently. So, if you’re considering investing in mutual funds, starting with an SIP might be a great option to help you achieve your financial goals.

Open demat account online with HDFC SKY and effortlessly grow your wealth with simple and convenient SIP options. Start your SIP journey today.