What Is SIP Investment & How SIP Works?

Systematic Investment Plan (SIP) is one of the most convenient ways of investing in mutual funds. Opting for SIP fosters a habit of monthly savings and promotes a disciplined approach among investors. In this blog, we will walk you through a comprehensive guide on what is SIP investment while highlighting all the associated details that you need to know. 

What Is a SIP Investment?

A Systematic Investment Plan is a type of investment strategy where an individual can invest a fixed amount in their preferred mutual fund scheme at an interval of specified time. Upon choosing this strategy, the financial institution will automatically debit the investment amount from your specified bank account.

The key feature of SIP is to average out your investment amount over a long period. It is way more flexible compared to other modes of investing. Hence, you may choose SIP to save and grow your hard-earned money gradually.

How SIP Works?

The SIP strategy simply works like an RD (recurring deposit) as the deposit amount will be auto-debited from your given bank account to your preferred mutual fund scheme. Afterwards, you will get a specified number of units in the scheme you invested. Generally, SIP works on the following two principles. 

  • Compounding

In this case, the total amount of interest is compounded on the newly increased capital, resulting after adding the accumulated interest to the base capital. As a result, an individual’s invested money grows exponentially, thanks to the compounding power of the strategy. 

For example, if an individual invests ₹100 for a term duration of 5 years at a rate of interest of 10%. In the case of compound interest, the amount will be ₹161. Whereas, the amount will be ₹150, in case of simple interest. Thus, you can get a rise of 7% by choosing SIP.

  • Rupee Cost Averaging

By opting for a Systematic Investment Plan, investors can save themselves from market volatility. One of the key highlights of this mode of investment is that it spreads out your purchase cost throughout the investment horizon. For instance, if an investor deposits a fixed amount every month, then he or she will be able to purchase more units when the price is low. Besides, he or she will be able to buy a lesser number of units when the price is high. 

How to Calculate SIP Online?

You can easily calculate the SIP by using an online calculator. By using this financial tool, one can plan their investment according to the tenure and investment amount. Besides, it will help an individual to get an idea about the total maturity amount of his/her SIP investment at the end of the tenure. 

Read below to learn how you can use an online Mutual fund SIP calculator seamlessly.

Step 1: Open an online SIP calculator tool. 

Step 2: Select the ‘SIP’ option on the top

Step 3: Set the monthly investment amount by using the slider.

Step 4: Enter the expected rate of return.

Step 5: Adjust the slider to set the SIP tenure.

Afterwards, you will get to see the results within a few seconds on your screen.

What Are the Advantages of Investing In SIP?

SIP or Systematic Investment Plan comes with varied benefits as mentioned below:

  • Flexible

By opting for SIP investment, you get the flexibility in choosing the monthly deposit amount and your SIP term. In addition, you can choose the investment frequency at your convenience. 

  • Diversified

SIP allows you to invest in various securities which eventually minimises the risk of investing in one security. Therefore, choose SIP so that you can maintain a balance in your investment portfolio along with diversifying it.

  • Long-Term Benefits

SIP is an ideal investment strategy for individuals looking for a long-term investment plan. This mode of investment allows one to make regular investments periodically. Besides, one can enjoy the power of compounding and get extra rise. 

  • Cost-Effective

Systematic investment plans are more cost-effective than other modes of investment as you need to make small deposits at a time. As a result, the management fee gets even out over the entire term of your SIP. 

  • Convenience

An individual can easily set up and manage their SIP investment. Besides, one of the key perks of SIP is that you do not need to worry about making a manual deposit. The amount will be auto-debited from your bank account at an interval of a predetermined time.

The Bottom Line

There are varied types of SIP like flexi, top-up, trigger, perpetual, and regular SIP. Thus, you must review each type and choose as per your preference. Now that you are well aware of what is SIP investment and other associated details, you can kickstart your mutual fund investment journey. However, you must consider a few factors such as your future financial goals and risk tolerance before starting investing.