What is Mutual Fund SIP?

What is Systematic Investment Plan (SIP)?

Recently a reader has asked me the following query -

“Hi,
I read your blog daily and i really appreciate the effort you put in to write those articles. I must say that your articles have really made me focus more on investment and financial knowledge.
Can you write an article about SIP and the way how it works? Also, does the lock-in period applies to every installment that we pay? If so, how can we encash them?
Thanks”

First of all let us discuss what is SIP (Systematic Investment Plan)?

The Systematic Investment Plan (SIP) is a simple and time honored investment strategy for accumulation of wealth in a disciplined manner over long term period. The plan aims at a better future for its investors as an SIP investor gets good rate of returns compared to a one time investor.

How you can invest in a mutual fund?

Well, there are basically 2 types of mutual fund investing methods.

01) Lump sum investment method &

02) SIP Method.

In Lump sum investment method, the investor invest lump sum amount of money in mutual funds and buy MF units while in SIP method, investor decides to invest small but regular amount of money every month, quarter, half yearly or any other regular interval.

Why SIP?

There are basically 2 reasons why investors prefer to go for SIP option. One is people who have just started earning and don’t have any accumulated wealth that they can invest lump sum in the stock market. These people receive a paycheck every month and thus every month they decide to put some amount of money for investment for their future benefits.

Another reason is rupee-cost-averaging. Most of the intelligent investors prefer SIP because SIP do rupee-cost-averaging over the time and drastically reduce the over all entry level into the market. These investors know that, it’s next to impossible to time the market and that’s why they start SIP in mutual funds.

This is how SIP works. Suppose you start SIP of Rs.10,000 every month. now when the market will be up, the unit price of your MF will be high and thus you will be able to buy less units and when the market will be down, the unit price of your MF will be less so you will be able to buy more units. Thus you will buy more when the market is down and less when the market is up.

Isn’t it amazing? In real life, most of the people do exactly reverse and that's why they suffer a huge financial loss. Means they buy more when the market is up and sell or stay away from the market when it is down.

SIP will set a discipline in your life and thus over the long run, SIP returns will be very high.

Key Features of SIP -

In the next article, I will reveal SIP Myths….so stay in touch….!!!!