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A Guide to SIP and How it Works in India
Systematic Investment Plan or SIP, as it is popularly called, has become one of the most preferred investment options today.
When asked about what is SIP, many individuals say that SIPs are just like several other mutual fund products but with relatively lower risks.
However, the truth is that SIP is merely a tool that helps investors be more disciplined towards their investments.
It helps the investors to stagger their investments, mainly in equity mutual funds over some time.
This is a rather convenient method for individuals who get monthly incomes in the form of salaries or wages.
What is SIP: SIP Meaning
A systematic investment plan, or SIP, is a method that enables investing in numerous mutual fund schemes ina staggered manner.
Investors can make periodic investments in their selected mutual fund schemes instead of depositing the entire amount in a lump sum.
The amount to be paid regularly is fixed in advance at the time of starting a SIP.
In case the investor wants to make any changes in the amount or the periodicity of the investments, he or she can do that by requesting the same to their fund manager.
The minimum amount to be invested in a SIP varies depending on the scheme, and the mutual fund house one chooses.
Generally, the minimum SIP amount is INR 500, and there is no maximum amount limit.
Thus, investors can choose any amount to be invested according to their regular overhead expenses and financial planning.
Since this investment method works periodically, once the investor has selected the mount, he is willing to invest and the frequency of the deposits, the amount gets debited from his or her bank automatically at the prespecified time.
This frequency can be weekly, monthly, or quarterly.
Thus, the investor must decide in advance of the amount and the time interval of his or her investments.
Also, it must be ensured that the bank account of the investor has the money required for the fixed SIP deposit at the time of the chosen SIP period.
Understand all about what SIP is and how it works. Source: Image from freepik.com
How does SIP work
Now that you know what SIP is and start investing, it is essential to understand its working.
This plan works in 3 stages, namely SIP Mandate, Auto Debit/ ECS, Allotment of Mutual Fund Units.
Let us understand these stages in detail.
Stage 1 – SIP Mandate
The first step is to give a mandate. Prospective investors must authorize for investing via SIP to start investing in the mutual fund schemes.
This stage can be completed online by selecting the ‘SIP’ option on any trusted mutual fund platform or via the Demat account.
Being a quick and hassle-free process, most of the investors choose to apply online over applying offline.
To complete this procedure offline, investors need to fill a SIP mandate form and proffer it together with the application form.
The investor needs to specify the SIP date on which they intend to invest the amount periodically and the amount that they would be spending.
These forms can be submitted in the office of the mutual funds’ house, or to the investor’s mutual fund agent.
Stage 2 – Auto Debit / ECS
Once the investor has given the SIP mandate, the mutual fund house is allowed to auto-debit the investor’s bank account with the amount indicated in the SIP form through standing instruction. The funds are then transferred through ECS for being invested in mutual funds.
This procedure is followed each time when the investment is to be made as per the frequency specified earlier.
Not only does this auto-debit feature save the investor from the hassle of keeping track of the investment date, but it also helps them avoid going through the same procedure each month or quarter.
Stage 3 – Allotment of Mutual Fund Units
The amount that is debited from the investor’s bank account as the SIP amount is utilized for the purchase of mutual fund units.
Investors are designated mutual fund units at the closing Net Asset Value for the day when the money transfer takes place, or the cheque is realized.
These are the simple steps in the working of mutual funds. Let us try to understand the process with the aid of an illustration:
Suppose you are aware of what SIP is and want to start a mutual fund investment via a systematic investment plan of INR 1000 on the 6th of a month.
This INR 1000 will get debited automatically from your bank account on the 6th of that month every month, quarter, year, as specified by you, and be used in acquiring mutual fund units.
These mutual fund units will be purchased at the closing NAV of that particular day. Thus more mutual fund units get added to your account with each investment paid.
Today, most of the people are aware of what is SIP and choose it as an option for its easy to follow procedure and several other benefits such as inculcating a habit of disciplined savings, averaging out the returns thus minimizing the risk, providing the investors with the facility to choose the amount and frequency of the investment, and many more.
Thus, we can conclude that it is a powerful financial tool that brings the perks of investing in a mutual fund at a low cost and with greater flexibility.