SIP – Meaning, how it works, and types

Congratulations! You have taken the most crucial step to secure your financial future. This step is crucial because unlike many others you have identified the importance of investing. The next big step is trying to understand SIP – the smart way to create future wealth.

Like many investors, you may be tempted to invest in the stock markets to make higher returns. However, equity markets are volatile and come with a real risk of losing your entire capital. A smarter and less risky way is to opt for a systematic investment plan that rides through the volatility of bull and bear markets ensuring you don’t have to time the markets.

What is SIP?

SIP is a smart investment option where you invest a certain pre-determined amount at regular intervals. This reduces the burden of investing large sums to build wealth over the long term. You can invest in a weekly, monthly, or quarterly SIP as per your convenience.

How does SIP work?

When you start a SIP, a fixed amount is invested on a predetermined date in your chosen mutual fund scheme. The total units allotted are based on the NAV on the date of investment. When the markets are declining, the NAV is lower and you receive more units and vice versa.

At the time of starting the SIP, you need to provide an e-mandate. This enables an auto debit from your bank account for the said amount on the investment date. Here is an example to help you understand how SIPs work:

The number of units allotted each month varies as per the prevailing NAV. SIP mitigates the market volatility risks and helps you to meet your long-term financial objectives.

Types of SIPs

• 🔹 Fixed – A fixed amount is invested at periodic intervals
• 🔸 Flexible – A variable amount is invested in each instalment
• 🔹 Perpetual – There is no specified end date for the SIP
• 🔸 Trigger – Certain triggers are set and the SIP is activated when these are hit
• 🔹 Top-up – The SIP amount can be increased
• 🔸 Step-up – The investment amount is regularly increased
• 🔹 Value averaging – A variable amount based on the current value is invested
• 🔸 Multiple – With a single mandate, you can simultaneously invest in multiple schemes

How to get started?

1. Set your investment target
2. Decide the SIP amount
3. Fix the investment tenure
4. Choose the mutual fund scheme
5. Determine the investment date
6. Accept the e-mandate

SIPs are a disciplined, easy, and smart way to invest in mutual funds. It is an excellent way to create wealth over the long term without requiring a large investible surplus. Before starting your SIP journey, connect with our experts to understand the various options and find the schemes that best suit your specific requirements.