What is SIP in Mutual Funds? A Beginner’s Guide to Investment

Mutual funds are a financial instrument that allow you to invest in different securities, like stocks, bonds and gold, with a single investment. They’re a pooled investment vehicle that are managed by professionals. Mutual funds allow you to invest in them in two ways – either a one-time lump sum investment, or through SIPs.

But what is SIP in mutual funds? A SIP in a mutual fund allows you to invest a fixed amount of money in a fund of your choice at regular intervals. You can choose to invest every week, month or quarter in a specific mutual fund scheme. What this does is that irrespective of the market price of the mutual fund, you get units based on the amount of money you choose to invest while starting a SIP in a scheme of your choice.

But, how does SIP work?

When you invest via SIP, you commit a fixed sum to the fund. The fund manager will invest money in a pool of securities. As the value of the securities change, so will the Net Asset Value (NAV) of the fund. NAV is the price per unit of the mutual fund you invest in. It is calculated by subtracting all the liabilities from the sum of assets invested in. NAV changes every day and your investment value depends on the NAV.

Now, your money gets debited from your account automatically on the investment day. The number of units you get will differ every month depending on the NAV. After the end of your SIP period, you can redeem your SIP investment.

If you have made it this far in the guide, you should have a fair idea of what is SIP in mutual funds and how they work. Now, let’s look at some of the features of SIPs and how they differ from lump sum mutual fund investments.

Characteristics of SIPs

1. Security Through Diversification

SIPs are a way to invest in mutual funds that are inherently diversified instruments. They invest in different assets across industries, offering a level of security through diversification. This reduces the impact of poor performance from a single investment.

Explore the benefits of portfolio diversification!

2. Convenience

SIPs are  generally convenient. You can automate a fixed amount every month or quarter, which will then be debited from your bank account. This eliminates the need for constant monitoring and decision-making.

3. Flexibility

Minimum SIP investments can start as low as Rs. 100 per month. This removes the barrier for investment.

4. Disciplined Investing

SIPs inculcate financial discipline. Since investments are made at predefined intervals, you’re less likely to make impulsive decisions based on market fluctuations.

5. Rupee-Cost Averaging

One of the biggest features and advantages of SIPs is the principle of rupee-cost averaging. You get more units when prices are low and fewer when prices are high. This averages out the cost per unit over time, reducing the impact of market volatility.

6. Power of Compounding

SIPs bring you the power of compounding with minimum SIP investment. As your investments grow, your returns generate potentially additional returns,  leading to exponential growth over the long term.

Learn more about the meaning of power of compounding and its benefits!

Benefits of SIPs

With just what is SIP in mutual funds and the features of SIP, you should understand the benefits of this revolutionary investment method. To break it down further, here is a list of all the benefits of SIPs:

1. SIPs can help you build a regular investing habit and avoid making emotional investing decisions.
2. The principle of rupee-cost averaging, where you get more units when markets are down and fewer units when markets are up, helps average out the cost of investment per unit over time. If you redeem your investment when the markets are high, you get potentially better returns. In this way, you can also think of them as low risk SIPs.
3. SIPs are highly adaptable, meaning you start a minimum SIP investment with as little as Rs. 100 per month. You can also choose the frequency of investments, such as monthly or quarterly.
4. They are extremely convenient. Once set up, they operate automatically without the need for constant monitoring or manual intervention.
5. SIPs reduce the need of market timing and also eliminate the risk that comes with it. Since you’re investing at regular intervals, you’re shielded from making substantial investments during market peaks.
6. SIPs leverage the power of compounding that can lead to substantial returns  in the long run.
7. There are also tax saving SIPs. Investments in Equity Linked Saving Schemes (ELSS), offer SIP tax benefits. More on that below.
8. SIPs encourage a long-term investment perspective. Since they’re designed to accumulate wealth over time, they are well-suited for investors with long-term financial goals.

Read more about the benefits of SIPs in India!

SIP Tax Benefits

You can invest in ELSS funds through SIPs that will count as tax saving SIP. Each investment amount will be considered an SIP under 80C Section of the Income Tax Act, 1961. When you invest in tax saving SIP or ELSS funds in regular intervals, you can claim up to Rs. 1,50,000 annually as an SIP deduction in income tax.

So far, we’ve talked about what is SIP in mutual funds, how it works and all the benefits of SIPs including SIP deduction in income tax. Now, let’s explore the different types of SIPs available in the market.

1. 1. Regular SIP

This is the standard form of SIP where you invest a fixed amount at regular intervals. You can choose to invest in any mutual fund of your choice. It is simple and promotes disciplined investing. Returns vary depending on the performance of the mutual fund and market conditions. However, it is subject to market risk and SIP returns are not guaranteed.

1. 1. Top-Up SIP

You may have heard of top-up SIPs. But what does it mean? This type of SIP allows you to increase the investment amount by a certain percentage or fixed amount at regular intervals. It helps adjust for inflation and rising income. While it has all the advantages of a regular SIP, this type of investment allows you to earn potentially higher returns because your investment amount increases. However, it does require regular monitoring to adjust top-up amounts.

1. 1. Flexible SIP

Flexible SIPs allow you to alter the investment amount at different intervals. You can increase, decrease, or even pause contributions based on your financial situation. The biggest benefit of SIPs of this type is their adaptability to changing financial circumstances.

4. 4. Multi SIP

This involves investing in multiple mutual fund schemes through SIPs. It diversifies investments across different funds and asset classes. While it provides enhanced diversification, it also requires research and tracking of multiple funds.

4. 4. Tax Saving SIPs

As already covered before, these SIPs under 80C Section of the Income Tax Act allow you to claim SIP tax benefit. You can claim up to Rs. 1,50,000 deduction per annum. However, each tax saving SIP investment has a lock-in period of three years.

Now let’s talk about how to select mutual funds for SIP. Follow these steps:

1. Start by defining your investment goals – whether it’s wealth creation, retirement planning, tax savings, or funding your child’s education. This way, you can estimate an investment horizon and choose among equity funds, debt funds, hybrid funds or ELSS mutual funds.
2. Assess your risk tolerance. Some SIPs may involve higher risk for potentially higher returns.
3. Once you have your goal, investment horizon and risk, research various mutual funds that offer SIPs. Consider their historical performance, fund manager’s track record, SIP expense ratio, investment philosophy, and asset allocation strategy.
4. Choose the type of SIP that aligns with your needs – regular SIP, top-up SIP, flexible SIP, trigger SIP, multi SIP, or SIP with life cover. Each type has unique benefits and considerations.
5. Mutual funds are categorized based on risk and return profiles, such as equity, debt, hybrid, and more. Choose a fund category that matches your risk appetite and investment goals.
6. Understand any exit loads or charges associated with redeeming your investment. Some investments via SIPs might have exit fees if you redeem before a certain period.
7. If you’re unsure, consider consulting a financial advisor.
8. Regularly monitor the performance of the SIPs you’ve invested in. If a fund consistently underperforms or if your financial situation changes, be prepared to make adjustments.

How to Start SIP?

Starting a SIP in India is a straightforward process.

Step 1: Choose a Mutual Fund
Begin by ensuring that the mutual fund scheme you choose matches with your investment objectives, risk profile, and timeline. Thoroughly research the different mutual funds you consider. Ensure you compare their historical performance and expenses.

Learn how to choose mutual funds that can help you achieve your goals!

Step 2: Complete Know Your Customer (KYC) Formalities
If you’re not KYC compliant, you’ll need to complete the KYC process by submitting identity proof, address proof, and a passport-sized photograph. KYC can be done through intermediaries like banks, financial institutions, or mutual fund houses. You may require:

• PAN card
• Aadhar card
• Passport
• Voter ID
• Driving License
• Utility bills

Step 3: Choose SIP Type and Amount
Decide on the type of SIP (regular, top-up, flexible, etc.) and the investment amount you wish to start with. Different mutual funds have varying minimum investment requirements.

 Step 4: Select SIP Date
Choose a specific date of the month when the SIP amount will be debited from your bank account. Many investors prefer aligning SIP dates with their salary cycles.

Step 5: Submit Application Form
Fill out the mutual fund’s SIP application form, available online or at mutual fund offices. The form will require your personal details, chosen mutual fund scheme, SIP type, investment amount, SIP start date, and bank details.

Step 6: Provide Bank Mandate
Attach a cancelled cheque or a copy of your bank statement as a proof of your bank account for the automatic debit of SIP amounts.

Step 7: Submit Documents
Submit the completed application form, KYC documents, and bank mandate to the mutual fund company or its authorized distributor. Many mutual fund companies also offer the facility to invest through their websites or mobile apps.

Step 8: Verification and Activation
The mutual fund company will verify your documents and process your SIP request. Once verified, your SIP will be activated, and the specified SIP amount will be automatically debited from your bank account on the chosen SIP date.

• We have reached the end of the guide on what is SIP in mutual funds. Just to recap, SIP in mutual funds is a way to invest in mutual funds in regular intervals. You can choose a fixed amount to invest every week, month or quarter in a mutual fund of your choice.
• When you invest via a SIP, you get units as per the NAV on that date. As a result of rupee-cost averaging and the power of compounding, you have the potential to earn reasonably high returns over the long term.
• SIP investments are suitable for a wide range of investment goals, including wealth creation and tax savings.
• You can choose from a wide range of SIP types, including regular SIPs, flexible SIPs, tax saving SIPs and SIPs with life cover.
• Investing in SIPs is rather straightforward. Just create a Folio with the mutual fund you want to invest in, complete basic formalities of folio creation and begin investing. However, make sure that you do your research or speak to a financial advisor before investing.