What is mutual fund SIP (Systematic investment plan) is a very common question asked by the investors who are either new to mutual funds or may have heard about the word mutual fund SIP but not yet started one. The question what is mutual fund SIP can be answered very differently by different people. But simply speaking,if you dream to become wealthy or want to save for your future goals but you do not have enough money, Systematic Investment Plans or mutual fund SIPs can help you achieve that.
Mutual Fund SIP is a way of investing a fixed amount, regularly –daily, weekly, monthly or quarterly in a mutual fund scheme. SIP allows you to buy the units of your chosen scheme on a date/s chosen by you. You can invest a pre-determined fixed amount in a chosen scheme every week, month or quarter or even daily, depending on your convenience through post-dated cheques or through ECS (auto-debit mandate) facility from your bank account.
With mutual fund SIPs; you can invest an amount as small as Rs 500 per month over a period of time. It helps you average out your cost of investing and benefit from the power of compounding. The power of compounding works best when you remain invested over a long period of time and thus helps your money earn returns over returns over the number of years of your investment.
You need to fill up a common application form of the AMC in whose scheme you are going to invest. Along with the common application form you also need to submit SIP ECS Debit mandate form giving your bank details from which the future SIP instalments will be debited. In this form you need to indicate your choice for the SIP date on which the amount should be deducted from your bank account. If you do not want to provide SIP auto debit mandate, you can also start a mutual fund SIP by providing post-dated cheques.
Read in detail – How to start SIP in a mutual fund
Benefits of a mutual fund SIP
Disciplined approach to investing – By choosing to invest regularly you bring discipline to your investments as you treat your SIPs like any other fixed expenses in a month like paying house rent, buying groceries, paying utility bills, school or college fees or eating out on the weekends.
SIPs inculcate the savings habit - It inculcates the habit of savings as you commit to save a fixed amount on a fixed date and invest it systematically over your chosen investment period.
SIP is flexible - Starting a mutual fund SIP is very easy. You can also close it anytime you wish by writing to the AMC and there is no penalty for foreclosure charges.
Wide choice of schemes available - You get a wide choice of Mutual Fund schemes and can invest in one which matches your risk profile and investment objective. You can even choose a mutual fund scheme which saves taxes for you. These schemes are called ELSS mutual fund schemes
Convenience – SIP is a convenient way of investing as no leg work is involved. All you have to do is sign an auto debt / ECS form and the amount will be deducted from your bank account on one of the dates chosen by you or the AMC will en-cash the post-dated cheques given by you on specified dates.
You can start a SIP with low investment amount - You can start a mutual SIP in India with as low as Rs. 500 per month in an ELSS mutual fund. For other open ended mutual fund schemes, generally the minimum SIP amount is Rs 1,000 per month.
Diversified investments - Starting a SIP in an equity mutual fund scheme allows you to take advantage of investing in diverse sectors and companies thus spread your risk across companies, sectors and market capitalization. You can further diversify your investments in large cap sector companies by investing in large cap funds or mid and small companies by investing in mid and small cap funds. Alternatively, you can also invest in diversified equity funds which invest across all sectors and companies of different market capitalization.
SIP helps achieve your long term goals – Mutual fund SIPs help you achieve your long term financial goals, like - Retirement, Children higher education and their marriage or so on. You can actually set a target corpus amount for your goal and invest every month/ week over a period of time in order to reach the goal in future.
For example – You are aged 30 and want to build a corpus of Rs 5 Crores for your retirement when you are aged 55. You need to invest only Rs 27,900 per month for next 25 years assuming you will get 12% annual return.
Check this calculator – how to become a Crorepati
Free life insurance cover – Some Mutual fund companies also offer free life insurance cover at no extra cost. The life cover depends upon the monthly SIP amount.
Tax Savings - By doinga SIP in ELSS scheme, you can save taxes under Section 80C of The Income Tax Act 1961 on your investments upto Rs 150,000 per annum.
You can also read – What are mutual fund tax benefits
Rupee cost averaging - A simple approach to long term investing is discipline and commitment to invest a fixed sum for a fixed period and sticking to this schedule irrespective of the market conditions. Rupee cost averaging in a way ensures that you automatically buy more units when the mutual fund scheme NAV is low and lesser units when the NAV is high. Suppose you are investing Rs 5,000 every month, when the NAV is Rs 20, you will get 250 units (Rs 5000/ NAV of Rs 20) = 250 units. However, if the market dips and the NAV drops to Rs 18, you will get 277.777 units (Rs 5,000/ NAV of Rs 18) = 277.777 units. As you can see, you accumulate more units when the markets are at lower level.
Mutual fund SIP is the way of investing in mutual funds if you are looking for long term wealth creation in a very simple and sustainable way. The popularity of mutual fund SIPs can be validated by the fact that there are over 17.3 million mutual fund SIP accounts in India. On an average 8.86 Lakhs mutual fund SIP accounts are added in a month and the average SIP size is Rs 3,250 (source: AMFI website).
If you have not yet started your SIP yet, you can start now – Try our automated SIP account online
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.