SIP Definition: What Is SIP and How Does It Work?

Over the years, the number of people opting for mutual fund investments has continued to rise. An investment in mutual funds has the potential for fetching long-term revenue. For signing up for a mutual fund scheme, you first need to select an asset management company (AMC). After selecting an AMC, you then need to determine the variant of the mutual fund scheme. After selecting a suitable variant of the mutual fund scheme, you need to determine the investment mode. An investment mode can be defined as the way you want to invest in the mutual fund scheme. There are two options when it comes to modes of investment. The two modes are lump-sum investments and systematic investment plans or SIPs.

Under a lump-sum investment, you are required to make a one-time payment for the mutual fund scheme. Since this mode of investment requires a one-time payment, it is important to make sure that the investor has access to the required amount of investment at their disposal. In case you don’t have access to the required investment amount, you need to borrow money. Regardless of your financial condition, you have to pay the stipulated amount at once. Conversely, SIPs work differently.

What are systematic investment plans?

As a mode of investment, a systematic investment plan or SIP is known for working differently from the lump-sum mode of investment. In this investment mode, every month, a fixed amount is deducted from your bank account. By signing up for this mode of mutual fund investment, you don’t need to worry about the pressure of arranging money usually falls on you. Furthermore, you could start with a small amount by selecting the SIP mode. Meaning that systematic investment plans don’t end up burning a hole in your wallet.

How do these plans work?

In a SIP, you can pay for the mutual fund at regular intervals (monthly payments being common). However, that does not mean that you need to physically visit the AMC. Under systematic investment plans, to pay for your mutual fund scheme you can add a standing instruction on the banking app that enables automatic deductions every month on a date specified by you. So, even if you were to forget the payment date, this feature ensures that the payment for mutual fund investment goes through smoothly.

Are there any benefits of SIPs?

Listed below are some of the advantages of systematic investment plans:

  • You could start with a very low amount:

As stated earlier, in contrast to the lump-sum investment mode, where you are required to make a one-time payment, with systematic investment plans, you can opt for regular payments. Also, under SIPs, you can start with a very low investment amount and increase deductions as your financial situation improves, making them light on the wallet.

  • These plans generate revenue through the power of compounding:

In mutual fund investments made through the SIP mode, you could make the most of the power of compounding. Through this feature, your funds are invested and re-invested again and again. Through the cycle of investing and re-investing, your investments gain profits over time.

  • These plans are very easy to use:

Another advantage of systematic investment plans is that they are very easy to understand and use. These plans have struck a chord with young professionals because they could pay for them at regular intervals. All that’s required on your part is to determine one of the many different mutual fund variants and determine the required amount for investment.

First-time mutual fund investors may consider beginning their mutual fund investment journey by initiating a SIP. This mode is suitable for investors who have a regular source of income, i.e., a salary.

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