To get some context on how powerful compounding can be, think of the returns in absolute terms. The returns on your SIP investment, just like other mutual funds, benefit from compounding.
Over time, the small contributions grow into a substantial amount because of compounding. The money is automatically debited from your registered account each month. You don’t need to make an extra effort for monthly contributions either. SIPs can help inculcate this discipline because you’re committing to investing a fixed amount each month. The wiser ones tend to do the reverse they spend what’s left after investing. It’s a win-win.Ī growth in income may trigger some to spend on upgrading their lifestyle. In essence, SIPs allow you to outsource investment expertise to a fund manager who manages the mutual fund’s assets to optimize the returns for its investors. Instead of risking your capital, let an expert manage your money. This is especially important for someone who doesn’t understand financial jargon or the markets. Since your SIP investments are investments in mutual funds, you benefit from the fund manager’s expertise. They also have a team of research analysts at their disposal that monitor the markets and gauge investment opportunities. Mutual funds are managed by experts that have a proven track experience as portfolio managers. However, because of rupee-cost averaging, your investment’s value in May with SIPs would be ₹25,211. If you had invested ₹25,000 in January, your investment’s value in May would have been ₹25,000. The value of the investment would also have been different. You’d also have been able to purchase only 250 units (2.11 fewer units, i.e., 25,000 ÷ 100 = 250 units) if you had invested a lumpsum amount. If you had invested a lumpsum of ₹25,000 in January, your NAV cost per unit would have been ₹100. Your average NAV cost per unit comes to 98.2, thanks to rupee-cost averaging. Here’s how rupee-cost averaging will work in your favor for this investment: For instance, say you’ve decided to invest ₹5,000 via SIP each month for the next 5 months. Over the long term, this reduces your average cost per allotted unit. When the markets, and consequently a mutual fund’s NAV, are low, you’re allotted a greater number of units for the amount you invest, on the other hand, you’re allotted fewer units when the markets are at a peak. SIPs take out the guesswork since it involves investing a fixed amount at predetermined intervals, regardless of the market’s position. Investors try to time the market by investing money based on momentary market movements and due to lack of expertise, can end up losing money in the process. Rupee-cost averaging is one of the most prominent benefits of SIPs because it eliminates the need to time the market. Following are some of the most prominent benefits of SIP plans: SIPs offer a broad basket of benefits to investors across age groups and risk profiles. The number of units allotted for each contribution may differ because the NAV changes every day. The acknowledgment also includes the number of units you’ve been allotted based on the NAV (net asset value). The funds will keep debiting from your bank account based on the frequency you entered while setting up the SIP.Īfter the money is debited, you’ll soon receive acknowledgement about your funds being invested. It will be debited each month based on the date you selected while setting up the SIP. Once everything is set up, money will be debited from your registered bank account. The process has been illustrated in detail in a later section.Īutomatic debits and unit allotment based on NAV If you’re a first-time investor, complete your KYC and enter the bank details along with your SIP contributions and frequency, and you’re done. On ET Money, go to your chosen mutual fund, click on invest. Setting up your SIP is a simple process once you’ve picked a mutual fund. However, if you have reasons to select a different frequency, you may choose to invest weekly, quarterly, semi-annually, or annually. The most common choice, especially among salaried investors, is a monthly frequency since they receive their salary monthly. The next step to your SIP investment journey is to choose an investment frequency you feel comfortable with.
#SIP MEANING HOW TO#
If you need some help with choosing a mutual scheme, take a read through our primer on how to choose a mutual fund. There are three stages to investing in SIP from beginning to the point where your funds are invested in a mutual fund scheme:Īs your first step in the SIP investment journey, you need to select a mutual fund scheme you want to invest in. If you find it easier learning through a visual mode, here’s a quick video in Hindi explaining how SIPs exactly work. Before you set up your SIP, there are a few essentials you need to know about how SIP works.
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