What is SIP?
SIP stands for Systematic Investment Plan, It is a beautiful way of investing regularly in mutual fund schemes and is quite common and preferred by many in today’s time. Through this , you can invest a fixed amount (as low as Rs 100 and in multiples thereafter) monthly or quarterly for a pre-determined period in a fund. It is similar like your recurring deposit where you put in a small amount every month. Units are allotted to you at the net asset value existing on the day of investment.
Besides mutual funds, some brokerages and gold exchange-traded funds have also started offering this option. With brokerages, you can dedicate a specific amount towards buying pre-decided scripts in tranches each month. SIP oftenly reduces the chance of investing at the wrong time when purchase price goes high and suddenly investor feels it was a wrong investment decision. As you new purchase are done at lesser value and again when price come up, investor feels secured as explained in below assumption illustration. Although, the maximum benefit of an SIP is derived by investing at lower levels always and one must get in at appropriate time only.
In comparison if , had you invested the entire amount in the first month itself, you would have garnered just 2400 units. In case of SIPs, the average unit cost is about Rs 47 as compared to Rs 50 in case of lump sum investments. Thus, SIPs help lower the average unit cost and buy you more units.
Way to Begin
First, select the scheme, investment amount and the time frame. Next, approach a mutual fund distributor or the fund house with your application and know-your-customer (KYC) documents. You can also invest through an online mutual fund portal. Typically, fund houses mandate investment for a minimum of six months or two quarters. So, you can either give post-dated cheque for the period or opt for the auto debit/electronic clearing system option. Remember, while you can start investing on any day of the month, you will have to pick a date for subsequent investments. That is, each mutual fund specifies dates for SIPs, like the first, seventh, tenth of each month.