What is SIP in Mutual Funds? How do they work?

One of the most important rules in creating wealth through investment is having investing discipline. When investors park their money over a long-term investment horizon, they can get significant returns. However, many investors find it hard to stick to a regimented investment plan. That’s where a Systematic Investment Plan or SIP comes in. A SIP is an investment vehicle that is offered by most mutual funds today that allows investors to invest periodically. Instead of needing to invest in a mutual fund with a lump-sum amount, SIPs allow investors to invest weekly, monthly or even quarterly. As the minimum investment for each monthly SIP instalment can be much smaller than the minimum contribution of a mutual fund, SIPs open up investment opportunities for many individuals. While the SIP contribution can be as low as Rs 500 in the agreed SIP interval, investors will have to ensure that they make the fixed amount payments that they have agreed to. How does it work? A SIP offered by a mutual fund registered by the Securities Exchange Board of India will allow you to make periodic and consistent investments. This investment is used to allocate a certain number of units of the mutual fund that you are investing in. The number of units allocated depends on the periodic investment amount and the mutual fund’s Net Asset Value (NAV) on each recurring investment date. Benefits of SIP: One of the biggest benefits of a SIP is the fact that it allows investors to invest money without needing to worry about timing the markets. SIPs essentially work on the dollar-cost averaging (DCA) or the rupee-cost averaging principle, with a fixed amount being invested in the markets periodically without any consideration for market positions. When invested over a long term, the DCA principle allows investors to get appreciable returns while compound interest also works wonders. A monthly SIP of just Rs 5,000 made over a decade at a 12 percent annual return can result in Rs 11.50 lakh in the bank at the end of the investment. With the SENSEX giving a compounded annual growth rate of over 16 percent between 1979 to 2019, returns are appreciably higher the longer the investment goes on for. Read all the Latest News , Trending News , Cricket News , Bollywood News , India News and Entertainment News here. Follow us on Facebook, Twitter and Instagram.