What is a Systematic Investment Plan (SIP)?
A simple and powerful way to build wealth over time.
The Core Concept
A Systematic Investment Plan (SIP) is a method of investing in mutual funds where you invest a fixed amount of money at regular intervals (usually monthly). Instead of investing a large lump sum at one time, a SIP allows you to invest smaller amounts periodically. It's like a recurring deposit for mutual funds.
When you start a SIP, a predetermined amount is automatically debited from your bank account and invested into the mutual fund scheme of your choice on a specific date every month. This disciplined approach removes the guesswork and emotional decision-making from investing.
How a SIP Works: An Example
Let's say you start a SIP of ₹5,000 per month in an equity mutual fund.
- Month 1: The NAV of the fund is ₹100. You are allotted 50 units (₹5,000 / ₹100).
- Month 2: The market corrects, and the NAV drops to ₹90. You are allotted 55.55 units (₹5,000 / ₹90).
- Month 3: The market recovers, and the NAV rises to ₹105. You are allotted 47.62 units (₹5,000 / ₹105).
As you can see, you automatically bought more units when the price was low and fewer units when the price was high. This is the magic of rupee cost averaging.
Key Benefits of SIP
Rupee Cost Averaging
You buy more units when the market is low and fewer units when it is high. This averages out your purchase cost over time, reducing the impact of market volatility.
Power of Compounding
The returns you earn also start earning returns. Over the long term, this can lead to exponential growth of your investment.
Disciplined Investing
SIPs automate the process of investing, instilling a regular saving habit without you having to time the market.
Convenience & Affordability
You can start investing with a small amount (often as low as ₹500 per month) and the process is fully automated from your bank account.