In simple words, an SIP or Systematic Investment Plan is a scheme in which a pre-decided amount is invested in a mutual fund of your choice for a specific duration at regular intervals. You decide the amount that you would wish to invest at specific intervals along with the scheme you prefer. Although mutual fund investments are subject to market risks, a well-structured SIP ensures that despite market turbulences, you are able to average out your investment returns.
SIP is a basic investment plan. Your SIP is either amount-based or quantity-based. In the first plan your investment amount is fixed whereas in the latter, the number of units to be purchased is fixed. Once you have decided your SIP scheme, the money for the SIP is debited automatically at a fixed interval decided from your bank account. The debited amount is then invested in the mutual fund that you have chosen. Based on your pre-decided investment amount and the market rate of the mutual fund, the proportionate number of units of the fund are allocated to you. As the lump-sum amount is a one-time investment, the market ups and downs make it a high-risk investment. However, in SIP, due to compounding of both - the principal and return amount over the entire investment period, the risk factor goes down marginally. In the amount based SIP, due to cost averaging, lesser units are bought at a higher market rate and more units are bought at a lower market rate.
For an SIP, you have to register online and submit the required information about yourself. You must confirm the availability of the required funds to begin with the plan and the rest of the process is automatically completed for every cycle of investment.
While SIP is not a high risk investment opportunity, you can be assured of better investment returns over a longer period which is why it is favored by many investors. Following benefits are associated with a SIP:
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