What is SIP and How it works?

A systematic investment plan or SIP is a Popular mode of investing in mutual funds. It allows an investor to systematically invest a fixed sum of money in a mutual fund scheme at fixed intervals. The systematic investment plan works on the principle of ‘Rupee Cost Averaging’, whereby the average cost per unit of investment reduces as more units are bought when the market is low and fewer units are bought when the market is high.Systematic investment plans have gained immense popularity over the years, especially among first-time investors and those with a limited budget. This is because SIPs help investors discipline their investments, without having to time the market. How does it work? A SIP is akin to setting up a standing instruction with your bank whereby a fixed sum of money is deducted from your account at regular intervals and invested in a mutual fund scheme. The investor does not have to worry about timing the market as the investment is made at regular intervals. How is it beneficial to investors? Regular investing discipline – As the investment is made at regular intervals, it helps an investor in inculcating the habit of investing regularly. They help investors plan and reach their financial goals. They help investors average out the cost of units bought, thereby potentially reducing the overall risk in the portfolio. SIPs offer the convenience of investing small sums of money at regular intervals. This makes it easier for investors to start and maintain their investment journey. While a SIP can be a great way to save money, there are a few key points to remember to make the most of your investment. First, be sure to link your financial goals to your SIP tenure. This will help you stay on track and make adjustments to your investment plan as needed. Second, select the correct SIP as per your investment time horizon. There are different types of SIPs available, so be sure to choose the one that best suits your needs. Lastly, SIP investing comes with several risks that investors should be aware of before beginning. Perhaps the biggest risk is that of market volatility: since SIPs are designed to invest a fixed sum of money at regular intervals, they can be adversely affected by sudden drops in the market. Other risks include the potential for poor investment performance (due to factors such as high fees or bad investment choices) and the possibility that the investment strategy may not work as intended. However, it's important to remember that SIPs offer the potential for tall rewards and that investors can minimize their risks by doing their homework and seeking the help of an experienced Investment Manager.