How SIP works

How SIP works

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What is SIP, and how it works.

Key Takeaways

  • A Systematic Investment Plan, known by the abbreviation SIP, is a way to invest in Mutual Funds.
  • With SIP, you can invest a fixed sum at fixed intervals in a Mutual Fund scheme.
  • SIP benefits include Rupee Cost Averaging and Power of compounding.
  • You can invest as low as INR 100 per SIP instalment.
  • There is no specific upper limit on SIP investments.

Introduction

To grow your money, you must invest it in the suitable instruments that help you earn inflation-adjusted returns. As a new investor, you can consider SIP Mutual Fund investment. Find out what is SIP and how it works in this article.

What Is A SIP?

A Systematic Investment Plan or SIP is a popular method of investing in Mutual Funds. You can invest a fixed amount at regular intervals (fortnightly, monthly, or quarterly) with SIP. You are allotted the Mutual Fund units per the Net Asset Value (NAV) on your investment date and do not have to worry about market volatility.

How SIP Works – The Fundamentals

You can link your bank account and provide standing instructions to automatically debit the SIP amount on a fixed date from your bank account. You must fill a form providing your personal and SIP details, including your name, bank name and branch, account number and IFSC code, SIP amount and date of investment to initiate the auto-debit facility.

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How SIP Mutual Fund Works – An Illustration

Let us find out how SIP works with an example.

You decide to invest INR 5000 on the 7th of each month in XYZ Mutual Fund.

  • On 7th August 2021, the price per unit of XYZ Mutual Fund is INR 25. You would be allotted 5000/25 = 200 units of the fund. Now suppose the per-unit cost of the XYZ Mutual Fund increases to INR 30 on 7th September 2021. In that case, the fund units allotted would be 5000/30 = 167 units. Since the per-unit price increased in September, you got fewer units.
  • Now it is October 2021, and the market witnessed a sharp decline. As of 7th October 2021, the per-unit price of XYZ Mutual Fund fell to INR 23, while your investment amount remains unchanged. In this situation, you would be allotted 5000/23 =217 units. This month you get more units due to the falling prices.

As is apparent, you typically get more Mutual Fund units when the market is down, whereas fewer units are allotted in a bullish market. This averages out the cost of investing and is referred to as Rupee Cost Averaging.

Final note

SIP investments are for everyone. While the minimum investment permitted in SIP is INR 100, there is no upper limit on the investment. If you stay invested for longer durations and reinvest your profits without redeeming them, you stand to gain compounding benefits.

The time to invest is now, and you can start your first or next SIP investment with digibank by DBS.

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*Disclaimer: This article is for information only. We recommend you get in touch with your income tax advisor or CA for expert advice.

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