You would be listening to a lot about the SIP. It seems that SIP can be the best thing to grow your money. However, There may be a lot of confusion about it. Very few people understand the meaning of SIP and its working. Let us decode it.
Meaning of SIP | Full Form
SIP is a smart way of investment into mutual fund schemes. Through it, you invest a fixed amount at a regular interval. This interval can be daily, weekly, monthly or quarterly. However, you would often find the monthly option.
Thus, it is a planned way of investing in mutual funds. It makes a habit of regular saving which in turn builds a greater wealth.
The Full Form of SIP is Systematic Investment Plan. It means an investment plan in which you invest systematically. Here systematically is used for the fixed amount and regular investment.
How Does It Work?
The SIP has simplified the investment into mutual funds. By a single effort, you can keep investing for months. It involves following steps.
- You choose the mutual fund scheme and fill the form to invest.
- In the form, you mention for the SIP investment.
- You Give a mandate for auto-debit of a fixed amount from your account.
- The mutual fund company debits the fixed amount from your account and buys mutual fund units for you. The price of units would be the ongoing market price (NAV- net asset value).
- Because of the change in price, each month, your mutual fund units may be less or more.
- The mutual fund company credits the units to your account.
The main feature of SIP is Rupee cost averaging. Because of this feature, it is considered a good way to mutual fund investment.
As I have told, the mutual fund company gives you the units of a scheme at different prices. Thus for the same amount you get a different number of mutual fund units.
Sometimes the market may go up and you get the Lesser unit at a higher price. While sometimes, you may get more units at a lower price. So at the end, your Average price of mutual fund units would be somewhere between the high and low price.
This average price of Mutual fund units would be neither very high nor very low. You would get it an average price. This averaging of mutual fund units because of the regular investment is called as the Rupee-cost Averaging. Because of the Rupee Cost Averaging, you don’t need to time the market.
Features of Systematic Investment Plan
SIPs are similar to the recurring deposit. Like RD, you deposit a fixed amount at a regular interval. However, in an RD, the interest rate is also fixed. These are the main features.
- You can invest small amount regularly.
- You can fix any tenure of the SIP. It starts with one year.
- The amount of investment remains same throughout the tenure.
- It deducts the regular amount directly from the bank account on a given date.
- The deduction of money and purchasing of MF units are an automatic process.
- The SIP is just a way of investment. Technically, every monthly investment is a separate and one individual investment.
In this post, I have only discussed the meaning of the SIP and how it works. You also need to know about the different types and best SIP to invest. I have covered these topics in different post. You would also like the myths of this popular investment