A Systematic Investment Plan or SIP plays a key role in helping you create wealth and achieve your goals through disciplined investing. The SIP option allows to you invest a fixed amount in mutual funds regularly thereby offering the benefit of rupee cost averaging. Long-term investment via SIP also offers the benefits of compounding. You can start investing via SIP anytime and work towards achieving your dreams. Let us find out the answer to how does a SIP work in mutual funds?

What is SIP?

SIP is a method of investing in mutual funds that is accessible even to investors having only a limited amount to spare. So even if you can spare only Rs 500 or 1000 per month, you can invest in a mutual fund offering the SIP route. In this form of investing you need to commit the amount that you will invest, the frequency- whether weekly or monthly, or quarterly, and the duration for which you are willing to commit. You can link a SIP investment to a specific goal and decide the amount and the duration accordingly. You can always take more SIPs or add to your existing SIP (if the mutual fund offers such an option) when you have extra funds to invest.

How Does a SIP Work?

When you opt for a SIP plan you invest a particular amount that is used to buy the units of a mutual fund on a specific date every month.  To know more about how SIP works in a mutual fund you should know that:

• You do not need to time the market and wait for an opportune time to invest. Investing a fixed amount every month ensures that you can participate in the markets in all its phases whether high or low thereby benefiting from the rupee cost averaging
• The longer is the duration of your SIP the more you benefit from the compounding effect.
• Investment in SIP is simple and possible through the ECS-the auto-debit facility. All you need to do is fill the application form and the SIP mandate form specifying your choice of the SIP date, the amount, and the frequency. You can use a mutual fund SIP calculator to decide the amount needed to invest for achieving a specific goal.
• These forms can be submitted online or offline either to the asset management company itself or the mutual fund investor service centres or the service centres of the Registrar and the transfer agent or the broker or the bank through which you are investing.
• The number of units that you receive differs every month depending on the NAV of the concerned mutual fund scheme. This means you get more units when the market is low and fewer units when it is high. This ensures that over a longer period your average cost of purchasing gets reduced.

To conclude when you decide to go for a SIP, you deposit a fixed amount with the mutual fund company which in turn issues you the units of the scheme to which you have subscribed. The collected funds are then used by the mutual fund company to invest in equities and other instruments as per a set strategy.