SIP in Mutual Fund – What Is SIP & How It Works | ICICI Bank

A systematic Investment Plan or SIP is a way to invest in Mutual Funds. These are simple and instant methods where the user needs to regularly invest a predetermined amount. SIPs are a great way to increase your wealth and grow the money over time. SIPs are ideal for reaching financial goals because they distribute assets, ensure market participation, and allow for the long-term benefits of compounding returns.

What is SIP

SIP (Systematic Investment Plan) is a way of investing in Mutual Funds. You can invest a certain amount in funds on a weekly, monthly, or quarterly basis. SIPs are flexible and you can change the investment amount according to your financial circumstances.

SIPs help build wealth over time by reducing risks and averaging market highs and lows. Both new and experienced investors who want to progressively achieve their financial goals without worrying about market timing will find it to be an excellent option.

How does an SIP work?

An SIP works like a recurring investment, where the amount is auto-debited from your bank account and invested in the mutual fund of your choice. Once the amount is deposited, you get a certain number of units of the mutual fund scheme where you have invested. The number of units that you have invested depends upon the Net Asset Value (NAV) of that particular scheme for that particular day.

SIP mutual fund allots you additional units of the scheme with every instalment. As the NAV of the scheme keeps on changing, with the same SIP amount you may buy fewer units when the market is high and more units when the market is low.

So, why is SIP an ideal investment option? There are two underlying processes to understand the work of SIP.

Fundamentals of SIP 

Power of Compounding

SIP method offers one of the biggest benefits, which is known as the power of compounding. It means when you invest regularly, your returns start earning returns too. With time, even small monthly investments can grow into a large corpus. It also implies that the longer you stay invested, the greater the compounding effect.

Rupee Cost Averaging

Rupee Cost Averaging is a fundamental benefit offered by SIP. It means you buy mutual fund units at different prices over time. With SIPs, you invest a fixed amount regularly, so when prices are low, you get more units; when prices are high, you get fewer. This balances out the overall cost of your investment and reduces the risk of investing a big amount at the wrong time. It removes the need to time the market and helps you stay invested in both ups and downs. In the long run, this strategy can lead to better average returns and a smoother investing experience.

Over a period of 6 months, the investment through SIP gets more units i.e. 300 with per unit cost at Rs 12. Similarly, with a lump sum investment, one gets only 240 units with per unit cost as high as Rs 15.

Who Should Invest in SIPs

The following people can consider choosing SIPs for maximum benefit:

• Salaried Individuals: SIPs offer a disciplined way to invest a portion of your monthly income towards long-term goals like a house, car, or retirement.

• First-Time Investors: Those who are beginners can also start small and learn how investing works, with less risk than lump sum investing.

• Homemakers and Students: Homemakers can also start with amounts as low as ₹500 per month. SIPs are an easy entry point into investing.

• Self-Employed Professionals: These are also ideal because they can build a habit of regular investment even with irregular income.

Types of SIP

SIP comes in different types so that it can suit different financial needs and investment styles. Here are the various types of SIP:

1. Top-Up SIP

The first SIP is the top-up SIP, where you can increase your investment amount at regular intervals, like annually or half-yearly. It’s ideal for those whose income grows over time. As you earn more, you can invest more, helping your wealth grow faster without much effort.

2. Flexible SIP

Flexible SIPs offer complete control over how much you want to invest each month. Depending on your cash flow, like receiving bonuses, facing unexpected expenses, or handling monthly budgets, you can adjust the amount accordingly. It’s perfect for people with irregular incomes or changing financial priorities.

3. Perpetual SIP

Unlike fixed-tenure SIPs, a perpetual SIP doesn't come with an end date. You can keep investing for as long as you wish and stop only when you’ve reached your financial goal. This plan is great for long-term investors who don’t want their investments to end automatically.

Consider each type of SIP carefully and choose the one that aligns with your financial goals. You also need to consider added factors like your income, lifestyle, and future goals.

Benefits of Investing in SIP

Investing in a Systematic Investment Plan (SIP) is a wise choice with many advantages for those seeking to participate in Mutual Funds in a systematic and organised manner.

1. Disciplined investment: SIP promotes disciplined investing by requiring regular contributions of a fixed amount. This approach encourages individuals to avoid attempting to predict the unpredictable nature of the market. It enables a consistent, reliable habit of saving and investing, a fundamental element in long-term wealth accumulation.

2. Cost efficiency: SIP makes Mutual Fund investment accessible to a broad spectrum of investors owing to its low minimum investment threshold. Moreover, breaking the investment into smaller, regular portions helps in reducing the influence of market fluctuations. Costs associated with investing in Mutual Funds through SIP are also relatively lower than those of alternative methods.

3. Power of compounding: SIP harnesses the power of compounding. Regular contributions over an extended timeframe allow not only the initial investment to grow but also the generated returns. This compounding effect leads to significantly higher returns on investment.

4. Flexibility: SIP mutual fund allows investors to start, pause, increase or decrease their investments, aligning their strategies with evolving financial objectives and circumstances.

5. Diversification: SIP enables access to a diversified portfolio of assets, given that Mutual Funds typically invest in various securities such as stocks, bonds and diverse instruments. This diversification effectively spreads investment risk, reducing vulnerability to market volatility.

Learn SIP through an Example 

Suppose you plan to start an SIP with a monthly investment of Rs. 10,000 in a mutual fund named "B." The mutual fund's current Net Asset Value (NAV) is Rs. 80 per unit, resulting in an initial allocation of 125 units.

As illustrated above, the number of units allocated each month is different and is based on the NAV of the mutual fund. Then, these units are added to your portfolio, enabling and contributing to growth. The fluctuation in NAV reduces the impact of market volatility.

How to Start Investing in SIP in 3 Easy Steps

Investing in SIP (Systematic Investment Plan) is easy and accessible. Here’s how you can begin:-

• Decide on Your Investment Objectives

First, make sure about your risk tolerance and financial objectives. This will assist you in selecting the appropriate kind and size of investment.

• Select a Mutual Fund Plan

Select a Mutual Fund based on your risk tolerance and goals. Before choosing look at the reviews and past performance of the funds.

• Apply for SIP

Fill out an application, link your Demat account, and do KYC, to begin an SIP.

• Choose the Investment Mode

You can invest online through the ICICI Bank iMobile App or internet banking.

How to calculate SIP investment?

Calculating your SIP investment is simple using a SIP calculator. This online tool helps estimate returns on your regular investments in Mutual Funds. You input details like your investment amount, duration, and expected annual return rate. The calculator then shows your total investment, estimated returns, and future wealth. SIPs involve investing a fixed amount at regular intervals making it easy to build wealth steadily. While manual calculations are possible, SIP calculators save time and provide quick, accurate projections for informed financial planning.

When to invest in SIP

Here’s when you can start investing in SIP:

1. Early Age Advantage

Starting to invest in SIPs in your 20s or 30s leverages the power of compounding for long-term growth. You can benefit from ample time to accumulate substantial wealth for future needs.

2. Mid-Life Start 

Initiate SIP in your 40s or 50s to secure a comfortable retirement or meet financial goals. Disciplined investing can yield meaningful results despite needing more time for compounding.

3. Stable Income 

Ensure a steady income source before beginning SIP to commit to contributions comfortably. Assess the financial situation to ensure surplus income after essential expenses for stress-free investing.

4. Beginning of the Month 

Start SIP at the start of the month to promote financial discipline and avoid delaying investments. You can benefit from Rupee Cost Averaging by consistently investing early, potentially reducing overall investment costs.

5. Special Occasions

Invest in SIP upon receiving lump sum amounts like bonuses or inheritances to put money to work efficiently. Commemorate special occasions like birthdays or anniversaries by initiating SIP for meaningful wealth growth.

6. Clear Financial Goals 

Start SIPs with specific goals such as vacation, home purchase, education funding, or retirement planning. Align SIP contributions with focused and committed savings objectives, ensuring effective wealth accumulation.

Tracking Your SIP Performance

Keeping an eye on your SIPs is important to ensure they are aligned with your goals. Here's how you can do it:

• Use Online Platforms: You can use trusted online platforms like the iMobile App and internet banking to keep track of your returns, NAV growth, and fund comparisons in a few taps.

• Review Every Few Months: A regular check helps you see if your SIP is doing well or if action is needed.

• Look for Consistency: Always look for a consistent underperformance (over a year or more) as it may also mean switching funds.

Common SIP Mistakes to Avoid

SIP investing is easy, but small mistakes can reduce your gains. However, avoiding these common mistakes can be beneficial for you:

• Stopping During Market Lows: Many stop SIPs during market dips, but that’s when you get more units at lower prices.

• Not Increasing SIP Amounts: As income grows, your SIP amount should also rise to meet bigger goals.

• Choosing Funds Without Research:Select funds based on your goals, risk profile, and time horizon.

• Expecting Instant Results: SIPs are designed for long-term investing. Don’t panic if results aren’t fast and as expected.

Common Misconceptions About SIP

There are common myths about SIPs that confuse investors. Let’s clear them up:

• SIPs Guarantee Returns: SIPs reduce risk over time but returns depend on market conditions.

• SIPs Are Only for Long-Term Goals: You can use SIPs for short-term goals if the fund suits the timeline.

• Only Small Investors Should Use SIPs: Even high-net-worth individuals use SIPs for systematic investing.

Conclusion

The entire process of SIP can be beneficial only when a person starts investing early and parks the money in the market for a longer period. One can start low and increase investments in the long run to enjoy the benefits of compounding. SIP calculator helps you to calculate your returns on your systematic investment. Start investing in your preferred fund through SIP to fulfil your long dreamt financial goals.

Systematic Investment Plan FAQs

What is the full form of SIP?

SIP stands for Systematic Investment Plan. It is a disciplined way of investing a fixed amount regularly into mutual funds, helping you grow wealth over time by leveraging the power of compounding and rupee cost averaging.

What is SIP Investment?

SIP is an investment method where you invest a fixed amount in a mutual fund scheme at regular intervals. It helps build wealth gradually by averaging out market risks and making investing more affordable and consistent.

How does an SIP Work?

In SIP, a fixed amount is automatically debited from your account and invested in a mutual fund. Over time, you buy more units when prices are low and fewer when high, balancing out the cost effectively.

Can I start SIP with a small amount?

SIPs are flexible, which means you can start investing with as little as ₹500 per month. This makes it an ideal option even for students, salaried individuals, or anyone starting their investment journey with a limited budget.

What is the minimum amount required to start an SIP?

Most mutual funds allow you to start an SIP with just ₹500 per month, though some may require ₹1,000. Always check the fund’s minimum investment criteria before starting to ensure it suits your financial capacity.

Can SIPs help in wealth creation in the long term?

SIPs allow you to invest regularly, benefit from market growth, and compound your money over time. With patience and consistency, SIPs can help you reach long-term goals like buying a house or retirement planning.

Can SIPs be cancelled or modified?

SIPs offer flexibility. You can cancel or modify the SIP amount, date, or fund choice at any time through your iMobile App or internet banking. There are no charges or penalties for making these changes.

What happens if I miss a SIP payment?

If you miss a payment due to insufficient balance, no units are allotted that month. But your SIP continues in the next cycle. Repeated misses may result in cancellation, so ensure funds are available on the debit date.

How often are SIP returns credited?

Returns are reflected daily based on the Net Asset Value (NAV) of the mutual fund. However, actual gains are realized when you redeem your units. SIPs grow gradually, and return compound over the long term.

Can I have multiple SIPs in different mutual funds?

You can start multiple SIPs across various mutual fund schemes. In fact, diversifying your SIPs helps spread risk and can balance your portfolio based on your financial goals, risk tolerance, and time horizon.

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