SIP (Systematic Investment Plan)
SIP stands for Systematic Investment Plan. It is a method of investing a fixed amount in a mutual fund at regular intervals, such as monthly, to build wealth steadily over time. Each installment buys units at the prevailing NAV, which helps average your purchase price across market cycles.
SIP helps you invest small amounts consistently, making it easier to start and stay invested through different market cycles.
SIP setup essentials
Start with a realistic monthly amount, choose a date that aligns with your cash flow, and set the frequency that suits you. Then pick a fund category that matches your goal and risk tolerance, such as equity for long term growth or hybrid for balanced exposure.
Once you set up the auto debit mandate, the SIP runs on autopilot, which makes it easier to stay consistent without trying to time the market.
How SIP works
- Select a fund: Choose a scheme based on your goal, time horizon, and risk profile.
- Fix the amount: Decide the SIP contribution and frequency.
- Auto debit setup: The amount is automatically debited and invested on the chosen date.
- Unit allocation: Units are allotted based on the NAV on each SIP date.
Types of SIP
A fixed amount is invested at a set frequency, making it the most common SIP type.
Your SIP amount increases at a predefined rate, keeping pace with rising income.
The investment amount can vary based on your cash flow or a rule you set.
Key benefits of SIP
- Rupee cost averaging: Reduces the impact of market volatility over time.
- Power of compounding: Regular investing helps build wealth steadily.
- Affordability: Start with smaller amounts and increase later.
- Discipline: Automated investing avoids emotional decisions.
SIP vs lump sum
A lump sum invests a large amount at once, which can be rewarding in rising markets but risky during volatile periods. SIP spreads investment over time, making it more suitable for salaried investors or those who prefer a steadier approach. For large one time amounts, consider a phased transfer using an STP.
Steady investing habit
SIP helps turn investing into a monthly routine.
Volatility smoothing
It spreads your entry points, reducing timing risk.
Long term growth
Compounding works best when you stay invested longer.
Costs and tax basics
- Expense ratio: Mutual funds charge an annual fee that is reflected in returns.
- Exit load: Some funds may charge a fee if you redeem early.
- Tax treatment: SIP installments are taxed based on fund type and holding period when you redeem units.
To understand return impact, you can check the XIRR calculator and review expense ratio basics.
When should you start a SIP
- Goal based planning: SIPs are ideal for goals like retirement or education.
- Limited lump sum: If you invest from monthly income, SIP is the natural fit.
- New investors: SIP simplifies investing without timing the market.
- Long time horizon: Longer horizons give compounding more time to work.
If you are new to investing, the mutual funds overview can help you understand fund categories and risks.
Who should consider a SIP
- Salaried investors who prefer monthly investing.
- First time investors building a long term habit.
- Investors who want to reduce market timing risk.
- Anyone pursuing long term financial goals.