A systematic investment plan (SIP) is a method of investing in mutual funds which allows investors to invest a fixed sum in a mutual fund scheme at fixed intervals. Under the SIP mode of investing, a fixed amount is deducted from the investor’s savings account on a daily/monthly/quarterly/semi-annually basis and is directed towards the chosen mutual fund scheme.
How Does SIP Work?
SIP works on the basic concept of regularity of investments. It works like a recurring investment of a fixed amount, which gets debited directly from your bank account every month on a predefined date. Similarly, SIPs allow you to systematically invest a small amount of money in mutual funds at regular intervals by instructing your bank to periodically auto-debit your account with the SIP amount.
Once you pay the SIP amount, the mutual fund house allocates you a certain number of units of the scheme in which you have invested, depending upon the scheme’s Net Asset Value (NAV) for the day. With every SIP installment, you are alloted additional units of the scheme.
Since, every time the scheme units are bought at different rates, therefore, with the same SIP amount of money invested at regular intervals, your money would buy fewer units of the mutual fund when markets are up and more when they are down. Thus, an SIP enables you to lower the average cost of your investment and reduce the risk of your investment by spreading your purchase price over time. This is known as rupee cost averaging.
Moreover, an SIP enables you to regularly increase your investment amount by a fixed amount and get the benefit of compounding as you earn returns on the returns generated by your investment. This is called power of compounding.
How To Start SIP Investment?
An SIP can be started following the 5 simple steps:
Step 1: Visit your nearest branch of an asset management company (AMC)/bank/Karvy/CAMS office/mutual fund agent or distributor. Or you can initiate the process online by visiting the website of an AMC or a registered investment adviser (RIA) like Paisabazaar or a mutual fund distributor. RIAs can only provide direct plans of mutual fund schemes and mutual fund distributors can only provide regular plans of mutual fund schemes.
Step 2: Submit the Know Your Customer (KYC) form to the concerned authority. You can also choose to opt for the e-KYC form which allows you to provide all the details digitally. You need to submit the following documents with your KYC/e-KYC form:
- An identity proof (Aadhaar card, Passport, Voter ID, or Driving Licence)
- PAN card
- An address proof
- A passport-sized photograph
Step 3: Complete In-Person Verification (IPV) as mandated by market-regulator SEBI (Securities and Exchange Board of India) from January 1, 2012. You can complete the IPV in two ways. You can either visit any of the following institutions and submitting the original copy of the above-mentioned documents:
- KYC registration agency (KRA)
- Mutual fund agent/distributor
- Mutual fund registrar
- Karvy/CAMS office
Or, you can complete the IPV via video conferencing using a webcam at a pre-agreed time with the concerned intermediary.
Step 4: Select a mutual fund scheme on the basis of the following factors:
- Financial goal
- Investment time horizon
- Risk tolerance level
- Fund’s performance – against benchmark and against fund category
- Fund’s performance consistency
- Fund manager’s experience
- AMC track record
- Fund’s expense ratio
You can read more about how to select a mutual fund scheme here.
Step 5: Submit the mutual fund application form. This can be done after the completion of the IPV which usually takes 5-7 days. Along the application form, submit the investment cheque amount and a SIP form to begin your SIP investment.
Also know about Best SIP Investments