What is a Systematic Investment Plan and How Does SIP Work?

A Systematic Investment Plan, or SIP, is a way through which you can invest your money in mutual funds and earn great returns over time. Here, you do not invest a large sum at once. Instead, you invest a small amount of money at fixed intervals. This way you not only manage your finances efficiently but also allow your money to grow without worrying too much about the fluctuations in the market. In the blog, let’s understand how SIP works, why to consider SIP investment and more.

How Does SIP Work?
Now that you know what is SIP, let’s understand how it works. Well, when you start a SIP, a fixed amount of money is deducted from your bank account periodically and invested into a mutual fund. Here’s how SIP works:

• Pick a Mutual Fund: First, you choose a mutual fund that matches your financial goals and risk appetite. A mutual fund is a pool of money from many investors, that is invested in stocks, bonds, or other assets.
• Choose the Investment Amount: Next, decide how much you want to invest regularly. You can start with as little as ₹500 per month. This amount would be deducted from your bank account on a set date.
• Set Up the SIP: Once you have chosen your mutual fund and decided on the amount, you set up the SIP. You can do this online or with help from a financial advisor. With this, you would choose how often you want to invest (monthly, quarterly, etc.) and for how long.
• Automatic Investments: After setting up the SIP, the amount you have chosen will automatically be taken from your bank account and invested in the mutual fund on the chosen date.
• Buying Units: Every time you invest, you buy a certain number of units in the mutual fund. The number of units you get depends on the price of the fund on that day.
• Compounding: Over time, the money you invest grows because of compounding. Compounding means that you earn returns not just on your original investment but also on the returns you have already earned.

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Why Should You Consider SIP Investment?

Here are a few reasons to consider SIP investment:

• SIP helps you build a habit of regular investing, which eventually helps in growing your money.
• SIP investment is quite affordable as you can start an SIP with a small amount.
• SIPs are also flexible and allow you to change your investment amount or stop the SIP whenever you need to.
• With SIP, you invest regularly, irrespective of the market.
• The longer you keep your SIP running, the more your money can grow, thanks to compounding.
• As you are investing regularly, you do not need to worry about whether it’s the right time to invest.

What Returns Can You Expect from SIP?
Systematic investment plan returns depend on the mutual fund you choose, how much you invest, and how long you stay invested. Usually, equity funds, which invest in stocks, provide higher returns over time but come with higher risks. Debt funds, which invest in bonds, offer lower but more stable returns.
To get the best returns from SIP, you must start early, invest regularly in the best SIP plans and stay invested for the long term. This way you can grow your money in the best manner possible. In India, the average annual return on mutual funds is 10%-12%.
Also Read – Automate your Investments in Simple Steps

Conclusion
So, if you are looking for an easy and smart way to invest and grow your money, it’s time to consider mutual funds. If you are looking for other avenues to invest your money, you can also consider P2P investing on the 13Karat app and invest in our 6-month or 3-month investment plans to earn returns of up to 13% per annum.