Everything You Need to Know About SIPs

As a young investor with dreams and aspirations, this is the time of your life! You’ve probably got so many personal goals to achieve, whether it’s a new house, a new car or a bucket list vacation. For each of those dreams, you must have a plan beyond just savings – and Systematic Investment Plans (SIPs) are one of the best ways to get there.
Mar 2023
5 mins read
What are SIPs?
SIPs are the recommended investment avenue for young investors. You can invest small or big amounts at a frequency of your choice – weekly, monthly, quarterly, biannually or annually. You could start from as little as Rs. 500 and choose the date of payment. You can also set up mandates allowing the mutual fund to automatically deduct the amount from your bank account.

How do SIPs work?
The amount debited from your bank account will be used to buy ‘units’ that are credited to your mutual fund account within days. Say you want to invest Rs. 1,000 every month in a particular fund – you could do so manually or create an SIP that deducts the amount from your bank account every month on a pre-decided date. The number of units allotted depend on the NAV of the mutual fund scheme on the date of deduction. The process continues for the chosen duration and frequency of your investment.

Know the kinds of SIPs
  • Basic SIP
    Allows you to set the initial investment, periodic investment, and frequency at the beginning, and remains active until you cancel. The amount remains fixed throughout the tenure of your mandate.

  • Top-up SIP
    Allows you to increase your investment amount periodically, enabling you to maintain a healthy investment-to-earnings ratio. It boosts the compounding ability of your investments and helps you build a sizeable corpus over time.

  • Flexible SIP
    Allows you to vary the amount you invest periodically. This is handy for individuals with volatile earnings, helping them adjust their investments as per their income.
Advantages of SIPs
  • Becoming a disciplined investor
    For a new investor, SIP saves the trouble of finding suitable investment options yourself. The option of automated payments from your bank account also reduces the hassle of investing manually. SIPs are a great way to set a routine and learn investing discipline.

  • The power of compounding
    Compounding is key to the idea of mutual funds – your returns are reinvested to generate even more returns. Thus, even smaller investments can grow and generate substantial returns in the long run. Try to start early and invest for a long time to gain the full benefit of compounding.

  • Rupee cost averaging
    Rupee cost averaging is a major advantage of SIPs. It works by averaging out the costs at which you buy units of a mutual fund in the long run. It means if you invest regularly, you buy more units when the markets are low and fewer units when they are high. By spreading out investments this way over time, it reduces the average cost of your holding over the long term
For young investors looking for strong returns, SIPs are a great way to lay the foundations of your financial future. Start investing today!
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