Everyone has aspirations and goals – an exotic vacation, a bigger home, a new car, purchasing jewelry, and more. To fulfill your desires, you need to actively pursue and work towards them. And a Systematic Investment Plan (SIP) helps you do just that. The first step is to learn what is SIP and how does it work.
What is SIP?
In short, SIPs are a form of investment that allows you to invest in mutual funds. As the name suggests, it’s a systematic method of investing fixed amounts periodically- semi-annually, quarterly, monthly, etc. Steadily investing helps you reach your financial goals. Now you get the basic idea behind a SIP. So before investing, you have to learn how does SIP investment works.
How does SIP work?
Saving a certain amount every month after making your expenses is challenging. SIPs work like recurring investments and encourage you to set a certain sum aside, small or large. Through forced savings, with time you can build a substantial corpus.
You have to invest a fixed sum, as per your choice, on a given date of every month. This amount can be made via a convenient method like UPI, internet banking, or the auto-debit facility. When you make the payment, the fund house allocates the corresponding number of mutual fund units, determined by the scheme’s current Net Asset Value (NAV). With every installment, the scheme units increase. You also have the flexibility to increase the amount of your investment to earn additional units and boost returns.
Let’s understand with an example. Say the current NAV for a mutual fund is Rs. 20. If you invest Rs. 1000 in that mutual fund you will get 50 units. When the scheme’s NAV grows, so will your investment. Let’s assume after one year, this fund grows to Rs. 30. After the increase, the original 50 units you purchased will be worth Rs. 1500. This is how your investment grows and creates wealth in the long term.
Now you’ve got answers to how does mutual fund SIP work. But as an investor, why should you invest in SIPs?
In short, here’s why:
- Beginner-friendly
- Light on the wallet
- No need to time the market
- Disciplined approach to investments
- Doesn’t require too much capital
- Mobilize the power of two powerful investment strategies – the power of compounding where smaller investments help create a larger sum over time and rupee cost averaging where you benefit from volatility.
Your money, your way
Recently, SIPs have become a preferred mode of investment in mutual funds. They’re an excellent tool to build wealth with regular investments and help you reach your financial goals in a stress-free manner. Just ensure you do your due diligence when you select a fund and keep up with consistent payments on the required date. Checkout investment apps like moneyfy app which can help you easily invest in mutual funds using SIP.