What is an SIP?

Posted on Tuesday, January 28th, 2025 | By IndusInd Bank

If you are new to investing, the world of mutual fund investments may seem a bit overwhelming, especially if you are unsure about how much to invest and when. This is where SIPs, or Systematic Investment Plans, come into play. 

An SIP allows you to invest a fixed amount in a mutual fund at regular intervals, which makes your investment more manageable and disciplined. Whether you are a seasoned investor or just starting, understanding what an SIP investment is and how it works can help you build steady wealth over time. Keep reading to learn more. 

What is an SIP?

• The full form of SIP is ‘Systematic Investment Plan’. In an SIP, the mutual fund company/distributor deducts a fixed amount from your bank account and invests it into a fund at regular intervals. One can invest in an SIP weekly, monthly, or quarterly.  

• SIP is an ideal and popular option for those who want to start small and gradually build their investment portfolio. Instead of investing a large sum at once, an SIP allows you to spread your investments over time. This can lower the impact of market ups and downs. 

• With SIPs, investors benefit from the power of compounding and the process of rupee cost averaging. Over time, this helps in steady wealth creation. 

Now that you know what SIP is and its full form, let’s also investigate its functioning. 

How Do SIPs Work?  

To understand how an SIP works, let’s break it down into simple steps:  

1. Set an Amount and Frequency

First, you must decide how much you want to invest and when (monthly, quarterly, etc.). For example, you can start an SIP with as little as ₹500 per month.  

2. Automatic Deductions

Once you have set an SIP, the selected amount will automatically be deducted from your bank account at the chosen interval. It will then be invested in your chosen mutual fund. 

3. Purchase of Units

The funds of your SIP amount are used to purchase and allocate units of the mutual funds, based on its Net Asset Value (NAV). When the NAV is low, you receive more units for the same amount. With a high NAV, you receive fewer units per SIP deduction. This process is known as rupee cost averaging, and it helps reduce the impact of market fluctuations.  

4. Compounding Returns

Over time, your investments grow through the power of compounding. The returns that you generate will be reinvested. This creates a snowball effect that leads to steady wealth creation.  

You can receive the returns of your investments after the end of the tenure, or during specific intervals. 

Benefits of Investing via SIPs

Now that you know what an SIP investment is and its workings, let’s see the benefits you can gain with it:

1. Disciplined Investing

SIPs instil a habit of regular investing by ensuring you stay committed to your financial goals. Regardless of other matters, the SIP amount will be deducted at the chosen duration and invested in the fund. 

2. Affordability

With SIPs, you can start small. You can invest small amounts regularly, which makes this an ideal option for anyone to begin their investment journey.  

3. Rupee Cost Averaging

Investing at regular intervals allows you to average out the cost of your investments over time. This minimises the impact of market volatility and helps you achieve better returns.  

4. Power of Compounding

SIPs reinvest the returns you earn, leading to a compounding effect on your wealth. Not only is the principal amount earning returns, but the previously earned returns are also being reinvested for better returns. Understanding how SIP works and starting early can make a major difference in your corpus because of the compounding effect.  

5. Convenience

Once you have set it up, an SIP will run automatically. There is no need to monitor the market constantly or manually invest each month.  

6. Goal-Oriented Investment

SIPs are the ideal investment option if you have a specific financial goal. This can include buying a house, funding education, or planning for retirement.

Also Read: 6 Types of Mutual Funds That Every Investor Must Know

Conclusion

SIPs, or Systematic Investment Plans, offer a simple and effective way to invest in mutual funds. By understanding what an SIP isand how it works, you can make disciplined, goal-oriented investments without the stress of market timing. With SIPs, you can start small, benefit from rupee cost averaging, and leverage the power of compounding to grow your wealth over time.  

If you are looking to start your SIP journey, IndusInd Bank can be your partner in need. We offer a range of mutual fund scheme options which you can invest in via an SIP of your choice. You can track your investments across devices as well, allowing you to make the right investment decisions. The best part is that you can get started with one click. So, start investing via an SIP today! 

Disclaimer: The information provided in this article is generic and for informational purposes only. It is not a substitute for specific advice in your circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any financial decisions based on the contents and information.