All you need to know about SIPs in Mutual Funds

Capital markets have gained a lot of popularity in recent years, and a substantial number of investors who park their money in markets are investing in mutual funds. A systematic Investment Plan, or SIP, has emerged as one of the preferred strategies for investing in markets, and this trend only seems to be catching on further. 

According to the Association of Mutual Funds in India (AMFI), SIP flows stood at a staggering ₹26,459 crore per month as of December 2024, as against just ₹8,418 crore in December 2020 – that is an increase of over 214 percent. There are several reasons for this. Investing through SIPs helps you navigate market fluctuations while benefitting from the power of compounding on your earnings. This makes SIPs an attractive option for cultivating a disciplined approach to saving.

Let’s decode what SIP means, why it is a good choice for the average Indian investor, and what are the key points to consider before starting it. 

What is an SIP?

An SIP is a method of systematic investing where you set aside a fixed sum of money at regular intervals to invest in a specific asset. For an average investor, timing the market to see the right time to enter and exit is tough. With a SIP, you can invest in mutual funds where professional fund managers track market conditions to make investment decisions. This disciplined approach allows investors to consistently invest, regardless of market fluctuations.

You can choose everything from the amount of money to be invested, the frequency of the investments, and the date when your account is debited, to suit your requirements, making it a flexible option.

With the Indian mutual fund industry witnessing significant growth, SIPs have played a pivotal role in making investments more accessible and fostering a culture of long-term savings.

What are mutual funds?

Mutual funds are investment vehicles that pool money from multiple investors to invest in a diversified portfolio of securities such as stocks, bonds, or a combination of both. These portfolios are managed by professional fund managers who strive to achieve specific investment objectives, such as capital appreciation or income generation.   

Why is a Demat account needed to invest in SIP?

Investing in mutual funds through SIP using a Demat (Dematerialised) account offers several advantages. It acts as an electronic holding space for your investments, similar to a bank account for your money. All transactions related to your mutual fund investments, including buying, selling, and receiving dividends, are recorded electronically in your Demat account, making it simpler to track and manage. However, you can start a mutual fund SIP even without a Demat account. This can be done as a direct investment with the mutual fund company or through an online provider. 

Benefits of investing through SIPs

There are several gains of investing in mutual funds through SIP, as against investing in a lump sum. These include:  

Building a corpus: You can start a SIP with as little as ₹500, which you can set aside each month, or any other interval, to start the discipline of saving regularly. This is a great option for those who want to start their savings journey but don’t have a lump sum to invest. A SIP allows you to choose the amount you wish to save along with the frequency of every instalment – whether bimonthly, monthly, quarterly, or yearly. 

Convenience of investing: The process of money transfer is completely hassle-free. By pre-selecting the transfer date for each month and providing standing instructions to your bank, you can automate the entire process. This eliminates the need for physical bank visits and reduces the time spent on manual transfers. In today’s digital age, this automation is particularly valuable as it aligns with the growing preference for contactless and efficient solutions.

Rupee cost averaging: One of the key benefits offered by a SIP is rupee cost averaging. In simple terms, it means that when the Net Asset Value (NAV) of a mutual fund scheme is low, the fixed amount that you have allocated towards SIP can buy more units of the fund as against times when the NAV is high. By investing a fixed amount consistently, you average out the cost of your investment over time, potentially reducing your overall investment cost and increasing your long-term returns.

Power of compounding: You can significantly benefit from the power of compounding when you stay invested in SIPs for the long term. This happens because the returns earned on your SIP investment get reinvested into the same mutual fund scheme automatically, allowing your money to grow more. By consistently investing through SIPs, you can experience the compounding effect and potentially create long-term wealth. This makes SIPs an excellent option for beginners.

Portfolio diversification: Ideally, the rate of return on any investment must beat the existing inflation rate. A SIP offers the option to park your money into varied schemes, offering a diverse mix of industries and options. The investments are managed by an expert, so you don’t need to have the know-how of markets and how to manage your money. What you get is a diversified portfolio that reduces the risk of volatility, even as you gain from a higher rate of returns when there is an upside in capital markets. 

Investing into capital markets: Traditionally, investing in the stock market often required a significant initial investment to purchase individual stocks. However, SIPs offer a more accessible route to capital market participation. Instead of directly investing in individual stocks, SIPs allow you to invest in mutual funds. These funds, in turn, invest in a diversified portfolio of stocks, so you can benefit from the growth of the stock market without the need for large upfront investments or the complexities of stock selection.

How to start an SIP

The first step for starting a SIP is selecting a mutual fund scheme that aligns with your investment goals, risk appetite, and time horizon. Then, decide on the fixed amount you wish to invest – you can use a SIP calculator from Upstox to determine this. Next, select the timings, whether weekly, monthly, quarterly, or at any other regular interval that works for you. You can set up an SIP through your bank, online platforms, or directly with the mutual fund company. It is a good idea to open a Demat account if you don’t have one already and route your investment through that. You can link your bank account to your Demat account to facilitate automatic deductions by the mutual fund company.

How does an SIP work?

On the date specified by you at the time of signing up, the SIP amount is automatically debited from your bank account and invested in the chosen mutual fund scheme at the predetermined time interval. You will be allocated units of the mutual fund depending on the NAV. The gains are also reinvested, making the corpus larger and also the returns.

How to withdraw SIP amount

You can opt for a Systematic Withdrawal Plan (SWP) to withdraw a fixed amount from your mutual fund investments at regular intervals and invest them into debt or any other asset class. You can even use the funds withdrawn for any other financial needs. The other option is to redeem your investments partially or fully at any time. Make sure you read the fine print of your investment before doing so as redemptions are subject to applicable exit loads and redemption procedures.

Key points to consider before starting an SIP

·   Have a clear investment goal. This will help you choose the right kind of mutual fund for the SIP out of the different kinds (equity funds, debt funds, balanced funds, etc) and also the time that you want to stay invested. 

·   It is a good idea to research the past performance of the mutual fund that you are shortlisting to understand whether it can withstand the ups and downs of markets. But, you understand that past performance is not fully indicative of future results. 

·   Choosing the right fund house and fund manager is equally important as their investment philosophy must align with your goals. 

·   Compare the expense ratios of different funds to ensure you are not paying excessively high fees. 

·   Taxation is another factor that can erode your earnings. You must understand the tax implications of investing in mutual funds before starting the SIP.

Conclusion

SIPs offer a simple, disciplined, and effective way to invest in mutual funds and build wealth over the long term. By regularly investing small amounts, you can harness the power of compounding and achieve your financial goals. However, it is crucial to do thorough research and understand your investment goals and risk appetite before investing. Read more about investing in mutual funds online on Upstox.