Basics of SIP or Systematic Investment Plan: A Guide to Mutual Fund Investment

Investors still face confusion when it comes to SIP. Some find it to be an investment plan, whereas it's just a tool to help investors invest in a disciplined manner and manage money better.


The investor accounts in mutual funds since 2015-16, are on a growth trajectory. According to the data released by the Association of Mutual Funds in India, the investor accounts in mutual funds have grown from 59 lakh in 2015-2016 to 81 lakh investor accounts in 2020-21. The increase in the number of investors in mutual funds will continue to surge as gradually people understand the importance of long-term wealth creation through mutual funds. Even though there has been an increase in the number of investors in the mutual fund’s space, confusions about SIP (Systematic Investment Plan) exist. Some say, ‘Can I invest in a SIP to achieve my goal,’ others say, ‘I have invested in SIP’. However, here’s what it actually means: 

A Systematic Investment Plan is an investment tool or facility offered by mutual fund firms. The plan helps investors to systematically invest fixed amounts of money in mutual funds periodically (monthly, quarterly, or semi-annually, etc.). A steady investment becomes easy for an investor to meet the financial goals. 

Why should mutual fund investment happen through SIP? 

SIP to an investor imparts financial discipline. It makes an investor regular with its investments. For instance, if the investor has decided to invest a fixed amount every month in a mutual fund scheme, he/she can be in a dilemma to invest or not by analysing the market conditions and might think of postponing the investment. The investor might think of delaying more till the market condition improves. A SIP puts an end to all the worries. The money is invested regularly in a scheme without any effort except researching fees and loads to calculate expense ratios and the fund’s past results.

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According to the data released by the Association of Mutual Funds in India, the investor accounts in mutual funds have grown from 59 lakh in 2015-2016 to 81 lakh investor accounts in 2020-21.

How does SIP work?

Investing through SIP allows an investor to purchase a certain number of fund units or shares for a certain mutual fund by making investments. The journey of investment happens for a long time during the lows and highs of the market. The investor does not need to think about the correct market timing to invest as for beginners it can be risky. It allows the investor to think of the tenure and frequency to automate the investment and instructs the bank to transfer the amount from the account into a mutual fund SIP of the investor’s choice. 

Benefits of Systematic Investment Plan 

  • Compounding power gives better returns

When investing in mutual funds becomes regular through SIPs, the returns get reinvested. Over time, under the snowball effect, the returns grow manifold. Therefore, to maximise gains one should invest for an extended period.

  • Begin with low investment 

One can begin investing through SIP in mutual funds as low as Rs 500. After which, one can increase the monthly investment amount when there is an increase in salary through the step-up SIP feature. This helps investors reach their investment goals at a faster rate.

  • Rupee cost averaging 

The investor has the freedom to purchase units or ownership of a mutual fund according to the performance of Net Asset Value (NAV). If the NAV of the fund is low we purchase more units and fewer units when NAV is high.

Different types of SIPs in India 

Mutual fund companies have introduced multiple SIPs tailored to the needs of different types of investors. Here are some of the popular ones:

  • The Flexible SIP 

As the name suggests, a flexible SIP allows adjusting the investment amount based on the financial conditions as well as the conditions of the market. It gives a pre-decided formula according to the market conditions when it is weak, it allows investors to invest more and suggests a lower amount when markets are optimistic. Investors, when faced with a financial crunch, can reduce the amount and increase the same if they have more disposable funds. With flexible SIPs, the investors can adjust the amount. 

  • The step-up SIP 

Step-up SIP allows an investor to increase the SIP amount at fixed intervals. Suppose the initial invested amount in a scheme is Rs 1000, the investor can instruct the fund company to increase the amount by Rs 500 after every six months to which the next investment amount becomes Rs 1500. The step-up option is appropriate for salaried individuals who are expecting a hike shortly.

  • Perpetual SIP 

Sometimes investors forget to mention the end date for the SIP. Any SIP without the end date mentioned becomes a perpetual SIP. Investors can stop the plan by submitting a written application to the mutual fund firm.

  • Trigger SIP 

In this SIP, the investor can set a limit or condition for the investment. For instance, if the investor can withdraw the amount, upon setting a condition that it is to be withdrawn when the net asset value of the scheme fails up to a certain level as per the investor or condition like if market indices Nifty or Sensex levels fall to a certain level. These conditions are generally set by the investors who have adequate knowledge and experience to set such conditions. 

What lies ahead for beginners to invest through SIPs in mutual funds? 

There are various types of SIPs for investors. While every investor can go with the basic SIP, one can consider one of the options mentioned above if the plans suit your finances and investment needs. Before investing, the investor should understand how particular SIP functions and the charges involved that are deducted with the returns.

Shalmoli Sarkar
Shalmoli Sarkar
An MBA in marketing and a BTech in chemical engineering, Shalmoli writes on marketing strategies and business technology for new and aspiring entrepreneurs.

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