How to Invest Regularly in Mutual Funds
Once you know what a Systematic Investment Plan is, the next question is: how does sip work on a practical, day-to-day level? Understanding the way it works can boost your confidence when setting one up.
How SIP Works Step-by-Step
To learn how SIP works, it is useful to break the process down into the core stages:
● The mutual fund scheme is selected based on your financial goal, risk comfort and investment horizon.
● You decide the SIP amount and frequency, it can be daily, weekly, monthly or quarterly as per the scheme’s option.
● You sign up for an auto-debit mandate and this gives authority to debit a fixed amount from your bank account on the date you have chosen.
● On every SIP date, your instalment is invested in the scheme and units are allotted based on the day’s Net Asset Value (NAV).
● It will then repeat automatically at whatever frequency you choose without requiring you to make a new decision each time.
How SIP Works: Role of NAV
It is important to know what happens in each installment to understand the working of SIP. Units are purchased at the current NAV:
● When NAV is lower on a particular date, you buy more units for your fixed SIP amount.
● If the NAV is higher, you get fewer units for the same amount
● This pattern can even out your overall cost per unit over a large number of installments, a concept called rupee cost averaging. It does not guarantee profit or protect against losses. It does reduce the need to time each investment.
Timing of Instalments—Importance
Another factor in SIP’s working is the duration for which each installment stays invested. As your first deposit is invested sooner than your fifth or tenth, it has longer to potentially benefit from market growth, assuming any gains are reinvested and continue to participate in future growth. That’s one reason SIPs are often associated with long-term goals, rather than short-term trading.
Adjustments You Can Make Along the Way
SIPs aren’t totally rigid. Depending on the scheme and platform, you might be able to:
● Take a break or stop your SIP.
● Change the instalment level.
● As your income grows, increase your SIP amount with a step-up facility
They help your SIP to grow as your financial position changes without starting all over again.
What SIP Can’t Do
It is also important to understand the limitations of how SIP works. It can’t guarantee returns or protect your capital from market losses or make a wrong scheme right for your goal. A lot depends on how the underlying scheme performs in the market and how long you stay invested.
See the Whole View
For a detailed explanation including rupee cost averaging illustrations, types of SIPs and suitability factors, kindly refer to our detailed SIP Guide.
Calculate your possible outcome
Once you get the hang of the mechanics, you can use the SIP Calculator to get an indicative estimate of how your chosen amount and tenure can grow over a period of time.
Summary of Conclusion
Knowing about SIP from the timing of the instalments to the distribution of units as per NAV, you can invest in mutual funds with more clarity and realistic expectations. This explainer is powered by Tata Mutual Fund.
Mutual Fund investments are subject to market risks. Read all the scheme-related documents carefully.