What is SIP in Mutual Funds?

benefits of sip in mutual fund

There are many investors who do not know what a Mutual fund is, but they have SIPs running in their name. On asking, they say they have invested in SIPs. Some even say that they do not want to take risks in Mutual funds, that’s why they prefer doing SIPs only.

(Read: What is Mutual Fund: Types and Concept Explained)

SIP vs. Mutual Fund:

Aren’t they both the same? Well, for the aware Investor, Yes.  Still, a lot of people use both the terms interchangeably, which is not Right. It is important for every Investor to know what exactly he/she is doing, so to be aware of the risk and return factors and decide wisely.

SIP or Systematic Investment Plan is a way to invest systematically in Mutual funds or any other asset class for that matter, at pre-decided regular intervals. However, only Mutual funds have made the term SIP popular and thus it is used in the context of Mutual Funds majorly. 

(Read: Asset Location is more important than Asset Allocation)

Just like you do Recurring deposit in Bank or Post Office, the same way you do SIP in Mutual funds. 

(Read: Taxation of Mutual Funds In India 2020)

SIP is just a way of investing so you may average out the cost of investment in this volatile stock market, thus this method is also called Rupee Cost Averaging.

You have to decide the Mutual Fund in which you want to invest, the amount you can invest and at what frequency (Monthly, Quarterly), and up to when would you like to continue investing (SIP Tenure), and that’s it, you are good to go. 

It is a wonderful tool, favorite among Financial planners, who prefer mapping your financial goals, especially long-term goals, such as- retirement, child education, etc. which requires saving for a longer period of time and in a disciplined manner, with this.

(Also Read: Why is Retirement considered to be the Most Important Goal?)

As mentioned above, it all starts with the selection of Mutual funds. So if the goal is near to short term then Liquid mutual funds may be the selection and you may do SIP in that too. (Read: How to use liquid mutual funds to your advantage?)

Regular, but disciplined systematic investment and proper planning would help you slowly create wealth over the long-term, to help you build the required corpus for all your financial goals, as and when they arrive. Provided you understand the product and use it meticulously.

(Also Read: What is the Right Time to Start Financial Planning?)

Benefits of Mutual Fund SIP:

  • SIP is a convenient mode of investing, without putting much burden on our pockets. When your Income comes monthly, Expenses go Monthly, then it’s easy to plan your investments considering monthly savings. 
  • SIP helps you build a saving discipline, as a fixed amount, as specified by you, goes out of your savings account and gets invested in a mutual fund, on a specific date. This restricts you from spending that amount from your income.
  • SIP helps you average out the cost of investing. Since stock markets never move in one direction for a long time, and also it’s not possible to time the markets for investment and withdrawal, so it’s wise to keep buying at every level. When prices are less you will get more units from your purchase and when prices are high you will see them growing. 
  • It is also easy to start or stop SIP and flexibility of choice of funds and time period of investment, that way it becomes easy to manage as well.

(Also Read: When is the right time to exit your Investments?)

SIP in mutual funds (Infographics)

Popular Myths around Mutual Fund SIPs:

SIPs are for retail (small) investors or salaried persons:

Many people believe that Mutual Fund SIP is only for small retail investors or salaried individuals, with lower disposable income. One cannot start a Mutual Fund SIP of a bigger amount. But this is not true.

As stated above, SIP is a mode of investment, not restricted to the investment amount. Anyone can invest through SIPs in mutual funds of any amount as desired.

SIP is a fund, people also ask for “Best SIPs”:

This is the myth I talked about in the beginning. People often believe that there is no difference between SIP and Mutual Funds or SIP is also an investment avenue like Mutual Funds, it is a big misconception. SIP is not a fund or instrument to invest but it is just a systematic, regular, and disciplined way to invest in any asset class, not only in mutual funds.

People also ask for “Best SIPs”, but there is nothing called Best SIP. I believe you get the point, as it depends on the fund where the actual investments will be going that matters.

Lump-Sum Investment is better than SIP:

This statement sometimes holds true especially when there is an upside trend in the Securities Market. As in those times in case of SIPs, every purchase will be at a higher price and thus results in fewer units.

But again, this is also true that you never know when the trend will reverse and you get stuck in your lumpsum investment as in those times it will be showing negative returns day by day.

Cost averaging always proves to be a wise strategy when you admit that you can’t predict market movements, which is possible only when you invest through SIP. 

Best way to use SIP in Mutual fund :

Investors often say “Abhi to market bohot gir gaya hai, Nuksaan ho gya, abhi SIP chalane ka koi faayda nahi, Isse Badhiya to FD hi kar leta.”

(Also Read: Safe Investment options in India)

Well, this is a complete misconception. If you are a SIP investor in Mutual Fund, then you have to capture the complete market cycle in your Investments. Volatility is a basic nature of Equity Markets and SIP can help you manage it, but you have to stick with the process for a reasonable time.

(Read: What is Equity?)

The best way to use SIP in Mutual Fund would be to link them to your financial goals and choose the fund according to the tenure of the goal you are targeting.

If the goal is long-term, then you should also take into account your Risk Profile before selecting funds and start SIP. You may take the help of Financial Planners to help design a suitable portfolio for your goals.

(Also Read: Why risk profiling is Important in Financial planning?)

That way, market ups, and downs would bother you less and you can manage your investment behavior better. (Learn more on SIPs from here)

FAQs related to SIP in Mutual Fund:

When Is the right time to start SIP?

You can start SIP anytime. Anytime is the right time to start SIP. Timing to start a SIP is just like timing the stock markets, which you can never

When Can I Stop SIP?

You can stop SIP anytime you want, but ideally, you should stop your SIPs, only in the following situations:
– When your financial goal for which the SIP is started comes closer.
– When your portfolio needs rebalancing.
– When the fund in which the SIP is started, constantly shows poor performance.
– Your financial situation has changed and you are left with little or no surplus to invest.

How to Start a SIP?

You can do it online by visiting the specific Mutual funds’ website or may even register yourself with some other tools like MF Utility etc. or can fo it offline by filling the form with AMC or take help of MF Distributor

How to Stop SIP?

The simple answer is the way you have started with the SIP. Online or Offline. So, you may fill the form or go online.  
But do remember, do not stop SIP in panic or by seeing market volatility. It is to be stopped only because of the reasons mentioned above.

What happens if I am unable to service my SIP?

When a SIP is registered, the fund house registers an ECS/NACH mandate with your bank. If you don’t have sufficient balance in your bank account to meet the SIP commitment, the bank may charge you a fee. The amount varies from Bank to Bank. The SIP gets automatically canceled after three installments bounce.
So, it is wise to ensure that sufficient funds are available in your account at the date of SIP to avoid any bank charges.

What should be the right date for SIP debit?

You can choose any SIP date as per your convenience. The date of SIP has no such relevance.

Can I start SIP only in Equity Mutual Funds?

Not only equity funds, SIP can be started in any mutual fund, whether it is equity, debt, or hybrid.

I hope this write up helps you understand the difference between SIP and Mutual Funds and all your myths around SIP are now busted.

Feel free to ask your questions in the comments section. If you like the article, share it with your family and friends.



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