{"id":32034,"date":"2024-08-22T19:52:14","date_gmt":"2024-08-22T14:22:14","guid":{"rendered":"https:\/\/kuvera.in\/blog\/?p=32034"},"modified":"2024-08-22T19:53:21","modified_gmt":"2024-08-22T14:23:21","slug":"sip-explained-what-is-sip-in-mutual-funds-benefits-and-how-it-works","status":"publish","type":"post","link":"https:\/\/kuvera.in\/blog\/sip-explained-what-is-sip-in-mutual-funds-benefits-and-how-it-works\/","title":{"rendered":"SIP Explained: What is SIP in Mutual Funds, Benefits and How it Works"},"content":{"rendered":"

What is SIP? SIP, or Systematic Investment Plan, is a widely used term in the world of investing. You may have come across this term in various media outlets, including television, radio, blogs, articles and more. But what exactly does SIP mean? Or, more precisely, what is SIP in mutual funds?<\/span><\/p>\n

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\"Start<\/a><\/b><\/h4>\n

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Let\u2019s learn about SIP and mutual funds in detail.\u00a0<\/span><\/p>\n

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The Association of Mutual Funds in India (AMFI) defines a mutual fund as a collective investment vehicle that collects and pools money from a number of investors. This pooled money is then invested in a diversified portfolio containing equities, bonds, government securities, and money market instruments.<\/span><\/p>\n

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How Does Mutual Fund Work?<\/b><\/h2>\n

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A mutual fund is managed by the Asset Management Company, or AMC, an entity responsible for managing and investing the pooled funds on behalf of the investors.<\/span><\/p>\n

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When you invest in a mutual fund, your money is combined with funds from other investors. In return, the mutual fund allocates a proportionate number of “units” to you, based on the prevailing <\/span>Net Asset Value (NAV)<\/span><\/a>. As a mutual fund investor, you can earn returns through income distributions from dividends, interest, or capital gains. Additionally, when you sell your mutual fund units, you may yield a profit or loss depending on whether their value has increased or decreased since your initial investment.<\/span><\/p>\n

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Start investing<\/a> in Index Funds.<\/span><\/p><\/blockquote>\n

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Methods of Investing in Mutual Funds<\/b><\/h2>\n

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There are two popular methods of investing in Mutual funds:<\/span><\/p>\n

1. Systematic Investment Plan (SIP)<\/b><\/h3>\n

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A SIP allows investors to invest a fixed amount at regular intervals. One key benefit of this approach, particularly in equity schemes, is that it averages the cost of acquiring units. For instance, when the market prices are low, more units are purchased for the same investment amount, and when prices are high, fewer units are acquired.<\/span><\/p>\n

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Let’s understand this with an example. If an investor invests \u20b91,000 per month for 12 months, and the NAV in the first month is \u20b910, they will be allotted 100 units (\u20b91,000 \u00f7 \u20b910). In the second month, if the NAV rises to \u20b912, the investor will receive 83.33 units (\u20b91,000 \u00f7 \u20b912). Conversely, if the NAV drops to \u20b99 in the third month, the investor will be allotted 111.11 units (\u20b91,000 \u00f7 \u20b99).<\/span><\/p>\n

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This illustrates how an investor benefits from acquiring more units when the NAV decreases and fewer units when it increases, thereby averaging the cost over time. This process is called rupee cost averaging.\u00a0<\/span><\/p>\n

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Start your SIP with a mutual fund scheme of your choice now with <\/span>Kuvera<\/span><\/a>.<\/span><\/p><\/blockquote>\n

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2. Lumpsum Method<\/b><\/h3>\n

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The Lumpsum method involves investing a large, one-time amount into a mutual fund rather than making smaller, ongoing investments over time. For example, if you invest \u20b91,00,000 into a mutual fund with a Net Asset Value (NAV) of \u20b910, you will receive 10,000 units. If the market performs well after your lumpsum investment, this strategy may yield higher returns. However, the fluctuating NAV can affect the entire investment and pose a higher risk due to immediate exposure to market volatility. Unlike a Systematic Investment Plan (SIP), the lumpsum approach might not benefit from cost averaging, making it more dependent on the timing of the investment.<\/span><\/p>\n

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Steps to Start Investing through SIP<\/b><\/h2>\n

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Step 1:<\/strong> Complete Your KYC<\/span><\/p>\n

To start investing through a SIP, you must first complete the KYC (Know Your Customer) documentation process. Thanks to technology, this can now be done online using platforms like Kuvera. You’ll need to submit:<\/span><\/p>\n