What Is Systematic Investment Plan and How Does It Work?

The best method for consistently and methodically investing in mutual funds is through a Systematic Investment Plan (SIP). A SIP works on the core tenet of recurrent investment, enabling you to build wealth over time. SIP allows you to make predetermined investments at predetermined periods, like every three months or once every week.

Due to averaging of cost and the power of compounding, an investor who chooses the SIP way to invest can do it in a time-bound manner without worrying about the state of the market.

What is SIP?
A systematic technique to invest regularly in a mutual fund is through a SIP or Systematic Investment Plan. We often lack significant financial resources in order to invest. Any mutual fund where you set up a SIP will deduct a specific amount from your account each month. This sum is invested towards one of your selected mutual funds. Your investments build up over time and keep expanding.

Rupee cost averaging and the power of compounding, the two most crucial investment features are effective with SIP. SIP aids in the development of a disciplined investing strategy.

How do SIPs work?
You could invest in any mutual fund through SIPs, which supports your long-term wealth creation. In this context, generating profits and building wealth are not synonymous. You might only make rewards by investing in fixed deposits. However, you could invest in SIP mutual funds if you want to accumulate wealth. Additionally, this amount is automatically deducted from your bank account at the interval you choose for investing.

Let's say you automate a monthly SIP where you invest a set amount on the fifth of each month. Therefore, this sum would be automatically taken out of your bank account on the fifth of every month to be invested in the mutual fund of your choice.

The above is for illustration purpose only. The SIP amount, tenure of SIP, expected rate of return are assumed figures for the purpose of explaining the concept of advantages of SIP investments. The actual result may vary from depicted results depending on scheme selected. It should not be construed to be indicative of scheme performance in any manner. Past performance may or may not be sustained in future.

How can investing in SIPs help create wealth?
It grants you several units in return for the money that was contributed to the mutual funds.

Let's say, for illustration, that a mutual fund's NAV is currently Rs. 20. You will now receive 50 units of the plan if you deposit Rs. 1,000 in the mutual fund. Your investments will increase in line with the mutual fund's rising NAV. Therefore, if the NAV of this fund increases to Rs. 30 the following year, the 50 units you purchased for Rs. 1,000 would now be worth Rs. 1,500. This is how your investment develops, assisting you in building long-term wealth.
The above is for illustration purpose only. The SIP amount, tenure of SIP, expected rate of return are assumed figures for the purpose of explaining the concept of advantages of SIP investments. The actual result may vary from depicted results depending on scheme selected. It should not be construed to be indicative of scheme performance in any manner. Past performance may or may not be sustained in future.

What is NAV?
The meaning of NAV can pique your interest if you are a mutual fund investor. NAV, or net asset value, is the term used to describe a mutual fund scheme's unit price. Mutual fund purchases and sales are based on NAV. In contrast to share prices, which constantly change during trading hours, the NAV is determined daily based on the closing prices of every security that the different mutual fund schemes own after making the required adjustments.

Benefits of SIPs
• Disciplined Investment Approach: By choosing to invest consistently, you add discipline to your investments since you treat your SIPs like any other fixed monthly expense, such as paying the rent on your home, purchasing groceries, going out to dine, or paying your children’s tuition fees.
• Saving Habit: It fosters the habit of saving by having you set aside a defined amount and investing it regularly every month or once in three months.
• Flexibility: There are no penalties for foreclosing a SIP, and it is relatively simple to start one or end one.
• Wide range of options: You could invest in a mutual fund plan that best suits your risk tolerance, investment objectives, or monetary objectives.
• Low Starting Investment: In India, a SIP can be started with as little as Rs. 500 or Rs. 1,000 every month.
• Investment Diversification: By starting a SIP in an equity mutual fund, you could benefit from investing in various industries and businesses, distributing your risk among diverse firms, industries, and market capitalizations.
• Power of Compounding: Since you could start SIP investments with tiny sums, you might start SIP investments from your regular savings and continue investing for a long period. You could build money by investing over a long period, thanks to the power of compounding. The power of compounding increases dramatically over extended periods of investing.
• Rupee Cost Averaging: Long-term investment could be made easily by having the discipline and commitment to invest a set amount of money for a set amount of time, regardless of the state of the market. Since SIP investments are made at various NAVs (price levels), Rupee Cost Averaging allows you to profit from market turbulence.

Bottom Line
SIP has emerged as the preferred method of investing in mutual funds in recent years. It helps you save money to reach your financial objectives in the future without significantly straining your current financial situation. You might exercise due care when choosing a fund which would be in line with your investment horizon and make sure to keep a consistent monthly payment schedule.

Views and opinions contained herein are for information purposes only and should not be construed as investment advice/ recommendation to any party or solicitation to buy, sale or hold any security or to adopt any investment strategy. It does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The recipient should exercise due caution and/ or seek professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein.

Statutory Details: Axis Mutual Fund has been established as a Trust under the Indian Trusts Act, 1882, sponsored by Axis Bank Ltd. (liability restricted to Rs. 1 Lakh). Trustee: Axis Mutual Fund Trustee Ltd. Investment Manager: Axis Asset Management Co. Ltd. (the AMC). Risk Factors: Axis Bank Limited is not liable or responsible for any loss or shortfall resulting from the operation of the scheme. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The AMC reserves the right to make modifications and alterations to this statement as may be required from time to time.
SIP Disclaimer: The above is for illustration purpose only. The SIP amount, tenure of SIP, expected rate of return are assumed figures for the purpose of explaining the concept of advantages of SIP investments. The actual result may vary from depicted results depending on scheme selected. It should not be construed to be indicative of scheme performance in any manner. Past performance may or may not be sustained in future.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.