How does SIP work, and how do you open an SIP account?

A Systematic Investment Plan (SIP) is a systematic approach to investing in mutual funds. It allows investors to build wealth gradually by consistently investing fixed amounts at regular intervals—whether weekly, monthly, or quarterly. To make the process more convenient, investors can opt for an auto-debit facility, enabling automatic withdrawals from their bank accounts for investments in the selected mutual fund scheme.

SIPs offer flexibility, allowing investors to make contributions based on their financial situation. This adaptability gives them control over how much they want to invest, making SIPs an accessible option for a wide range of individuals.

How does an SIP work?

In SIP, the amount is auto-debited from your bank account and invested in the  scheme of your choice. In exchange, you will receive a specific amount of units of the mutual fund based on its Net Asset Value of that day. The Net Asset Value (NAV) for a specific scheme on that day determines the number of units you've purchased. With each instalment, investors will get fund units, which allow them to capitalise on market fluctuations.

Here are the two principles of SIP:

Rupee Cost Averaging: Market prices fluctuate over time but Rupee Cost Averaging is another advantage of the Systematic Investment Plan as buying more units when fund value is low and lesser at a higher market price enables you to average out your investment cost over time, thus protecting against the market fluctuation.

Compounding: In SIP mutual funds, you reinvest the returns generated by your investments, hence your wealth grows exponentially over time. The longer your money stays invested, the more significant the compounding effect becomes, helping you multiply your returns.

Key Features of an SIP
Here are the advantages of SIP that allow investors to invest in mutual funds:

• Modest Investment Plan: Unlike significant lump sum investments, SIPs are an excellent choice for people who want to start investing with a relatively small amount. With SIP, you can start with as low as Rs 500 per month.
• Consistent Investment Intervals: By giving you the option to select from a variety of investment intervals, including weekly, monthly, or quarterly, SIP enables disciplined saving and investing. This regularity helps you cultivate a systematic saving habit while also benefiting from rupee cost averaging.
• Fixed Investment Amount: The initial investment in a SIP is predetermined. It's vital to remember that although you can utilise the "SIP Top-up" feature to make more contributions, you cannot lower the SIP amount without cancelling the current plan and starting a new one.
• Pause your SIP: You can pause investing in your SIP mutual funds for one to three months, depending on the mutual fund provider's policy. This flexibility can be beneficial during difficult times financially. When the pause period ends, the SIP automatically resumes. Check with your mutual fund provider if this pause provision is available.
• No upper investment limit: While the minimum SIP amount is Rs 500, there is no upper limit. Investors can contribute as much as they wish, ensuring consistency throughout the plan's tenure.
• Cancellation clause: SIP offers the freedom to end the plan whenever possible. You have two options for cancelling: online or by sending the applicable mutual fund provider the SIP cancellation form.

How to open an SIP account?

If you are thinking of investing in mutual funds, then open SIP from any mutual fund distributor in India. Let's discuss steps to open an SIP account with trusted banks such as ICICI Bank:

Keep these documents handy
ID Proof
PAN Card
Address Proof
Bank Account Details
Passport/Driving License

Complete your KYC: Ensure that you complete your KYC (Know Your Customer) with the bank. This can be done using your PAN card, Aadhaar, etc, either online or at the branch.

Register for an SIP: Choose your broker like a reputed bank such as ICICI Bank. Go to the bank's website or mobile banking application like the iMobile app.

Start an SIP: Navigate to the mutual fund section, and click on 'Start now' under 'Invest in SIP in just one click'.

Select the Mutual Fund You Want: Take a look at all available mutual fund schemes and pick the ones according to your financial goals and risk preferences.

Choose the Amount to Invest: Choose the weekly or monthly investment as per your financial goals.

Choose the SIP Date: Select a date of the month to auto-debit the SIP amount through your bank account.

Fill the Form: Submit the form once you select your MF company and SIP.

Choosing a perfect SIP plan for investment

Deciding on mutual funds can be challenging for anyone new to the world of investing. However, by following the tips below, individuals can confidently select a suitable SIP plan:

The investor needs to be aware of their current financial situation to identify how much risk they can take.

They should understand different  to choose a fund that aligns with their expectations.

Compare different funds available to estimate returns. Analysing their historic performances will enable investors to make better decisions.

Choose a fund house that has a great reputation in the market.

Conclusion

Systematic Investment Plans (SIPs) offer a flexible, disciplined, and practical approach to maximising people's wealth. It allows individuals to invest and achieve their financial goals as per their financial circumstances. It creates an escape from market fluctuations with some advantageous features like compounding and rupee cost averaging.