What is SIP in mutual funds and how does it really work?

If you are new to mutual funds, one term you will hear repeatedly is SIP, or Systematic Investment Plan. Often mistaken for a product, an SIP is simply a method of investing, much like a recurring deposit, where a fixed amount is invested at regular intervals into a mutual fund of your choice.

The key difference is that mutual funds do not offer assured returns. Instead, SIPs help investors build wealth gradually by investing consistently across market cycles, making them one of the most popular and disciplined ways to invest in mutual funds today.

According to data from industry body AMFI, over Rs 29,000 crore is invested in mutual funds through the SIP route every month by nearly 9 crore investors.

You can set up SIPs to be executed on specific dates in a month by using the ECS (electronic clearance service), direct debit and biller payment modes of your banking facility or give post-dated cheques.

On the specified date, the amount you wish to invest will be debited from your account to buy units of the fund of your choice.

What is the advantage of investing through SIP?

By opting for the SIP mode, you get the habit of investing regularly. You get to buy units at different price points in the market cycle and average your purchase price. You can also invest in the direct plans of mutual funds through the SIP route. In short, SIP is not a product, but a way of disciplined and convenient investing.

What is an ideal SIP tenure?

There are no defined ideal tenures. You must ideally save for various goals through the SIP mode. Financial planners and advisors emphasise that all investments must be made for specific goals. So, you can invest in buying your dream home, a car, a foreign vacation, retirement, children’s education, to cite an example. Depending on the tenure of these goals and risk appetite for risks, experts would suggest suitable funds for you. You can run SIPs for just six months or for an indefinite period, unless you instruct otherwise.

Can I stop or pause my SIPs?

Yes, however, there are some conditions set by most fund houses. You must run a minimum number of SIPs (usually for six months) or invest till the minimum amount specified by the fund for the scheme is reached (usually Rs 5,000). If you face a fund crunch or if the markets move up too quickly, your financial adviser may ask you to pause or even stop SIPs.

You can write to the fund house to terminate or pause your SIP or do it yourself online through Registrar and Transfer Agents (RTAs) such as CAMS, KFintech, MF distribution portals or the websites of asset management companies. Most fund houses allow you to pause your SIP for a minimum of one month and a maximum of three months. Your investments would resume after the period specified for the pause is over.

Remember, stopping a SIP means permanently terminating investments in a specific scheme.

Can I invest in equity and debt funds through SIPs?

You  can invest in all kinds of funds- equity, debt, hybrid -through the SIP mode. In fact, SIP investments in equity funds are very popular. Even debt and hybrid funds allow SIP investments. You are also allowed to invest in liquid funds through SIPs, as part of building an emergency corpus.