SIP, or Systematic Investment Plan is a payment mode through which you can invest in mutual funds in periodic intervals which can be made weekly, monthly, quarterly, or semi-annually. It is one of the two modes available for investing in mutual funds while the other one is lump sum wherein you invest the whole amount at a single point in time.
By reading this article, you’ll get to know about the working of an SIP and its types.
Working Process of an SIP Investment
SIP investment starts with the selection of a mutual fund and ends with getting the allotment of units. Here is the step-by-step working process of SIP:
- Select a Mutual Fund
The first step is the selection of a mutual fund from the list of different types of mutual funds based on your financial agendas.
- Start the SIP Mandate
After selecting a mutual fund, you need to give a mandate to the AMC (Asset Management Company) to start the SIP. This can be done online through your mutual fund account and you have to select the frequency and amount of installment.
- Amount Deduction
After the mandate, the amount on the pre-decided installment date will be automatically deducted from your linked bank account. Therefore, you do not have to be concerned about making the payment on every installment date.
- Allotment of Units
Once the SIP amount gets debited, the units of a selected mutual fund will be credited to your mutual fund account. The number of units you get is dependent on the closing NAV (Net Asset Value) of the day. It means that when the NAV is low, you will get a higher number of units with the same amount and vice versa.
5 Types of SIP
There are different types of SIP investment through which you can make installments. Here are the five main types of SIP that can help you meet your monetary goals:
- Regular SIP
In this type of SIP, you end up paying the same installment amount on every frequency period. In the regular SIP, you have to select the frequency, investment amount, and tenure of the SIP.
- Flexi SIP
In the flexible SIP, you have the liberty to change the installment amount every time you want to invest. This type of SIP will help you achieve control of your investments.
- Step-up SIP
In this SIP, the installment amount will get increased every time by some percentage set by you and that’s why it is also known as top-up SIP. This will help you invest more and creates higher wealth over time.
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Perpetual SIP
In the perpetual SIP, you will select the start date of the SIP but not the end date. This means that the tenure of the SIP will go on perpetually until you give the mandate to stop it. - Trigger SIP
This SIP starts when certain pre-specified trigger levels arise such as a drop in the NAV to some point, a fall in the value of the underlying securities, etc. The trigger SIP can be set for buying units of a selected mutual fund, redeeming the units, or switching it to another scheme.
Conclusion
SIP is one of the finest ways to invest in different mutual funds which can be done online in a hassle-free manner. SIP is not just a regular mode to make the same installment every time but comes in different types that can help you catch the market-ups at the right time.
