How Does an SIP Work? Meaning, Process, Benefits, and Examples

An SIP is a method of investing regularly in a mutual fund. You choose a scheme, decide how much to invest and select the investment frequency.

The key points to remember are:

• You can invest a fixed amount at regular intervals, such as monthly or quarterly.
• Each instalment buys units of the selected mutual fund based on its applicable NAV.
• A lower NAV means your fixed SIP amount buys more units, while a higher NAV means it buys fewer units.
• SIPs can help you maintain a regular investment habit.
• SIPs do not guarantee returns or protect you from losses because mutual funds are market-linked.
• Each SIP instalment is treated as a separate investment when calculating its holding period for tax purposes.
• On the Bajaj Broking website, SIP investments can start from Rs. 100 per month, subject to the applicable scheme terms.

In simple terms, you choose the fund and amount, set up the SIP, and invest at regular intervals. The value of your investment can rise or fall depending on the performance of the selected mutual fund.

A Systematic Investment Plan, or SIP, is a method of investing a fixed amount in a mutual fund at regular intervals.

You can choose how much you want to invest and how often you want to invest. Depending on the scheme and platform, common frequencies include monthly and quarterly investments.

An SIP is different from a mutual fund. A mutual fund is the investment product, while an SIP is one way of investing in that mutual fund.

For example, you can invest Rs. 2,000 every month in a selected mutual fund through an SIP. Each Rs. 2,000 instalment is invested separately.

If you want to understand the concept in more detail, you can also read this article - What is SIP.

An SIP works through a series of regular investments. You first select a mutual fund scheme and decide the amount and frequency of your investment.

The following steps show what happens during an SIP:

1. Choose a mutual fund scheme: Select a scheme based on your financial goal, investment horizon and risk level.
2. Choose the SIP amount: Decide how much you want to invest at each interval.
3. Select the frequency: Choose an available frequency, such as monthly or quarterly.
4. Select an investment date: Choose an available date for the SIP instalment.
5. Set up the payment mandate: Authorise the required payment method or mandate.
6. Invest the amount: The selected amount is debited on the scheduled date.
7. Receive mutual fund units: Units are allotted based on the applicable NAV.
8. Repeat the investment: The process continues for each scheduled SIP instalment unless you modify or stop it according to the applicable terms.

On the Bajaj Broking website, you can start an SIP from Rs. 100 per month and explore more than 4,000 mutual fund schemes, subject to the applicable scheme terms.

The number of mutual fund units you receive depends on your investment amount and the applicable NAV.

Formula:

Units allotted = SIP investment amount ÷ Applicable NAV

For example, suppose you invest Rs. 1,000 and the applicable NAV is Rs. 20.

Rs. 1,000 ÷ Rs. 20 = 50 units

If the NAV is Rs. 10 for another Rs. 1,000 instalment, you receive:

Rs. 1,000 ÷ Rs. 10 = 100 units

This is why a fixed SIP amount can buy different numbers of units at different times.

You can learn more about mutual fund units and how they form part of your investment.

NAV stands for Net Asset Value. It represents the value of one unit of a mutual fund scheme.

The applicable NAV is used to determine how many units your SIP instalment buys. If the NAV is lower, the same investment amount can buy more units. If the NAV is higher, the same amount buys fewer units.

NAV can change based on the value of the securities held by the mutual fund and other applicable factors.

You can also learn more about NAV in mutual funds to understand how it is calculated and used.

Rupee-cost averaging refers to investing a fixed amount regularly, regardless of market movements.

When the NAV is lower, your fixed investment amount buys more units. When the NAV is higher, it buys fewer units. Over several instalments, these different purchase prices contribute to your average cost per unit.

However, rupee-cost averaging does not guarantee a profit or protect your investment from losses. The value of your mutual fund units can fall when market conditions or the value of the underlying investments change.

An SIP and a lumpsum investment are two different ways of investing in a mutual fund. An SIP spreads investments across multiple instalments, while a lumpsum investment puts the selected amount into the fund at one time.

The following illustration shows how the number of units can differ when the NAV changes over six months. It is only an example and does not show that an SIP will always perform better than a lumpsum investment.

In this illustration, the SIP buys 300 units because the investment is made at different NAVs. A Rs. 3,600 lumpsum invested when the NAV is Rs. 15 would buy 240 units. Actual outcomes depend on the NAV when the investment is made.

You can compare these approaches further using the lumpsum investment calculator and SIP return calculator.

An SIP can help you invest regularly without having to make a large investment at one time. It can also make it easier to follow a planned investment schedule.

The main features to understand are:

• Regular investing: You invest a fixed amount at chosen intervals.
• Smaller instalments: You can spread your investment across multiple payments instead of investing one large amount at once.
• Rupee-cost averaging: Different NAVs across instalments can result in different numbers of units being purchased.
• Investment discipline: A scheduled SIP can help you follow a regular investment plan.
• Compounding potential: When investment gains remain invested, future gains can build on the earlier gains. The actual outcome depends on the performance of the mutual fund.
• Goal-based investing: You can choose an SIP amount and investment horizon based on a financial goal.

These features do not remove market risk. The suitability of an SIP depends on the mutual fund selected and your financial circumstances.

Compounding means that returns earned on an investment remain invested and can generate further returns over time.

For example, if an investment earns a return and that return remains invested, the next period's growth can apply to both the original investment and the earlier gain.

In mutual funds, however, returns are not fixed. The value of your investment can rise or fall because returns are linked to the performance of the underlying securities.

Therefore, compounding can contribute to long-term growth, but it does not guarantee a particular return or final value.

An SIP does not remove market risk.

Regular investing means that you buy units at different NAVs instead of investing the entire amount at one time. This can spread the effect of different market prices across your instalments.

However, the value of the mutual fund can still fall. The level of risk depends on the selected scheme and its underlying investments.

Before investing, check the scheme's Riskometer. The Riskometer categories are Low, Low to Moderate, Moderate, Moderately High, High, and Very High.

You can also learn more about mutual fund risks before selecting a scheme.

There is no single SIP amount that is suitable for everyone.

Consider your regular income, essential expenses, existing financial commitments, financial goals and investment horizon before deciding how much to invest.

Choose an amount that you can maintain without affecting your essential financial needs. You should also understand the risk level of the mutual fund in which the SIP will be invested.

Starting with Rs. 1,000, for example, does not make an investment safer than starting with Rs. 5,000. The risk also depends on the mutual fund scheme selected.

You do not choose an “SIP fund” separately. You choose a mutual fund scheme and then decide whether to invest through an SIP.

Consider the following factors before selecting a scheme:

• Financial goal: Identify what you are investing for.
• Investment horizon: Consider when you may need the money.
• Risk level: Check the scheme's Riskometer and understand the underlying investments.
• Fund category: Understand whether the scheme invests mainly in equity, debt, hybrid or another category.
• Costs: Check applicable expenses and charges.
• Past performance: Use past performance as information, not as a guarantee of future returns.

The right choice depends on your circumstances. A fund that suits one investor may not suit another.

You can explore different mutual fund schemes and compare relevant schemes before investing.

There is no single date that is the right time for every investor to start an SIP.

Your decision can depend on your financial goal, investment horizon, income, existing financial commitments and ability to take market risk.

If you decide to invest, maintaining a regular schedule can help you follow your investment plan. However, you should not invest money that you may need for essential expenses or short-term obligations.

Starting an SIP through the Bajaj Broking website involves selecting a mutual fund scheme and setting up regular investments. Investors can start with Rs. 100 per month, subject to the applicable scheme terms.

The basic process is:

1. Complete KYC: Complete the required Know Your Customer (KYC) process before investing.
2. Register on the platform: Create and access your account on the Bajaj Broking website.
3. Choose a mutual fund scheme: Review available schemes and select one based on your goal, investment horizon and risk level.
4. Set the SIP amount: Decide the amount you want to invest at each interval.
5. Select the frequency and date: Choose the available investment frequency and date.
6. Set up the payment mandate: Complete the required mandate process for recurring payments.
7. Start the SIP: Once the setup is complete, the selected amount is invested according to the SIP schedule.

The Bajaj Broking website offers access to more than 4,000 mutual fund schemes, and SIP investments can start from Rs. 100 per month, subject to applicable scheme terms.

An SIP is a regular investment method, but it does not make a mutual fund risk-free. Understanding the following points can help you make an informed decision:

• Returns are not guaranteed: Mutual fund returns depend on market performance.
• Losses are possible: The value of your investment can fall.
• The fund matters: Your SIP's performance depends on the mutual fund scheme you select.
• Each instalment is a separate investment: This matters when calculating the holding period for tax purposes.
• Check applicable charges: Exit loads and other applicable costs can affect the amount you receive.
• Review your goal: Your chosen fund and SIP amount should continue to match your financial needs.
• Understand the Riskometer: Check the scheme's stated risk level before investing.

An SIP should therefore be viewed as a way to invest regularly, not as a method that guarantees a particular return.

SIP taxation depends on the type of mutual fund, the date of each purchase and the applicable tax rules.

Each SIP instalment is treated as a separate purchase. Therefore, the holding period for units purchased through different instalments is calculated separately.

For equity-oriented mutual funds, current rules provide a 12.5% tax rate on long-term capital gains exceeding Rs. 1.25 lakh under Section 112A, subject to the applicable conditions. Short-term capital gains on specified securities covered by Section 111A are taxed at the applicable rate.

Debt-oriented and other mutual funds can have different tax treatment. Certain specified mutual funds are covered by Section 50AA, so you should not apply old debt-fund tax rules or indexation provisions automatically to a current investment.

Tax rules can change. Check the applicable provisions for the financial year in which you redeem your investment.

For a broader understanding, you can read about mutual fund taxation.

Some SIPs offer a top-up facility that allows you to increase the investment amount at specified intervals.

For example, you may start with an SIP of Rs. 2,000 per month and increase the amount later if your income or investment needs change.

The availability and terms of a top-up facility depend on the applicable platform and scheme. Check the relevant terms before setting one up.

You can use the step-up SIP calculator to estimate how increasing your SIP amount could affect the projected value of your investment.

An SIP is a regular investment instruction. Depending on the platform and scheme, you may be able to modify or stop future instalments.

Stopping an SIP does not automatically mean that your existing mutual fund units are sold. Your existing investment can remain invested unless you redeem it or take another permitted action.

Before stopping an SIP, consider why you started it and whether your financial goal or circumstances have changed.

Yes. You can invest Rs. 1,000 per month through an SIP if the selected scheme permits that investment amount.

On the Bajaj Broking website, SIP investments can start from Rs. 100 per month, subject to the applicable scheme terms.

The amount you invest should be based on your financial situation and investment goal rather than a fixed rule about how much you should invest.

If you invest Rs. 5,000 every month for three years, your total contribution would be Rs. 1,80,000.

Your final investment value could be higher or lower than this amount because mutual fund returns are market-linked. It is not possible to guarantee the final value in advance.

You can use the mutual fund calculator to create an illustration using an assumed rate of return. The result is an estimate and not a guarantee of actual returns.

An SIP does not automatically beat inflation.

Whether your investment grows faster than inflation depends on the mutual fund selected and its actual returns over the investment period. Equity-oriented mutual funds may have the potential for higher long-term returns, but they also carry market risk.

Therefore, an SIP should not be treated as a guarantee that your investment will maintain or increase its purchasing power.

You can learn more about inflation and investments to understand how rising prices can affect the future value of money.

An SIP is not automatically suitable or unsuitable for a particular time period.

The suitability depends on the mutual fund scheme, its risk level and when you need the money. Market-linked investments can experience fluctuations over short periods.

If you have a financial goal that is approaching soon, consider the risk of investing in a market-linked mutual fund before starting or continuing an SIP for that goal.