How Does SIP Work?

How Does SIP Work?

There are a wide number of choices for you when it comes to investment in the mutual – one of them is SIP. SIPs are different from lump sum amount investments in mutual funds; this is where you can start investing a little at regular intervals. This post speaks about everything that you need to know about SIP funds.

What is SIP?

A SIP’s straightforward structure lets you invest a fixed sum in various mutual funds on a regular base. As a result – you would invest in a fund of your choice on a monthly, quarterly, weekly, daily, or any other frequency that suits you. SIP is nothing more than a clever investing technique for mutual funds.

A systematic approach to investing, specifically in the mutual fund area, may have various long-term benefits. When you include mutual fund investing as part of the monthly budget, which you manage with your regular monthly income, this regular investing could become a habit.

What makes SIP so famous is the ease and convenience it provides, allowing for little investments over time that have the potential to generate wealth for investors.

The ability to contribute as little as INR 500 per month makes SIP not only accessible but it also allows many first-time mutual fund investors to get experience with mutual fund investing. The transfer of funds from one’s bank account to the fund; the allocation of units according to the unit price, which is known as the fund’s net asset value (NAV) on the day the funds are credited; and so on.

How Does a SIP Work?

To begin investing in a mutual fund through SIP, you must first be KYC compliant. KYC requires the provision of required documents, which include bank account information, a PAN card, and evidence of identification.

With a valid KYC, you can invest in the fund of your choice by filling out a physical application form or online with the asset management company or other platforms of your choice. When you choose the SIP method of investing, you can choose any investment frequency, such as monthly, quarterly, or annually. You can also choose a specific day for SIP from the available possibilities.

You’ve simply linked your bank account to the investment account, which will effortlessly transfer funds from the bank account to the fund in which you have chosen to invest through SIP. If you initiate a monthly SIP, it implies that on a specific date each month, a defined sum from your bank account is debited and deposited to the fund for unit production. The fixed payment would be converted to fund units based on the current NAV and deposited into your mutual fund investment account.

Kinds of SIP Mutual Funds in 2022

Flexible SIPs – Flexible SIPs allow you to adjust the amount of your periodic investment based on your cash flow. While a predetermined investment amount is still provided when initiating a flexible SIP, you can change it up to 7 days before the installation date. Therefore, it is one of the best low duration funds. This is even simpler if you use SIP over the internet.

Perpetual SIPs – The end date of your SIP is not specified when you establish a perpetual SIP. Unless you give it specific instructions to the contrary, your periodic installments will continue to be invested.

Top-Up SIPs – As your career progresses and your earnings improve, you can use the top-up SIP tool to enhance your SIP investments. Top-up SIP allows you to raise the existing SIP amount on a regular basis (for example, you could increase your existing SIP of Rs.1,000 per month by Rs. 500 after every six months; this means, after six months, your monthly SIP will become Rs.1,500; after another six months, it will rise to Rs.2,000 and so on).

Trigger SIPs – SIP through Trigger is an option for experienced investors. If the market becomes turbulent, you can set a trigger to automatically redeem and/or switch from one scheme to another.

What are the Perks of SIPs?

Investing through SIP has several advantages over lump sum investments (where you invest a large amount in a single installment). The benefits are as follows:

Rupee Cost Averaging: By investing fixed sums on a regular basis, you receive more units of your selected mutual fund when the market is low and fewer units when the market is high. Over time, persistent SIP investing reduces your average cost of the purchase to less than the scheme’s current NAV. It is referred to as rupee cost averaging.

Low Entry Level: Making SIP investments do not require a huge chunk of money. You could invest even as little as Rs.500 at regular intervals. It is not necessary to time the market; Regularly investing through SIP allows you to benefit from market volatility while eliminating the need to time the market. In contrast, in lump sum investing, your entry point is critical because you could face book losses if the market collapses soon after you invest.

Compounding power: Since SIP investors invest for the long term, they profit from compounding (returns over the returns already earned, exactly like compound interest). For example, a monthly investment of Rs. 5,000 over ten years at a 12% investment return can result in a wealth accumulation of Rs. 11.50 lakh.

How are SIP Funds Taxed?

The taxation of redemptions in mutual SIPs is determined by the type of scheme and the time of redemption. For taxation of redemption proceeds in SIPs, the concept of First in First Out (FIFO) applies; you should speak with your tax expert or chartered accountant to understand how FIFO will be used. The taxation of redemption proceeds in SIP investments is also dependent on whether the scheme is an equity fund or a non-equity fund; visit your financial advisor to learn which funds are considered equity or non-equity funds for tax purposes.

Short-term capital gains in stock funds are taxed at 15%, whereas long-term capital gains are taxed at 10% after the first Rs 1 lakh. Short-term capital gains in non-equity funds are taxed at your marginal tax rate, whereas long-term capital gains are taxed at 20% after indexation. If you invest in IDCW (dividend) options via SIP, dividend payments will be taxed at your marginal tax rate, both for equities and non-equity funds.


Investing in SIPs is a great start for someone who wants to start off small yet wants to start somewhere. Also, the risks that are associated with it are quite lower than they are with other funds.

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