In mutual funds, a SIP, or systematic investment plan, is a method of putting a fixed amount of money into a chosen scheme at regular intervals, usually monthly, through an automatic debit from the investor's bank account, in place of investing one large lump sum at once.
The Association of Mutual Funds in India (AMFI) describes this as investing a fixed sum at fixed intervals, and the interval can be monthly or quarterly. AMFI compares it to a recurring deposit, where the account holder also pays a set amount at regular periods. The investor commits a smaller sum on a fixed date, instead of arranging a large amount at one time.
How instalments are collected
The investor gives a standing instruction to the bank, and the bank account is debited on the chosen date every month, so no cheque has to be written each time. AMFI says an instalment can be as low as Rs 500 a month.
For an individual putting Rs 5,000 a month into a scheme, there will be more units bought in a month when the net asset value (NAV) is low and fewer units when the NAV is high. AMFI calls this rupee cost averaging, and describes it as disciplined investing without any need to time market.
Several variants of the plan are also available and the step-up SIP is one of them, where the investor can raise the instalment amount over time.
Why it matters, and what a SIP is not
For a first time investor, a SIP makes it possible to start with a small monthly amount, and the investment continues on the fixed date without any fresh decision being needed each month.
AMFI counts SIP accounts and not individual investors, as one investor can run several SIPs at the same time.
A SIP is not a separate fund category, and it has no risk or return of its own. The scheme chosen determines the risk, and a SIP does not guarantee returns.