How does mutual fund SIP work?

Systematic Investment Plan (SIP) is the buzzword among investors who are pouring in close to Rs 5,000 crore into equity mutual funds through the SIP route every month. Experts say an SIP is the most effective way of investing, especially for retail investors.

Let's find out more about SIPs and how they work.

What is an SIP?

An SIP is a specific amount, invested for a continuous period at regular intervals, generally on a monthly basis. Using this method, an investor buys units of a scheme at a pre-decided frequency. SIPs, which help investors take part in the stock market, obviate the need to time the market, and also bring a discipline to their investment methodology.

When can I start an SIP?
In an open-ended mutual fund scheme, you can start an SIP any time you want. Just fill up the application form along with an SIP mandate and submit it to the point of acceptance. It generally takes 10-30 days for the bank to register your SIP mandate and start it.

For how long can you run an SIP?
Most fund houses stipulate a minimum of six months for an SIP. Investors can choose any tenure they wish or they may even opt for the 'perpetual option', which means the SIP will continue till the investor gives an instruction to the fund house to close it. Financial planners suggest investors to link each SIP to a goal and continue with it till the goal is reached.

Can you change the SIP amount?
An investor can increase or reduce his SIP amount, by first cancelling the existing mandate and giving the revised one. Fund houses do not charge any penalty for stopping the SIPs.

Can I invest lumpsum in a scheme in which I have an SIP running?
Yes, you can add a lumpsum amount to the same scheme in which you are running an SIP. It does not affect the SIP.