SIP Investment Guide for Beginners – How SIP Works, Benefits & Steps to Start

SIP in UAE

Systematic Investment Plans (SIPs) have become a highly popular method for investing in Mutual Funds. SIPs present an excellent way to develop financial discipline and gradually accumulate wealth for future goals. The beauty of this method lies in its ability to let you start small and grow your ...read more

What is an SIP?

SIP, as discussed above, is a method of investing in mutual funds. Here, you invest a fixed amount in a particular fund on a regular basis — usually monthly or quarterly.

Instead of a single lump sum payment, SIP allows you to contribute a set amount at regular periods. They are similar to recurrent deposits in that they allow for automated monthly payments, resulting in regular and disciplined investing.

SIP investments are intended to help you invest over time and manage market volatility without the pressure of market timing. In essence, this method supports the notion of starting early and investing regularly to maximise long-term profits.

Policy Term

Amount

Payment Frequency

YearlyMonthly

How Does SIP Work?

SIPs work on two crucial principles —

1. Cost Averaging

One of the primary benefits of SIPs is cost averaging, which relieves the stress of timing the market.

With SIPs, you invest the same amount regardless of market conditions — this lets you buy more units when prices are low and fewer units when prices are high. This technique averages the cost per unit across time, lowering the likelihood of making poor investment decisions based on short-term market swings.

2. Compounding

The second key principle is the power of compounding.

By investing regularly over an extended period, your initial investment grows — not just through your contributions, but also by earning returns on your returns. The longer the investment period, the greater the impact of compounding.

Let’s consider two investors for example —

Investor A starts investing at the age of 40, contributing Rs. 2,000 per month for 20 years at an assumed annual return of 8%. At the end of 20 years, they have a total amount of Rs. 11,85,895.
Investor B starts investing at the age of 20, contributing Rs. 2,000 per month for 40 years at the same 8% return. By the time they reach 60, their corpus would be Rs. 70,28,563 — almost 6 times the amount accumulated by Investor A.

When Should You Start SIP?

You can start an SIP investment anytime — the sooner, the better. There is no fixed "best time" to invest in SIPs, as they are designed for long-term wealth creation. However, as a rule of thumb, you can start them as soon as you have a stable income.
The key to maximising the benefits of SIPs is to stay consistent with your contributions and allow your investments to grow over time.

Benefits of SIP Investments

Disciplined Approach to Investing

SIPs instill financial discipline by encouraging regular, automated investments. With them, you are less likely to deviate from your investment plan even during market fluctuations.

Compounding Benefits

SIP investment leverages the power of compounding. By making small, consistent donations, the gains are reinvested. This can lead to significant growth over the long term.

Convenience

SIPs are incredibly convenient. Once set up, they require little management. You can automate your investments through your bank, ensuring that the amount is deducted every month and invested in your chosen mutual fund scheme.

Lower Investment Capital

This method of investing in mutual funds is accessible to everyone. With a minimum investment requirement as low as Rs. 500 per month, even those with limited capital can start investing and grow their wealth.

Flexibility

SIPs offer great flexibility. You can choose how much to invest and the frequency of your contributions (monthly, quarterly, etc.). With some options, you can even adjust the amount based on your financial situation.

Lower Risk Compared to Lump Sum Investments

SIPs reduce the risk associated with lump-sum investments. Instead of investing a large sum at once, they spread your investments over time. Over the long term, this can minimise the impact of short-term market volatility.

Steps to Invest in SIP for Beginners

Investing in SIP is easy and can be done in a few simple steps —

Step 1: Prepare the Necessary Documents

Before you start, make sure that you have the following documents ready —

PAN card
ID proof (Aadhaar, passport, voter ID)
Address proof (utility bills, passport, and so on)
Bank details (for auto-debit)

Step 2: Complete KYC

Completing your KYC (Know Your Customer) is mandatory before you can invest in SIPs. This can be done through your bank or online.

Step 3: Register for SIP

Once your KYC is complete, register for an SIP investment through your chosen mutual fund company or financial advisor. Choose a scheme that aligns with your investment goals and risk profile.

Step 4: Choose the SIP Amount and Frequency

Decide how much you want to invest each month and the frequency of the investment (monthly or quarterly). Ensure this amount fits within your budget.

Step 5: Choose the SIP Start Date

You can select a convenient date each month for your SIP investment to be auto-deducted from your bank account.

Step 6: Submit Your Form

After you submit the necessary forms (either online or offline), your SIP investment will be set up. Your bank will automatically deduct the SIP amount every month and invest it in your chosen mutual fund.

Click here to Start Your Investment Plan!

Frequently Asked Questions (FAQs)

An SIP account is an arrangement with a mutual fund house that allows you to invest a fixed amount regularly in a mutual fund scheme of your choice.

NAV (Net Asset Value) is the price at which mutual fund units are bought and sold. SIPs are based on the current NAV at the time of investment.

SIPs are generally considered safe as they encourage regular investing over long periods, thus managing market volatility. However, as with all investments, they are subject to market risk.

Yes, you can partially withdraw from your SIP whenever needed. However, you may want to avoid premature withdrawals to allow your investment to grow fully.

SIPs often offer higher returns than FDs, especially over the long term. However, FDs are safer, providing fixed returns, while SIPs involve market risk. Ultimately, the choice depends on your financial goals, risk tolerance, and other factors.