How does it work?
Mutual funds nowadays offer SIP on their different schemes you can buy there NAV. And there is no fixed amount that you have to invest you can decide on your capital allocation and invest in them either monthly or quarterly.
Cost Effectiveness & Acquisition Price
When you buy a NAV of 10 Rs with an investment of 1000 RS you get 100 Units in the first month ,and in the second month the price of NAV goes up by 11 Rs with the same investment amount of 1000 RS you get 90 units ,then your Acquisition price is at 10.5 for 190 units and in the following month NAV price goes down to 9 RS then on your investment of 1000 RS you get 111 units .So by the end of third month your holding 301 units at a acquisition price 9.95 on your investment of 3000 RS.
Imagine without the SIPs if you had invested 3000 Rs in the first month itself then you would have got 300 units at 10 Rs and in the fourth month if the price is at 10 Rs then your investment is the same after 3 months, but when you compare it with SIPs then your investment stands at 3010 Rs with all the volatility your money has grown.
In SIP you’re in a state of mind that you have to invest a certain portion of the capital into SIP at regular intervals and this meant to reduce volatility, better acquisition price, Increase in Units of NAV and you don’t have to monitor it on day to day basis. Whereas if you are investing directly in stock markets to invest lot of time to keep track of changing situations then it starts affecting your decision making abilities which leads you to wrong decisions.
What SIP does is actually cultivates a habit of saving money every month and this discipline is a must for a person who is planning to grow his money over the years.
There are plans which give you exemption from Tax which you can deduct in your tax-fillings.
If you have decided to invest a size able amount of money every month then don’t simply invest all the money into a single SIP plan, rather invest in different sip plans which are based on different themes this will actually help in having a balanced portfolio.
SIP in Stock market
Mutual Funds invest directly into stock market and you purchase thereby reducing your risk exposure but, if have a high risk taking capability then you have to identify a good stocks from a leading Index and invest a small portion of money in a individual stock this will acts as a sip but you have to treat it like a sip, and it to be invested keeping in mind 2 or 3 year time horizon.