10 Key SIP Terms For Beginners By Vishal Pathak, Content Writer

10 Key SIP Terms For Beginners

Vishal Pathak, Content Writer | Tuesday, 28 January 2025, 10:28 IST

10 Key SIP Terms For Beginners Investors looking to invest in mutual funds through a Systematic Investment Plan (SIP) need to understand some key terms, as that will help them navigate the investment journey better and make informed decisions.

Here’s a glossary of some important SIP-related terms that will benefit beginners starting with SIP investments in mutual funds.

10 SIP-related terms that all beginners should know

1. Systematic Investment Plan (SIP)

An SIP is a popular mode of investing a fixed amount in a mutual fund at regular intervals (monthly, quarterly, etc.). SIP helps in averaging costs and building wealth over time. It also helps build a disciplined investing habit.

2. Rupee-cost averaging

Rupee-cost averaging is one of the key benefits of investing a fixed sum regularly through SIPs. It allows investors to buy more units when the price is low and fewer units when the price is high. This allows for averaging the cost of acquisition of the mutual fund units over time and reduces the impact of market volatility.

3. Step-up SIP

A step-up SIP allows investors to increase the SIP amount periodically, for instance, annually. The increase can either be in the form of a fixed percentage like 10% or a fixed amount like Rs 5,000. This helps in aligning investments with rising income and inflation, enabling investors to achieve financial goals faster.

4. SIP Tenure

SIP tenure refers to the duration for which an investor plans to invest through SIP. An investor can choose a specific number of years or opt for a perpetual SIP, where they can continue to invest until they decide to stop.

5. NAV (Net Asset Value)

The Net Asset Value (NAV) is the per-unit price of a mutual fund. In SIP, the investment amount buys a certain number of units depending on the NAV on the day the SIP is executed. The lower the NAV, the more units are bought, and vice versa.

6. Direct plan

A direct plan is a type of mutual fund investment where the investor directly invests with the mutual fund company without going through a distributor or intermediary. This can lower the expense ratio and lead to higher returns in the long run.

7. Regular plan

A regular plan is where an investor invests in mutual funds through a distributor or broker. In this case, a distributor commission is included in the expense ratio, resulting in a slightly higher cost compared to direct plans. For new investors who do not have much market knowledge, regular plans are recommended.

8. SIP Calculator

An SIP calculator is an online tool used to estimate the future value of SIP investments. By entering the monthly SIP amount, expected rate of return, and tenure, one can estimate how much wealth their investment could accumulate over time. Most mutual fund houses offer this tool for free on their website.

9. Redemption

Redemption refers to withdrawing the investment from the mutual fund. In SIP, one can redeem the units partially or fully depending on their needs, but certain funds may have lock-in periods. For instance, the Equity-Linked Savings Scheme (ELSS) comes with a three-year lock-in period.

10. Flex SIP

A flex SIP allows investors to change the amount they invest based on their cash flow or market conditions. Investors can increase or decrease their SIP instalments as per their convenience.

Conclusion

By understanding these key SIP-related terms, investors can make more informed decisions while investing in mutual funds through SIPs. Whether one is aiming for wealth creation or planning for a specific financial goal, knowing the ins and outs of SIP will help optimise the investment strategy.