Generally, it has been noticed that investors try to co-relate between these two words - mutual funds and SIPs and gets confused that how systematic investment plans, also called SIPs, actually work and make your investments profitable. Therefore, before making any investment, you as an investor should understand what a mutual fund is and how doing systematic investment planning helps you to achieve your financial goal over a period of time.

To understand how SIPs work in mutual funds, let us first briefly know what mutual funds itself stand for. A mutual fund is a financial instrument, which comprises of several schemes where you pool your money along with other investors’ money, which then gets invested in stocks or bonds or a mix of the two (both stocks and bonds), depending on the type of mutual fund scheme you choose.

The total investment made by a mutual fund, either in stocks/bonds, is then divided into units. You get units, based on the proportion of your investment (money you invest in the mutual fund).  The value of the mutual fund is measured by its Net Asset Value (NAV). This is the value at which you (investor), buy and sell mutual funds.