SIP – Systematic Investment Plan
Systematic Investment Plan or SIP is a method of investing in mutual funds wherein an investor chooses a mutual fund scheme and invests the fixed amount of his choice at fixed intervals.
SIP investment plan is about investing a small amount over time rather than investing one-time huge amount resulting in a higher return.
How Does SIP work?
Once you apply for one or more SIP plans, the amount is automatically debited from your bank account and invested in the mutual funds you have purchased at the predetermined time interval.
At the end of the day, you will be allocated the units of mutual funds depending on the NAV of the mutual fund.
With every investment in an SIP plan in India, the additional units are added to your account depending on the market rate. With every investment, the amount being reinvested is larger and so is the return on those investments.
It is at the discretion of the investor to receive the returns at the end of the SIP’s tenure or at a periodic interval.
Let us understand with an example
Suppose you want to invest in a mutual fund and you have set aside a sum of 1 Lakh Rupees to invest in the same. Now there are two ways in which you can make this investment.
Either you can make a one time payment of Rs 1 Lakh in the mutual fund, also known as lump sum investment. Or you can choose to invest via Systematic Investment Plan or SIP.
You need to start an SIP of a set amount. Say Rs 500. Then Rs 500 will be deducted from your account and auto credited to the mutual fund you want to invest in, at a certain fixed date every month. This will continue till the time period.
When to Invest in SIP?
SIP investments can be started anytime ensuring minimum risk with the correct suitable scheme plan for the investor.
It is very important for the investor to choose the scheme which suits his long-term goals well. Hence, there is no suitable time frame within which an investor should start a SIP investment plan, the sooner the better.
Types of SIP
Understanding the different types of SIP will help you choose the right scheme as per your goals.
Here are the types of Systematic Investment Plans available-
- Top-up SIP
The Top-up SIP allows you to increase your investment amount periodically giving you the flexibility to invest higher when you have a higher income or available amount to be invested.
This also helps in making the most out of the investments by investing in the best and high-performing funds at regular intervals.
- Flexible SIP
As the name suggests, Flexible SIP plan carries flexibility of the amount you want to invest. An investor can increase or decrease the amount to be invested as per his own cash flow needs or preferences.
- Perpetual SIP
A perpetual SIP Plan allows you to carry on the investments without an end to the mandate date.
Generally, an SIP carries an end date after 1 Year, 3 Years or 5 years of investment. The investor can hence withdraw the amount invested whenever he wishes or as per his financial goals.
Benefits of Investing in SIP
There are several benefits of investing in SIP over Lumpsum. Some of them are listed below
- Makes You a Disciplined Investor
SIP can be the best investment option for you if you do not possess superior financial knowledge about the way the market moves.
You do not have to spend your time analysing the market movements or the right time to invest in.
With SIP since the money gets auto-deducted from your account and goes to your mutual funds, you can sit back and relax. Further, unlike lump sum investments, it ensures that you are working actively towards making your investments grow because of the periodicity.
- Rupee Cost Averaging Factor
With SIP comes the advantage of rupee cost averaging.
With SIP since your investment amount is constant, for a longer period of time, with rupee cost averaging you can take advantage of market volatility. The fixed amount you invest by means of an SIP averages out the value of each unit.
So you can buy more units when the market is low and buy fewer units when the markets are high, lowering down your average cost per unit.
What is A SIP?
A systematic Investment Plan, commonly referred to as an SIP, allows you to invest a small sum regularly in your preferred mutual fund scheme. By activating an SIP, a fixed amount is deducted from your bank account every month, which gets invested in the mutual fund of your choice.
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Unlike a lump sum investment, you spread your investment over time with an SIP. Therefore, you don’t need to have a large amount of money to get started with your mutual fund investment through SIPs. By investing via an SIP, you are forced to set aside a sum at regular intervals, which help you instil a sense of financial discipline in the long run.
How Do SIPs Work?
Every time you invest in a mutual fund scheme through an SIP, you purchase a certain number of fund units corresponding to the amount you invested. You don’t need to time the markets when investing through an SIP as you benefit from both bullish and bearish market trends.
When the markets are down, you purchase more fund units while you purchase fewer units when the markets are surging. Since NAV of all mutual funds are updated on a daily basis, the cost of purchase may vary from one SIP instalment to another. Over time, the cost of purchase averages out and turns out to be on the lower side. This is known as rupee cost averaging. This benefit is not available when you invest a lump sum.
Benefits of investing in mutual funds via SIP
With an SIP, you can get started with your investment with a small amount and reap significant returns in the long run. It’s simple and the most convenient way of investing in mutual funds. It also brings financial discipline.
Convenience
You can invest in a disciplined and phased manner through an SIP. It gives you the convenience of starting your investment with as low as Rs 100 a month.
Rupee Cost Averaging
SIP helps you invest in equity funds without having to time the stock market. You invest a fixed amount regularly across stock market levels when you invest in equity funds through the SIP. It helps you buy more equity fund units when the stock markets are crashing and lesser units when markets rise. You will be averaging out the purchase price of equity fund units over time thereby lessening the impact of short term market fluctuations on your investment.
Lets understand Rupee Cost Averaging with an Example: Suppose you invest Rs 1000 every month in an equity fund through an SIP. Stock markets are highly volatile and the Net Asset Value (NAV) of the equity fund keeps changing. It means you will not be able to invest at the same NAV every month. If you invest Rs 10,000 every month from January to June in a particular year your SIP investment could look like this.
| Month | NAV | Number of Units (Rs 10000/ NAV) |
| January | 100 | 100 |
| February | 95 | 105 |
| March | 96 | 104 |
| April | 93 | 108 |
| May | 94 | 106 |
| June | 98 | 102 |
| Total | 576 | 625 |
From the above example, the average purchase price for units of equity funds was Rs 96 (576/6) over 6 months and you purchased a total of 625 units. If you had invested a lump sum amount in January, your purchase price would have been higher at an NAV of Rs 100 and you would have bought 600 units. (Rs 60,000/100). Therefore, Rupee cost averaging has helped you average out the purchase price of units over time.
Power of Compounding
Power of Compounding helps you magnify your returns over time. It is basically a return on your returns from equity mutual funds. For example, suppose you invest Rs 100 in an equity fund which fetches you returns of 10% per annum. You do not take out your profit from equity funds which is effectively reinvested in the mutual fund and your total corpus is Rs 110. The returns you now earn from the equity fund are on Rs 110 and not Rs 100 which is return on your returns.
You can invest in equity funds through the SIP to enjoy the power of compounding. It helps if you start your SIP as early as possible and stay with your investment for the long run to enjoy the power of compounding benefit.
Lets understand the power of compounding with an example. Suppose four people, Ramesh, Suresh, Mahesh and Uday who are 30, 35, 40 and 45 years old have invested Rs 5,000 per month in equity funds through the SIP. Let’s assume equity funds offer an annual return of 12%.
The table below shows their accumulated corpus at retirement at the age of 60 years.
| Monthly SIP (Rs) | Age (Years) | Time till Retirement (Years) | Investment Amount (Rs) | Final Corpus (Rs) | |
| Ramesh | 5,000 | 30 | 30 | 18,00,000 | 1,58,49,569 |
| Suresh | 5,000 | 35 | 25 | 15,00,000 | 94,88,175 |
| Mahesh | 5,000 | 40 | 20 | 12,00,000 | 49,95,740 |
| Uday | 5,000 | 45 | 15 | 9,00,000 | 25,22,880 |
You can use ClearTax SIP Calculator to calculate the investment amount and the final corpus.
Inference: As you see from the table, Ramesh has accumulated a corpus of over Rs 1.5 crore. It is way above the accumulated corpus of Suresh, Mahesh and Uday. The primary reason for this is Ramesh has invested for a longer period of time. Moreover, the power of compounding benefit has propelled Ramesh’s investment to a massive portfolio.
Low Initial Investment: You can invest as low as Rs 500 per SIP instalment in equity funds. It helps you start investing for your financial goals without having to wait until you accumulate a lump sum amount. However, it helps if you invest a higher amount through SIP if you want to attain your long term financial goals faster.
2x Higher returns than RD
ELSS mutual funds have the potential to provide much higher returns than bank FDs, PPF and other traditional investment options.
Ease of Investing
Investing in equity funds through SIP is a convenient way of building wealth over time. It is pocket friendly as you can invest a minimum of Rs 500 per SIP installment.SIP gives standing instructions to your bank to deduct the requisite amount every month and this amount gets invested in the equity fund.
Why should you invest in SIP Mutual funds?
Poeple should invest in SIP mutual funds because The concept of SIPs is focused on the philosophy of “Save First, Spend Next”.
With an SIP, you can invest small amounts at fixed intervals (weekly, monthly or quarterly) instead of making a one-time investment.
Power of Compounding
The rupee cost averaging results when you stagger your investments over a long period. This ensures that you get much more returns as compared to a lump-sum investment.
Start with as low as Rs 100 a month
You can start investing in mutual funds through an SIP with an amount as low as Rs 500. Over time, you can increase your monthly SIPs when you get the feel of what mutual funds are capable of.
Rupee Cost Averaging
The equity market is volatile, and when you invest via an SIP, you will buy more number of units during a slump and less number of units in a booming market, and as a result, you would decrease the cost per unit in the long run.
Become a disciplined investor
Investing via an SIP would make you disciplined in terms of managing your finances. With the option of automated payments, you don’t have to go through the hassle of investing manually every month.
Acts as an Emergency Fund
You can stop your SIPs at any time, and the fund house has no say in this. Also, you can redeem your investment at any time (if there is no lock-in period).
Who Should Invest Through SIP?
The first-time mutual fund investors may consider starting their mutual fund journey by initiating an SIP. This is ideal for those having a regular source of income, such as a salary. You can divert a portion of your regular income towards mutual fund investments by initiating an SIP. This helps you instil a sense of financial discipline in the long run as you will be forced to set aside a sum at regular intervals.
SIP or one-time: How should you invest?
Often, first-time investors get confused about choosing between an SIP investment or one-time investment.
One-time investment
In this mode of investment, you make a one time payment of a considerable sum of money.
Monthly SIP
On the other hand, in an SIP, a fixed amount of sum is deposited at regular intervals of time in a mutual fund scheme. In short, one-time investment mode can be chosen if you have money in hand right now that can be invested, and an SIP can be chosen if you are expecting a regular inflow of money in future. First-time investors are advised to take the SIP route.
| SIP Investment | One-time Investment |
| Periodic investments in a tenure | One-time investment in a tenure (lump sum) |
| Earns better during market lows | Earns better during market highs |
| SIPs can protect investments from potential market crash | One-time investments can lead to major loss during market crash, which happens often enough |
How to Choose Best SIP Mutual funds?
The internet will provide you with the A-Z of the mutual funds you shortlisted including their past returns.
However, you have to make sure that the fund you pick meets the below criteria.
Goals
It is important to ensure that you choose to invest in those funds that help you achieve your goals.
You have to assess your requirements and match them with the objectives of the fund under consideration before initiating an SIP into it.
Risk tolerance
It is essential that you invest only in those funds whose risk level falls under your risk appetite.
If you are a risk-averse investor, then it is important that you invest in those funds that carry minimal to no risk.
₹500 Crore Asset Under Management
A Rs 500 crore asset size can be a reasonable benchmark when selecting a fund. This doesn’t mean that funds below this corpus are bad, but it is not advisable unless you are willing to take some risk.
Duration of SIP
The longer the duration of your SIP, the better. It is advisable to continue your SIP for as long as possible. Even if you don’t invest, you can continue letting your investment stay invested. This way, you give your investment the time to grow to a significant sum
Fund House
The reputation of the fund house is an important factor while choosing a plan as it tells how well they were able to handle market highs and lows without letting their investors feel the impact of fluctuations.
How To Invest in SIP
Set Investment Goals
Every mutual fund is built around an objective to achieve. You have to analyse your requirements and choose that fund which is in sync with your goals and risk profile. If you are finding it difficult to choose the right mutual fund, then let us know your requirements, we will shortlist funds accordingly.
Decide between SIP or lump sum
There are two ways of investing in mutual funds; a lump-sum investment or stagger your investment over time via an SIP. You have to assess your profile and choose to invest either a lump sum or an SIP.
KYC
All our mutual fund investments mandate KYC documentation and a net banking account. Undergoing KYC verification is mandatory as per the norms of the Securities and Exchange Board of India (SEBI), without which you cannot invest in mutual funds, and it is a one-time process. There is usually no need to sign cheques and fill out forms if you are investing in mutual funds with us.
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How to customise your SIPs?
Many people, especially salaried employees, prefer monthly SIPs. It is because you can quickly transfer the SIP amount from your bank account to the selected mutual fund when you receive your monthly salary.
Frequency of your SIP
Mutual Fund houses offer you the facility to invest in SIPs through daily, weekly, monthly, or quarterly facilities. Moreover, there are several types of SIPs, and you can choose the ones you prefer depending on your financial goals.
Let’s take a look at the different types of SIPs:
1. Top-Up SIP
Top-Up SIPs allow you to increase your SIP amounts at regular intervals. It is called the Step-Up SIP, as you can increase your SIP contributions when your income grows. You can accumulate a considerable corpus over time and reach financial goals faster through the Top-Up SIP as you enjoy the power of compounding.
Let’s understand how Top-Up SIP works with an example. Suppose you invest Rs 20,000 per month for 20 years at an expected rate of return of 12%. You can create a corpus of nearly Rs 2 crore with an investment of Rs 48 lakh.
Suppose you decide to Step-Up your SIP by Rs 2,000 every year. You can accumulate a corpus of Rs 3.17 crore against investments of Rs 93.6 lakh. It means an additional corpus of around Rs 1.17 crore by increasing your SIP by Rs 2,000 per annum.
2. Flexible SIP
The flexible SIP allows you to change the amount you want your mutual fund house to deduct every month towards your SIP contributions. It offers the facility to intimate the mutual fund house to stop your SIP instalments until further notice if you face a cash crunch. Moreover, you can increase your SIP contributions for a particular duration if you have surplus cash in your bank account.
3. Perpetual SIP
You must select the SIP tenure when you fill-up the SIP application form. If you do not specify the SIP tenure, your SIP becomes a perpetual SIP. In simple terms, the SIP continues for a duration until you provide instructions to the mutual fund house to stop your investment. Moreover, if you do not want to limit your SIP contributions with a maturity tenure, you can opt for the perpetual SIP variant in the SIP application form.
4. Trigger SIP
You can opt for the trigger SIP if you are familiar with stock market movements. It helps you set the SIP start date or switch or redeem your SIP after the selected event occurs. You can set a trigger for a favourable stock market event, an NAV (Net Asset Value) or an index level. However, you must opt for the trigger SIP only if you understand the ups and downs of the stock market.