SIP - Systematic Investment Plan

SIP stands for Systematic Investment Plan. SIP is a method of investing in mutual funds where investors regularly invest a fixed amount of money at predetermined intervals (such as monthly or quarterly) over a specified period.

SIP allows investors to take advantage of rupee cost averaging and the power of compounding. 

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What is SIP - Systematic Investment Plan?


Systematic Investment Plan or SIP allows you to invest a fixed amount in your preferred investment scheme periodically. On activation, your bank deducts a fixed amount and invests it in a mutual fund scheme of your choice. 

The periodicity of the investment may be daily, weekly, monthly, or quarterly. It is best suited for beginner investors who prefer to invest a small amount periodically versus a one-time lumpsum investment. 

An SIP mutual fund is one of the most convenient and hassle-free means of investment. You may start or end an investment at any time with minimal documentation. Various AMCs and mutual fund schemes are available based on your risk appetite and required rate of return. 

How does SIP Work? 

SIP investment plans are straightforward and convenient. It involves the following steps. 

1.    Select the frequency and amount of investment. Choose the AMC and the mutual fund scheme that suits your investment objectives. Apply for the SIP mutual fund based on these inputs. You may choose from a large-cap, mid-cap, small-cap, tax-saver, debt, or hybrid scheme. 

2.    The investment amount automatically moves from your bank account to the mutual fund scheme on the stipulated date. Irrespective of the market movement, the investment is recurring on the predetermined date. 

3.    The mutual fund will allocate units to you based on the Net Asset Value (NAV). It also adds additional units per investment based on the current market rate. 

4.    Receipt of returns is at the investor’s discretion. It may be at a periodic interval or at the end of the investment tenure. For regular returns, you must select the dividend option. Alternatively, select the growth option for lumpsum investments. 

5.    Market expertise is optional for SIP investment. An investor benefits from bullish and bearish market trends. 

6.    The NAV of a mutual fund scheme changes daily. Therefore, the purchase cost varies for each instalment. When the market is down for an SIP, you purchase more fund units since the NAV is lower. Likewise, when the market is booming, you buy fewer units. With time, the cost of investment averages, and it signifies the rupee cost averaging concept. 

The benefits of investing in SIP 

SIP investments have multiple benefits for investors. Primarily, it allows investors to earn significant returns on relatively small investments. The benefits are as follows. 

a.    Ease of Investment
SIP investments offer convenience for wealth creation over time. There is no restriction on minimum investment. You may start with as little as Rs. 500. It also provides a standing instruction to your bank to auto-deduct the investment amount periodically. 

b.    Return on Investment
SIP investment provides a significant return on investment with rupee cost averaging. You need not time the market. You can purchase more units when the markets are bearish and fewer units if the market is bullish. The fixed investment amount using SIP averages the value of each unit and reduces the overall investment cost.

Additionally, this investment plan offers compounding power that magnifies return over time. Essentially, it is a return on your returns from a mutual fund. It is beneficial if you start your investment as early as possible and remain invested for the long term to enjoy the compounding benefit.

c.    Financial Discipline
This investment does not require expert financial knowledge for market movement. You do not need to spend time analysing the ideal time for investment. Furthermore, it instils a saving habit with frequent and fixed investments. SIP promotes disciplined and phased investments.

d.    2x Higher Returns than RD
SIP Investment Plan offers better returns than traditional Recurring Deposits (RDs). Returns from this investment beat inflation effectively. 

Types of SIPs 

There are different types of SIP plans to invest in based on the frequency of investment. 

A.    Top-Up SIP

Top-Up SIPs, also called Step-Up SIP, let you increase the investment periodically. Therefore, you can increase the contribution in line with your income. It enables you to accumulate a sizeable corpus to achieve your financial objectives. You can also enjoy the power of compounding from the first investment. 

For example, you invest Rs 20,000 monthly for twenty years. The XIRR on the investment is 12%. At the end of the investment tenor, your total investment is Rs. 48 Lakhs, and your corpus is Rs. 2 crores. 

Alternatively, if you opt for a Step-Up SIP and decide to increase investment by Rs. 2,000 every year, your corpus is Rs. 3.17 crores with an investment of Rs. 93.6 Lakhs at the end of twenty years. The Step-Up SIP translated into an additional corpus of Rs 1.17 crores with a marginal increase in investment. 

B.    Perpetual SIP

Typically, these investments are for a fixed period of one, three, or five years. However, a perpetual SIP does not have an end date to the mandate. As the name suggests, it continues until you instruct the asset management company to stop the investment. Each application form contains an option to select the investment tenure. An SIP becomes a perpetual one if you do not mention the tenure. Similarly, you can opt for a perpetual variant in the application form. 

C.    Flexible SIP

A flexible SIP allows you to modify the contribution amount. It allows you to stop your instalments until further notice. It is especially useful in case of a cash crunch. It also increases the contribution if you have surplus funds in your bank account. For example, salaried employees can opt to increase the contribution amount on receipt of a bonus or additional income. 

D.    Trigger SIP

A Trigger SIP is suitable for investors with good knowledge of the stock market. They enable you to set a start, switch or redeem date for your investment after the occurrence of a predetermined event. The catalyst may be a stock market event, index level, or net asset value (NAV).  

Trigger SIPs are only for investors who understand the highs and lows of the market. They encourage speculation and therefore are not desirable. 

Why should you invest in SIP Mutual funds?  

The primary concept of a Systematic Investment Plan is "Save First, Spend Next."  It allows investors to save and invest a predetermined amount at a periodic versus a one-time investment. 

Below is a list of reasons to invest in SIP.

●    Minimal Investment: 
The minimum investment in a SIP can be as low as Rs. 500 monthly. Simultaneously, there is no upper limit on the maximum investment. Thus, it provides flexibility and convenience for investment. It does not create a financial burden on the investor. It also leaves scope to increase the monthly investment. 

●    Disciplined Investment: 
SIP requires investors to contribute a fixed amount at periodic intervals. Therefore, it instils discipline among investors. Furthermore, the automatic debit facility ensures that investors do not skip any instalment. There is a standing instruction to invest in SIP on a prespecified date in the preferred mutual fund scheme. 

●    Power of Compounding: 
Generally, SIPs are long-term investments. For particular tax saver funds, there is a lock-in period of three years. Likewise, there is an exit load on redemptions within one year to encourage long-term investments. Due to the long-term horizon, SIPs enjoy the benefit of compounding. Therefore, the return tends to be more than a lump sum, one-time investment. 

●    Contingency Fund: 
The process to withdraw or redeem an SIP mutual fund is relatively simple. You may even redeem your investment online. Therefore, it acts as a contingency fund in case of any emergencies. Due to the long-term nature of the investment, it yields better returns and helps investors achieve their financial goals. 

●    Rupee-Cost Averaging: 
The distinguishing factor of a SIP investment is rupee cost averaging. The financial markets are volatile and subject to price fluctuations. However, with periodic investments, investors purchase units at all levels. In turn, this reduces the overall cost of investment. 

How to Choose a SIP?  

There are various SIP plans to invest from multiple fund houses. You must evaluate the below parameter to choose a Systematic Investment Plan.

i.    SIP Duration:
Investment tenor is crucial in selecting an SIP. Before investment, you must consider the investment objective, risk involved, tax benefit, and required rate of return. Ideally, the investment period must be five years or more to earn sizable returns. Therefore, this investment is not preferable for liquid funds. It is best suited for equity and tax savings schemes. 

ii.    Asset Management Company:
Asset Management Company or AMC refers to the fund house that manages your investment. It is pertinent to verify the reputation of an AMC or insurance company before investing. Additionally, evaluate the years of operation, past returns, and fund managers. These parameters provide insight into the resilience of the fund and the ability to deal with market highs and lows.  

iii.    Financial Goals and Risk Tolerance:
When choosing a SIP, you must also consider your financial objectives and risk appetite. For example, an equity-linked savings scheme is ideal for benefits, whereas investment in equity schemes is for long-term investors. Therefore, the scheme must coincide with your financial goals. 

iv.    Size of Assets:
It is also important to consider the assets under the management of an AMC. An appropriate benchmark for asset size is Rs. 500 crores. Although, funds with an AMC of less than 500 crores are alright. However, fund performance may be less robust. 

Can a SIP be Customised?  

In addition its various benefits, you can customise your investment plan based on your requirements. Furthermore, you can even conveniently modify the fund option and investment amount. 

Follow the steps below to customise your SIP.

1.    Submit a written request to stop your existing SIP.  There is a turnaround time of fifteen days to stop the current investment. 
2.    Fill out details in an application form with the AMC you wish to invest. Furthermore, submit the SIP registration form and OTM/NACH form. 
3.    Lastly, invest the SIP amount with an authorised representative.

Mistakes to avoid when investing in SIP 

While Systematic Investment Plans tend to be profitable investments, many investors make mistakes that may affect the overall returns from investment. Below are the six common missteps associated with SIP investments.

1.    Choice of Fund
A investment starts with the choice of fund and mutual fund house. There are various financial institutions and insurance companies that offer SIP investments. It is your preference to choose the fund suitable for your investment needs. Before investing, you must know your risk appetite, investment objective, and expected returns. It is beneficial to conduct comprehensive research and compare various schemes before choosing a fund. 

2.    High Investment Amount: 
This investment type involves frequent and periodic investments in mutual funds and ULIP plans. Therefore, your initial investment must be such that you can continue to invest continuously. It is advisable to earmark a small amount of your disposable income for SIP investments. 

3.    Short-Term Investment:
The investment period and value are directly proportional. Thus, the longer the investment term, the higher the return from investment. A short-term horizon for this investment does not provide the benefits of compounding and rupee cost averaging. 

4.    Lumpsum Investment:
Some mutual fund schemes allow you to add lump sum investments to your SIP account. It is beneficial to add a lump sum amount in case of a cash surplus. A combination of regular SIP and lumpsum investment will likely fetch higher returns. 

5.    Suitability:
The most common misconception about SIPs is that it is only for small investors due to the lack of capital for a lump sum investment. However, there is no limit on the maximum investment. 

6.    Dividend v. Growth:
Investors often choose a dividend over a growth option for a mutual fund investment. A dividend option distributes profit from investment periodically, whereas a growth option does not pay out any returns from investment till maturity. 

The primary advantage of SIP investments in mutual funds and ULIP is the power of compounding and rupee cost averaging. The principle of return calculation for the dividend option is simple interest. Therefore, the returns are lower than the growth option. Most schemes offer an option to switch between dividends and growth anytime to achieve your financial objectives and plan for emergencies. 

Tax Benefit of Investing in SIP  

Equity Mutual Funds
The maximum holding period for short-term capital gains in equity funds is one year. Short-term capital gains tax is applicable at 15% on equity funds. Alternatively, long-term capital gain tax is applicable for SIP investments with a holding period of more than a year. Long-term capital gains tax on equity funds is 10%. However, long-term capital gains up to Rs 1 Lakh is exempt from tax.
Debt Mutual Funds
The minimum holding period for long-term capital gains in debt funds is three years. Short-term capital gains tax on debt mutual is in line with the applicable tax rate of the investor. Long-term capital gains tax is at 20%. Furthermore, dividends from equity and debt mutual funds are exempt from tax.  

Equity-Linked Savings Scheme (ELSS)
You can claim a deduction under Section 80C of the Income Tax Act for investments in Equity Linked Savings Schemes. The maximum deduction under this section is Rs. 1.50 Lakhs. Therefore, investors with a tax bracket of 30% can save tax up to Rs. 46,350 with ELSS investments.

How does SIP Calculator Work?  

An SIP calculator is an online tool that helps to calculate the estimated investment value using some basic inputs from the investor. You may use a calculator before choosing a mutual fund and determining the instalment amount to estimate returns from investment. 

SIP returns calculation uses the principle of compound interest to estimate returns. The inputs required include monthly investment and investment tenure. The calculator uses the rate of return from past investments to calculate the maturity value. A SIP calculator is useful for financial planning. You can decide whether the additional investment is necessary to meet your financial goals. 


Frequently Asked Questions

When should I invest in SIP? 

For an SIP, timing is less significant. The overall investment cost averages over its tenor.  The focus must instead be on the investment objective and the risk and reward trade-off offered by a scheme. Tus investors can start investing anytime to the requirement and stability.

Should I invest in SIP for long-term financial growth? 

SIP is suitable for long-term investment. Certain tax-saver SIP investments are subject to a minimum lock-in period of five years. Historically, these schemes provide maximum return on investment over the long term. An SIP investment also benefits from rupee cost averaging and compounding in the long term and improves investment returns. 

What are the minimum and maximum amounts I can invest in SIP? 

The minimum investment in a SIP plan is Rs. 500 per month. There is no limit on the maximum investment in a SIP. 

Can I miss the payment of SIP? 

Yes, you can miss a SIP payment. The mutual fund AMC does not automatically deactivate your account if you miss a payment. Some schemes even offer an option to pause SIP payment for a certain period.   

Are all SIP investment offers tax benefit? 

Investments in equity-linked savings scheme (ELSS) offers tax benefit. An ELSS is popular under section 80C and offers tax deductions of up to Rs 1,50,000 each financial year. With an ELSS investment, you may effectively save tax up to Rs 46,800 annually. However, ELSS investments are subject to a lock-in period their years from the purchase date. 

You can create an investment account with an AMC to start a SIP into an ELSS fund of your choice. On creation, you must undergo KYC verification. Upon successful verification, you can link your investment account with your bank account and start the investment. 

How safe is it to invest in SIP? 

An SIP investment plan is an investing technique in the mutual fund industry. The security of your SIP investment depends wholly on the underlying financial instruments in the portfolio. 

However, mutual funds through SIP are safer than one-time, lumpsum investments. SIPs are subject to lower risk levels. You extend the investment over a period and effectively minimise the market exposure, but you mitigate the risk associated with a large sum at once. 

How to shorten the duration of SIP? 

You can follow the alternative below to shorten the SIP duration.

●    Send a written application to the fund manager. 
●    Alternatively, you may raise an online request to reduce the duration. 

Do note that you must submit the request before allocating the subsequent SIP. However, it is preferable if the investor completes a minimum investment period, typically six months.

How to extend the duration of SIP? 

The process of extending SIP duration is simple. Normally, investors receive renewal reminders from AMC close to the end of the investment tenure. Based on the returns from the scheme, you may opt for renewal. 
At the end of the SIP tenure, you can renew the investment. To continue your SIP, you can fill out the renewal form and select the revised duration of your investment. It takes between twenty to thirty working days to process the renewal request.