What is SIP? | How Systematic Investment Plan Works in India?

Investments are paramount choices if you want to cut corners and make a fortune over the long term. But nothing in life is free, and investing is no different. It has a price, which is the associated risks. So, where should I invest? The finest option for resolving your financial investment problems is to pin your hopes on a SIP investment. In addition to providing security and competitive interest rates, some SIPs are also tax-free.

A Systematic Investment Plan (SIP), also referred to as SIP, is a tool provided by mutual funds to help investors make disciplined investments. The SIP option enables an investor to make fixed investments in the mutual fund scheme of their choice at predetermined intervals. The predetermined SIP periods might be weekly, monthly, quarterly, semi-annually, or annually, and the preset sum of money could be as small as Rs. 500. Due to average costing and the power of compounding, an investor who counts on the SIP as an investment mechanism can do it in a time-bound manner. The best part about SIP investment is that you don’t have to worry about the unsteady market. 

What is SIP – Systematic Investment Plan in India?

A SIP, or Systematic Investment Plan, is a regularly used term. SIP plans in India let you periodically invest a set amount in your preferred mutual fund schemes. You can easily  increase the SIP premium via compound interest.

In a nutshell, SIP investment allows you to make predetermined contributions once a week, month, or quarter whatever suits you the best. It is a hassle-free investment option that will enable you to save and earn money. 

SIP mutual funds come with flexibility and allow investors to decide when they want to opt-out from investing in the plan or change their contribution amount. For novice investors and those less familiar with the workings of the financial market, SIP is the safest and wisest option.

Benefits of Investing in SIP

When you count on SIP investments, as an investor, you unlock doors to numerous other benefits. Individuals can generate significant returns with planned mutual funds by making small and frequent investments. Following are some of the key advantages of investing in SIP:

Convenience

You can make investments methodically and stepwise by using SIP. Investors can start investing through SIP with an amount as low as Rs. 500, making it one of the easiest and most convenient investment methods.

Additionally, the investors can give the bank a mandate to make the SIP investment automatically each month. 

Rupee Cost Averaging

With the SIP mutual funds, there is no need to stick to market timing because you can purchase more units during periods of low market performance and fewer units during periods of great market performance. This lowers the overall cost of the investment.

Power of Compounding

Regular investing is one of the finest strategies to build financial stability. Over time, a modest sum that is consistently invested can eventually double. Compared to a one-time investment, the advantage of compound interest guarantees successful long-term returns.

2x Higher Returns than RD

When you count on a SIP, you get the benefit of securing higher returns unlike any other investment option, including Fixed Deposits and Recurring Deposits. This makes it considerably easier to combat inflation.

SIP mutual funds offer rewards regardless of the overall fund market performance while assisting with market volatility.

Types of SIP – Systematic Investment Plan

SIP provides you with four options for investing. Based on your needs and what SIP is offering, you can rely on any of them. Here is a brief explanation of the four types of SIPs to help you choose the right investment strategy that fits your needs. 

Top-up SIP

You can gradually surge the investment amount with a top-up SIP. This also means that you get the option to maximise the SIP mutual fund investment by counting on making periodic contributions to high-performing mutual fund schemes. When your income rises, you can increase the amount you invest.

Flexible SIP

With a Flexible SIP, you can alter your investment amount in accordance with the available resources and cash flow. In this way, if you run into financial difficulties for any reason, there’s the possibility of skipping one or more instalments. You don’t need to burden yourself for that specific time frame. You can contribute more to your SIP account when you earn a bonus or increased income.

Perpetual SIP

SIPs often have a defined duration of one year, three years, or five years. If you omit the end date from the mandate date, the SIP will be referred to as a Perpetual SIP. With this type of SIP, you can redeem your funds anytime necessary or, more specifically, after reaching your financial objectives. However, it is preferable to designate a pre-specified end date for the SIP contribution to creating a focused and disciplined investing portfolio.

Trigger SIP

For investors with little experience in the financial market, Trigger SIP is the foremost option. It allows the investor to set NAV, start date, and index level. This sort of SIP mutual fund encourages speculating; hence it is neither desirable nor highly advised. 

Why Should You Choose and Invest through SIP?

The “Save First, Spend Next” principle underlies SIP’s operations. Instead of making a single investment, investors can make a defined amount of investments through SIPs at regular intervals. Investors can select any interval, i.e. once a week, month, or quarter. Here’s why you should count on investing through SIP:

Minimum Investment Amount is as Low as Rs. 500

A minimum of Rs. 500 can be used by investors to begin a SIP mutual fund. Additionally, there is no upper limit for the SIP mutual fund’s investment amount. The investor can enhance the monthly instalment by a factor of 15% by counting on spending a pre-fixed sum at their discretion without feeling any financial strain.

Unlocks the Power of Compounding

SIP provides the investors with the power of compounding through which investors can earn income on their initial investment over an extended period of time. As a result, the long-term return on investment is greater than the initial outlay.

Develops a Disciplined Investment Habit in Investors

SIP encourages investors to develop a disciplined habit by requiring them to invest a set sum of money on a regular basis at predetermined intervals of time. Additionally, investors cannot skip an investment as the SIPs come with automatic payment options. With automatic payment, the money is withdrawn from the investors’ bank account and transferred to the SIP investment. 

Rupee Cost Averaging

Investments in mutual funds are prone to volatility. In contrast, rupee cost averaging in SIP allows investors to purchase more units during a low market performance and fewer units during an upsurge market performance. This results in lowering the overall cost per unit.

Acts as an Emergency Fund in Unexpected Situations

With a quick withdrawal process, the SIP might serve as an emergency fund in case of unforeseen circumstances. Additionally, through SIPs, people can achieve their life’s financial goals and build wealth over the long term.

How do SIPs Work?

Systematic Investment Plans (SIP), are financial instruments that are frequently related to mutual funds. Instead of making a huge one-time payment, SIPs allow investors to buy units of the mutual fund on a regular basis. Many investors attest to the advantages of SIPs over one-time investments.

With a SIP, you won’t have to worry about how the money is being managed because a team of professionals, i.e. fund managers, will be making the crucial calls at the appropriate times. Therefore, it is important to comprehend how the SIP path might help in making your money work along with escalating the returns. 

In a SIP, investors purchase mutual fund units at predetermined intervals based on the amount invested and their Net Asset Value (NAV). The then-current value is credited to your account when you redeem these units. These units continue to accumulate until the investment tenure.

SIP mutual fund investing is a straightforward and hassle-free process. Your money is automatically taken from your bank account and is further invested in dedicated mutual funds. The investor purchases the mutual fund in which the amount will be invested while applying for the best SIP. At the end of the day, you are given a specific amount of units based on the Net Asset Value of the funds. Every time you invest, you select the best SIP in India, and new mutual fund units are piled into your SIP account as per the current SIP interest rate.

For investing in the stock market, one does not need to be an expert in market timing. There are several rates for buying units. Investors purchase more units when prices are high, whereas they purchase fewer units when prices are low.

Rupee Cost Averaging and the Power of Compounding are two strategies that investors in even the greatest SIP’s can use to their advantage. 

Rupee-Cost Averaging

India’s stock markets are subject to sudden changes. As a result, it can be challenging to choose when to invest and when not to. Rupee-cost Averaging assists investors in solving this issue. It enables you to earn more units; specifically, the per unit price is low and fewer units when the price is high on your invested funds.

Let us understand this through a quick example. Say you decide to invest Rs.500 on a monthly basis from 1st July 2022 to 1st June 2023. 

The following table will help you to understand that the per unit cost on average is lower than the average Net Asset Value. 

Average Cost

Overall Amount / Total Number of Units 

6000/21.64

INR 277.27

Average Price

Sum of Net Asset Values (NAV) / Time Frame of the Investment

6757.8/12

INR 563.15

From the above computation, it is clear that the average cost is lower than the average per unit price. Thus, Rupee-Cost Averaging allows you to secure surged returns by purchasing units at lower costs. 

In addition to Rupee-Cost Averaging, SIP also works as per Compounding. 

Power of Compounding

You receive interest on any invested amount in a SIP mutual fund. Over time, these interest rates compound and accrue. The fund value would increase as the tenure lengthens. Because of the power of compounding, you can increase your wealth if you invest for a longer tenure. As a result, when you start making investments early in life, you will end up accumulating more wealth compared to an individual who starts later. 

Let’s refer to an example to understand how the power of compounding works in a SIP. The below-depicted table will give you a clear idea about the power of compounding in generating maximised returns. 

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How to Choose and Invest in SIP?

All of the information pertaining to different mutual funds is available online for investors. However, there are a few things that should be considered before investing. 

• Duration of SIP: From the perspectives of risk, return, and tax, the length of a SIP mutual fund is a crucial factor to take into account. Investors should monitor the overall fund performance throughout the market and have a point of comparison of five years in mind when making SIP investments.
• Performance of the Fund House: Before selecting a plan, it is crucial to research the fund house’s reputation. Investors can estimate how successfully a fund house will handle the market’s ups and downs without making the investors feel the effects based on the fund house’s performance.
• Asset under Management: When selecting the fund, the asset size of Rs. 500 crores can be used as an adequate benchmark. The funds below this asset level may not perform as well as the ones placed above this asset size, but that does not necessarily indicate they are poor assets.

The SIP mutual fund investment process is straightforward and hassle-free. Investors should keep the following points in mind when making SIP investments.

• Objective of the Investment: SIP mutual fund investments come with a predetermined objective and aim. Investors can select the investment option based on their current obligations and ambitions.
• Choose the Correct Plan: Because there are numerous SIPs in the market, choose the correct plan by looking at the previous fund performance.  Additionally, the investors should select the programmes that are best for them based on their objectives.
• KYC: A net-banking account is required for investing in any type of SIP mutual fund and completing the KYC paperwork. Investors can choose the e-KYC alternative to complete the process by uploading the required documents online.

Mistakes to Avoid While Investing in SIP

Investors typically choose funds depending on the risk profile, commitment length, and returns offered in the past decade. To prevent losing money in a market crash, these factors must be reviewed, but there are also a number of other factors that must be evaluated.

Six frequent mistakes that investors make when making SIP investments are listed below:

• Counting on Inappropriate Fund: The first step in mutual fund investment is to select one or more funds to place your money. It is essential to be aware of your investment objective, anticipated returns, and risk tolerance before making the payment. Before beginning an investment, it is advisable to carry out extensive research and analysis. If you are investing to cope with long-term objectives, picking the incorrect fund could jeopardise your financial plans.
• High Investment Quantity: Because SIPs let you invest small sums of money consistently in mutual funds, be careful not to choose an investment amount that you might not be able to maintain for the remainder of the year. To get the results you had initially hoped for, you must determine a sum that you can afford to invest each month.
• Small Investors: Since SIPs do not allow for lump sum contributions, there is a prevalent misconception that SIPs are just for small investors. Indeed, that isn’t the actual scenario. For instance, if your investment goal was INR 5,000 monthly, SIP is still a viable option for you because you can make a lump-sum SIP investment of INR 50,000. The major reasons for this are the SIP’s guiding concepts of rupee-cost averaging and compounding.
• Short-term Investment: SIP investors frequently commit this additional error. The length of time an investment is kept in the market determines its worth, not the amount invested. In other words, the investment value will increase as the investment duration lengthens.
• Set Unrealistic Goals: Inexperienced investors sometimes make unachievable investment goals and then kick themselves. It is wise to avoid setting unrealistic expectations for the future of your current investment. Instead, you want to plan on average returns and keep making your regular investments. It goes without saying that anticipating returns of 50 to 100 per cent rather than 10 to 20 per cent is unrealistic.
• Not to Boost SIP: We occasionally experience both financially prosperous and difficult periods. When your finances are strong, you have the money to make a one-time lump sum contribution to the SIP account. There are some funds that allow you to increase your investment by adding a lump sum payment to your SIP account within the same portfolio. When you count on the blend of regular funds along with a lump sum investment, you likely yield a higher return than a typical SIP.

Tax Benefits of Investing in SIP

SIPs help you make disciplined investments and lower your tax burden. A tax exemption is available for SIPs in Equity-Linked Savings Scheme (ELSS) under the Income Tax Act – Section 80C, 1961. Be aware that only an amount up to INR 1.5 lakhs is eligible for tax exemption under this provision.

As a result, you must begin a SIP in an ELSS Mutual Fund designed with tax savings in mind if you want to save money. The Equity Linked Savings Scheme locks in the invested amount for three years and has a more considerable equity exposure.

Additionally, it’s crucial to establish a SIP early in the fiscal year so that the collected funds can provide you with a sizable tax benefit by the end of the fiscal year. Knowing the investment amount in advance allows you to budget your expenses appropriately and make sure you’re getting the most out of Section 80C.

SIP vs Lump Sum Investment

Following are the key differences between SIP (Systematic Investment Plan) and the Lump Sum Investment: 

Top SIP Mutual Funds in India

There are numerous SIPs to invest in. Deciding which one to count on can be a bit confusing. Here’s the list of top Mutual Funds in India that can be invested upon 

Investors can easily invest in the above listed five funds with the intent to make regular investments through a SIP and have a high to moderate risk tolerance. Always utilise a trustworthy SIP calculator before investing to determine the likely return on your money. 

Types of Funds for SIP to Invest in 2022

You can either count on Equity-based SIP Mutual Funds or Hybrid SIP Mutual Funds per your financial obligations and objectives, Here’s the list of top equity and hybrid SIPs to invest in 2022.

Best SIP Mutual Funds to Invest in 2022 (Equity)

Following table lists the best Mutual Funds in India based upon Equity: 

Best SIP Mutual Funds to Invest in 2022 (Hybrid)

Following table lists the best Mutual Funds in India based upon Hybrid option: 

How Do I Start/Stop a SIP?

Before investing in any mutual funds, you must finish the KYC procedure. This is accomplished by providing specific documents as identification and address proof. A SIP can be started or stopped very simply and conveniently. 

Here’s how to start and stop a SIP:

Step 1: Select the SIP mutual fund scheme you are looking forward to investing in.

Step 2: You can either count on the online or offline mode as per your convenience:

Online Mode: Visit the official website of the mutual fund provider and purchase the decided SIP.

Offline mode: Visit the branch, fill out and submit the application form for the same. 

Step 3: Get in touch with your bank executive, and fill out the form allowing the fund company to deduct the payments towards the purchase. Usually, banks take 7 to 30 days for approval. 

Step 4: And that is it! Your SIP will be activated for the chosen time frame. 

Step 5: If you want to opt-out or stop your SIP at any point, you just have to submit a written request for the same. The best part is you don’t have to pay any penalty for opting out of the SIP investment. 

Step 6: This may take 7 to 30 days, based on your bank and the mutual fund organisation. 

What Happens When You Miss an Instalment?

As an investor, you don’t have to bear any penalty even if you miss one or even two instalments. SIP falls under the simple investment category; thus, you don’t have to sign any contract for the same. The mutual fund organisation would at most halt the SIP, preventing further payments from being taken out of your account.

In Summary

If you are looking to secure wads of money through investment, the SIP mutual fund is the paramount choice. A Systematic Investment Plan is a powerful yet the most convenient investment method with the potential to create a prolonged wealth corpus. After going through the blog, it’s pretty clear that as an investor, you must be aware of Mutual Funds, the best Mutual Funds in India to invest in, the best SIP to invest in, its tax benefits and much more. 

SIP investments are practical and aid in creating a long-term smart habit of consistent saving and investing. Long-term SIP investing increases your profits. It enables you to invest consistently in a certain mutual funds programme. With SIP investments, you can choose your investment size and frequency while still receiving the benefits of investing in a mutual fund at a cheap cost.

FAQ’s about SIP