Systematic Investment Plan (SIP)

Systematic Investment Plan (SIP)


A systematic investment plan is a referred way to invest in mutual funds and is especially handy for people who do not have a large lump sum amount to invest. Investors can make fixed investments periodically in the market-linked securities for a specific tenure. SIPs are a robust and efficient way to achieve your financial goals.

In this article, let us shed some light on SIPs and talk about how they work and why you should invest in them.

What is SIP?

A systematic investment plan, commonly known as SIP, is an investment strategy where you as an investor can put a fixed amount of money in your preferred mutual fund at regular intervals. It enables you to participate in the stock markets without actually timing them.

In simple terms, SIP is a smart and hassle-free mode of investment where you can contribute a pre-determined sum on a weekly, monthly, quarterly basis. They are flexible in nature, and thus an investor can choose to increase or decrease the investment amount or even stop investing in SIP whenever they want.

Systematic Investment Plan is one of the effective options available for beginners and for people who do not know much about how the financial market operates.

How Do SIPs Work? 

A systematic investment plan requires periodic and consistent investments and works pretty much like a recurring deposit. Under a SIP plan, the investment amount is automatically debited from your bank account as per your standing instructions. After that, the corresponding amount of mutual funds is allocated to you. The number of units you receive will depend on the scheme’s current Net Asset Value (NAV).

NAV of a mutual fund is basically the price you pay per unit of the scheme. To fully understand this, let us look at an example. Suppose that the NAV for a mutual fund is Rs. 10. If you invest Rs. 2000 in this mutual fund, you will receive 200 units of the scheme. With the increase in NAV, your investments will also grow. So, assuming that the NAV rises to Rs. 20 next year, the 200 units you bought for Rs. 2000 would be worth Rs. 4000.

This way, a systematic investment plan can help you build a significant corpus in the long run. 

Why Should You Invest in SIP Mutual Funds? 

“Save First, Spend Next”—this phrase pretty much summarizes the philosophy of a systematic investment plan. Through SIPs, one can invest small amounts at regular intervals as opposed to a one-time investment. Let us take a look at some of the reasons you should invest in SIPs: -

· Invest as low as Rs. 500

Under a systematic investment plan, you can start investing with an amount as low as Rs. 500. With the increase in your income, you can increase your investment amount when you feel the need. Moreover, there is no upper limit for the investment amount.

· Building on Effect

A systematic investment plan offers the benefit of building on your investments. This occurs when the returns earned on your investment start earning returns. The returns start to compound on the invested amount over a long-term period.

· Develops Discipline

SIPs help develop the habit of discipline among amateur investors as they only need to invest a fixed sum regularly. Moreover, if you opt for the automatic payment option, the money will automatically be debited from your bank account.

· Rupee Cost Averaging 

Rupee Cost Averaging is a concept where the investor purchases more units when the NAV of the scheme is low and lesser units when the NAV is high. This averages out the purchasing costs over the period of the investment.

· Convenient Investment Option 

SIPs are a convenient investment options available today. In the hectic life of today’s day and age, one may not get time to do extensive market research and analyze to adjust and balance their investment portfolio. Under a systematic investment plan, you can give standing instruction to the bank to take care of your regular investments.

· Can Act as an Emergency Fund 

A systematic investment plan lets you withdraw money at any time you like. And these withdrawals, in case of any contingencies, can act as an emergency fund. Moreover, SIPs can create adequate wealth overtime to help fulfil your financial objectives.

Types of SIPs

There is a total of four types of systematic investment plans. Let us talk about each of them briefly: -

· Top-Up SIP 

This type of SIP enables you to increase your investment amount with time. You can make the most of a systematic investment plan by investing in well-performing mutual fund schemes.

· Perpetual SIP 

Most SIPs are usually offered for a fixed period of 1, 3, or 5 years. But in the case of a perpetual SIP, the end date is not mentioned. Under this type, you can redeem your funds whenever you require. However, it is suggested to set an end date to build a disciplined and goal-based investment.

· Trigger SIP 

Trigger SIP can be ideal for investors with very little knowledge of the financial markets. This type of SIP allows you to set the NAV, index level, SIP start date, etc.

· Flexible SIP 

Under flexible SIP, you can increase or decrease your investment amount at your convenience. You can even skip a few payments if you face any financial difficulties. Similarly, you can make higher contributions to your systematic investment plan when you have some extra money at hand.

Who Should Invest Through SIP? 

If you are a first-time mutual fund investor, you can consider starting your journey by investing through a systematic investment plan. SIPs are ideal for people who have a regular source of income, such as a salary. This way, investors can easily divert a small portion of their income towards mutual funds through a SIP plan.

SIPs instill financial discipline in the long run as you have to set aside a fixed amount of money at regular intervals.

SIP or One-Time? Where to Invest?

First-time investors usually get confused about whether they should go for a systematic investment plan or a one-time investment. In the case of one-time investments, you only need to make a one-time payment of a significant amount of money. On the other hand, you need to invest a fixed amount at regular intervals in a mutual fund scheme.

One-time investments can be beneficial if you have a large sum of money at hand that can be invested immediately. However, if that is not the case, you should go for SIPs, under which you are only expected to set aside a small amount at regular intervals.

Here are some of the key differences between a one-time investment and a SIP investment –

One-Time Investment Plan

Systematic Investment Plan

The investor needs to make a lump-sum payment during the tenure

SIP includes periodic investments, where the investor contributes a fixed amount regularly in a scheme of their choice

In general, a one-time investment generates more investment returns when the market is progressing.

SIPs usually bring more return on investment when the market dips.

It can result in losses at the time of market fluctuations.

rupee cost averaging in a systematic investment plan helps deal with the market crash.

Benefits of Investing in Mutual Funds via SIP

A systematic investment plan offers a wide variety of benefits to its investors. The most significant advantage of investing in SIPs is that you do not need to time the financial markets, as you benefit from both bullish and bearish market trends.

SIPs help reap sizeable returns by investing a small amount of money regularly. Here are some of the key benefits provided under a systematic investment plan: -

· Power of Building on 

The compounding in SIPs occurs when your returns start earning returns. In other words, the returns generated by your regular SIP investments gets reinvested in the plan. In the long-term, this can increase your potential returns substantially. The ideal strategy to maximize your gains through a systematic investment plan is to invest for an extended period.

· Low Initial Investment 

You can invest in mutual funds through a systematic investment plan starting with only Rs. 500 per month. This is an affordable way to invest without putting any stress on your pocket. With the rise in your income, you can increase your investment amount via the SIP step-up feature.

· Rupee Cost Averaging 

SIP investors do not need to time the financial markets, as they can buy more units when markets perform low and buy fewer when the markets perform high. The averages out the overall investment cost.

· Higher Returns Than RD 

A systematic investment plan offers about two times the returns when compared to standard Fixed deposits (FDs) and Recurring Deposits (RDs). The SIP plan can generate enough returns to beat inflation efficiently. Moreover, they can help deal with the market fluctuations and offer returns regardless of the market performance.

· Tax Benefits 

The investment in eligible mutual fund made towards mutual funds through SIPs offers tax benefits up to a maximum of Rs. 1.5 lakh under section 80C of the Income Tax Act of India, 1961.

How to Customize Your SIP Plan?

Most investors, especially the salaried ones, prefer the monthly SIP investment plan. SIPs help them directly transfer the investment amount to the fund when they receive their monthly income. However, there are some ways you can customize your systematic investment plan through its types: -

Frequency of SIP 

You can invest in the mutual funds through SIP on a weekly, fortnightly, quarterly, or half-yearly basis. In case you want to invest for the future without an end date, you can do that as well. You can do this through a Perpetual SIP option.

· Perpetual SIP

Under perpetual SIP, you can easily transfer a fixed amount to the mutual fund of your choice for as long as you like. This is a good option for the people who need a large corpus to fulfil a significant financial goal in the distant future.

· Step-Up SIP

The Step-Up SIP allows a step-up or an increase in your SIP investment amount on a regular basis. Let us take up an example to understand this a little better. Imagine you start a SIP with Rs. 2000 per month. You can give standing instructions to your bank to step-up your investment amount. If you plan to step-up by Rs. 1000 per year, you will need to invest Rs. 2000 per month in the first year, Rs. 3000 per month in the second year and so on.

The two key benefits of stepping up your SIP investments: -

1. You can build a larger corpus during your tenure.

2. You can achieve your financial goal earlier.

Frequently Asked Questions

1. Why should I invest in a systematic investment plan? 

A SIP investment plan is a simple, safe, and cost-effective way to invest your savings in mutual funds. It is a great investment option if you want to minimize your risks and invest regularly.

2. What is the best time to invest in a SIP plan? 

The fact is—there is no ‘best’ time to invest through a systematic investment plan. The important thing to note is that you do not need to time the market or wait for the opportunity to invest in market-linked securities. SIPs make investment simpler and help automate the entire process.

3. Can I miss a SIP payment?

Yes, you can miss SIP payments. And when you do, your account will not be deactivated. Mutual fund houses offer an option to pause the payments for a specific period. This is a useful feature you can use in case you face any financial difficulties.

4. How safe is it to invest in SIP? 

SIP is the safest way to invest as it allows you as an investor to invest fixed amounts regularly. SIPs are a planned approach towards investment and act as a financial cushion by developing a habit of saving.

5. How do I start my SIP investment plan?

You can start investing in SIPs by selecting a fund of your choice. But before that, you need to complete the necessary formalities and provide your KYC details to the Asset Management Company (AMC).

6. How can I extend my SIP duration? 

After completing your SIP term, you can renew your investment. Fill out the required form and state the tenure of investment to extend your SIP duration.

7. How do I shorten my SIP plan? 

To shorten your systematic investment plan, contact your house by writing an application to them. You can even put up an online request. Make sure that you have completed the minimum investment period for the request to be considered.

8. How much should I invest in mutual funds through a systematic investment plan? 

Most fund houses allow the investors to start investing through SIPs with just Rs. 500. And there is no upper limit for the investment amount.

9. What would happen if I miss my SIP installment?

A default on SIP installment can be because of insufficient balance in the bank account. Nevertheless, you don’t need to worry if you miss your SIP installment for the month. The default amount will be added to the next month’s installment. However, it is to be noted that a default on SIP installments for 3 consecutive months can lead to termination of SIP.

10. Is there a minimum amount to invest in SIP?

The minimum amount to invest in SIP is INR 500. You can start with this amount to generate a significant corpus on maturity.

11. How can you automatically renew your SIP?

If your SIP is nearing maturity and you wish to continue it to generate maximum wealth, you can automatically renew your SIP by sending out a renewal request at least 30 days before the maturity date. It’s advisable to contact your asset manager for detailed process as process varies according to the asset management company.  

Sources:

[1] https://www.sebi.gov.in/sebi_data/faqfiles/may-2017/1494501305219.pdf

[2] https://www.incometaxindia.gov.in/Pages/tools/deduction-under-section-80c.aspx

[3] https://economictimes.indiatimes.com/industry/banking/finance/what-is-sip-types-of-sip-how-it-works/articleshow/77991976.cms

ARN No: PCP/SIP/17052022

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