SIP - Systematic Investment Plans
A disciplined approach to invest regularly in mutual funds
What is SIP in Mutual Fund?
Systematic Investment Plan (SIP) is a simple and easy way to invest in mutual funds. An SIP allows you to invest a fixed amount of money in a mutual fund scheme of your choice. It also gives you the choice to invest at time periods that suit you best – be it fortnightly, monthly or even quarterly. The best part is that you can start an SIP plans with as little as Rs. 500 and you do not need to worry about timing the market since you are making fixed periodic investments. This allows you to participate at all levels of the market and helps you to stay disciplined in your investing.
How does an SIP work?
It is very easy to invest in SIP. Once you have chosen the mutual fund scheme in which you want to invest, you need to specify the following:
- 1. The amount that you want to invest in SIP
- 2. The time interval for which you want to invest – fortnightly, monthly, quarterly
Assume that you choose a monthly SIP of Rs. 5000. Now, every month, Rs. 5000 will get debited from your bank account and units worth Rs. 5000 will be bought in the mutual fund scheme of your choice. When markets are down, the Rs. 5000 SIP will purchase more units while when markets are up, the Rs. 5000 SIP will purchase less units. This way, you participate at all levels of the market and lower the average cost of purchase.
Benefits of Systematic Investment Plan (SIP)
Investing through SIPs can have multiple advantages. Some of these are:
Convenience and discipline:
When you invest in systematic investment plan, you make a commitment to invest an amount and as per a schedule that works best for you. The automatic debit makes it convenient and ensures that you do not let your behavioural biases take over during market ups and downs.
Power of compounding:
This is a simple math concept that allows investment returns to multiply. Generally, when you make an SIP investment, you earn interest (returns) on the invested amount. However, if you continue to stay invested, then through the power of compounding you earn money on the initial invested amount as well as on the returns that are generated.
Rupee cost averaging:
Instead of trying to time the markets and look for opportunities to buy low and sell high, an SIP lets you take advantage of all market levels. When the market falls, you end up purchasing more units of the fund at a lower price and when the market increases, you buy less units of the fund at a higher price. As a result, over a period of time, the average cost of your SIP investments reduces.
Expert management:
Investments in mutual funds are managed by expert fund managers who are supported by a team of qualified research analysts. When you invest in a mutual fund through an systematic investment plan, you can take advantage of expert management.
Why start an SIP Investment Plan?
- No need to worry about timing the market: With an systematic investment plan you do not need to worry about catching market tops and bottoms since an SIP plans allows you to invest consistently through market cycles.
- Become disciplined by automating your monthly investments: Once you set up the auto debit facility for SIP, you don’t need to make an effort every month to save and invest some money.
- Allows you to start small: It allows you to start your savings journey as soon as possible as you can invest in SIP with as low as Rs. 500.
- Offer flexibility: Even though you might start small, you can always change the amount and time period of your SIP plans as your personal circumstances change.
- Avoids behavioural biases: Market ups and downs can impact our ability to make the right investment decisions. SIP investment plans make sure that you continue investing through sharp price movements and don’t make any decisions that could have a negative impact on your portfolio.
Who Should Invest through an SIP?
You should invest in an SIP if
You want to reap the benefits of equity investments but do not want to take the risk of direct or lumpsum equity investing
You have a long-term goal that you need to achieve in 7 to 10 years
You want to automate your investments
You want to remove behavioural biases from your investment decisions
SIP vs Lumpsum : What's the Difference?
| Systematic Investment Plan | Lumpsum | |
|---|---|---|
| Define | Invest a fixed amount of money on a periodic basis | Invest money in one go |
| Amount | Can start small and increase over a period of time | Generally, a large amount of money is invested |
| Timing the market | No need to time the market since investments are made through market ups and downs | Timing the market becomes important since you would ideally like to invest a big amount at a lower price |
| Benefits | You can benefit from rupee cost averaging and ensure disciplined investing | Since you invest in one go, you cannot benefit from rupee cost averaging or maintain disciplined investing |
How to choose an SIP?
- Determine your goals: You may have multiple goals, some of which you might want to achieve in the next one year (short-term), some over a period of 2 to 5 years (medium-term), and others that you might want to achieve after 5 years (long-term). Systematic Investment Plans are generally best suited for long-term goals.
- Determine the amount that you want to invest: Decide how much money you can comfortably invest after you have allocated money for all your expenses.
- Determine the investment intervals: Decide whether you want to do an SIP fortnightly, monthly, or quarterly.
- Choose the fund: The mutual fund scheme that you choose to invest in should be able to help you achieve your goals in your desired time-frame.
- Choose the type of SIP plans:Here you have multiple options:
Any Time SIP
Enjoy the flexibility to choose the date, frequency and amount of your investment in SIP.
Steps to start an SIP
Starting an SIP investment is very simple. Steps to follow:
- Step 1: Complete your Know Your Customer (KYC) formalities: You can do this either through the fund house that offers the eKYC (i.e., electronic KYC) facility or you can do it through the online portals of registrar and transfer agents like CAMS and Karvy. The documents that you would require to complete your KYC include PAN Card, Proof of Address, Passport size photograph, and a cheque book to provide your bank details.
- Step 2: Once the in-person verification is done, the KYC process has been completed.
- Step 3: Next, you can visit the mutual fund website, personal finance platforms, or an advisor to choose the mutual fund scheme in which you want to start the SIP investments. Once you know the scheme, all you need to choose is:
- The amount you want to invest
- The intervals at which you want to invest
- The date on which the SIP amount will be debited
Learn More About SIPs
How to Invest in SIP plans online
Systematic Investment Plans (SIPs) are an investment tool that let you invest a fixed amount periodically in a mutual fund of your choice.
Steps To Choose Best Mutual Funds For SIP Investment
A simple facility that helps you choose the right combination of two pre-determined schemes for your SIP investment plans based on your risk appetite.
SIP vs LUMPSUM
Buying a house is a major life goal for most people. It has been a long-time dream of 28-year-old Susheel Kumar who is from a middle-class household. He wishes to buy his own house in the next eight years and has decided to invest in mutual funds to build a sizeable corpus for the down payment.
Watch video to Learn More about SIP Investment
Frequently Asked Questions on SIP
Systematic Investment Plan (SIP) is a route to invest in a mutual fund scheme. There are generally two ways by which you can invest in a mutual fund scheme, lumpsum or SIP. If you choose to make a lumpsum investment then you will be investing a large amount of money in one transaction. If you choose to invest via an SIP, then you will be investing a fixed amount of money on a periodic basis.
NAV stands for the Net Asset Value of a fund and is the price at which fund units are purchased and redeemed. It is calculated as: NAV = (Market value of all assets in the fund – Liabilities) / Total number of outstanding units
When it comes to calculating SIP returns, there are a few things that you need to consider:
- Your SIP amount
- The duration of your SIP
- The frequency at which you make regular SIP investments
- The expected rate of return
Using an SIP calculator, you can input the above details to arrive at the amount that you could potentially accumulate at the end of the investment period. Further, if you know the amount that you want to accumulate along with the investment time period, frequency, and expected rate of return, then you can also calculate the SIP amount that you need to invest in order to achieve your goals.
When you are selecting a mutual fund for your SIP there are three things that you need to consider. One, your return requirement. Can the mutual fund scheme potentially generate your expected returns? Two, your risk profile. You must ensure that the risk category of the mutual fund scheme is aligned with your risk profile. And, three, the time frame of the scheme if aligned with your investment time frame. For example, there is no point in starting an equity SIP for a goal that needs to be achieved in two years.
As such, there is no specific evidence that points to any particular date or time that is best for investing in sip investment plans . Thus, you must choose a date that is convenient for you in terms of your monthly cash flows.
The amount that you invest in SIP will primarily depend on the source and stability of your income. If you are an employed individual then you know the amount of money you will be earning every month. You are also aware of your monthly expenses and liabilities and can accordingly set aside money for a monthly SIP. However, if you are an entrepreneur, then your cash flows might or might not be stable. Choose an SIP amount that you can continue even if your income falls for a period of time.
You can also log on to our SIP calculator to determine the amount that you need to invest via an Systematic Investment Plan to achieve a certain goal. All you need to do is enter the following details:
- Amount you want to accumulate
- The time period for which you want to invest
- Your expected rate of returns
Edelweiss mutual fund offers a top-up SIP facility that allows you to increase your SIP investment amount so that you can save more and reach your financial goals early
Capital gains in excess of Rs. 1,00, 000 made on equity SIPs are subject to long-term capital gains tax of 10%, if redeemed after a period of 12 months. Capital gains made on SIPs redeemed under 12 months are subject 15% short-term capital gains tax.
When calculating tax on SIP, you must take into consideration the holding period and profit made on each SIP instalment. Let us understand this better with an example. Assume you started a monthly SIP investment plan which lasted for 24 months. For the purpose of calculating tax, you need to consider:
The profit made on each SIP instalment: To calculate this you will need to take the NAV at the time of each SIP instalment and the NAV at the time the SIP was redeemed. For example, assume that the NAV at the time of redemption was Rs. 20. In the first month, your SIP was purchased at an NAV of Rs. 15. Then profit made on this particular SIP instalment would be (20-15) * number of units purchased. Similarly, in the second month, your SIP was purchased at an NAV of Rs. 18, then the profit made on this particular SIP instalment would be (20-18) * number of units purchased. This will be calculated for each month.
The holding period of each SIP instalment: Capital gains in excess of Rs. 1,00, 000 made on equity SIPs are subject to long-term capital gains tax of 10%, if redeemed after a period of 12 months. Capital gains made on SIPs redeemed under 12 months are subject 15% short-term capital gains tax. Thus, you need to calculate the holding period for each SIP instalment to determine whether it is subject to short-term capital gains tax or long-term capital gains tax. For example, the units that you purchase up till the 12th month will be subject to a long-term capital gains tax of 10%. However, units purchased from the 13th month onwards will be subject to short-term capital gains tax of 15% since the holding period does not exceed the 12 months required for long-term capital gains.
You cannot compare SIP and Mutual fund as is as Systematic Investment Plan (SIP) is a route to invest in Mutual Fund.
A mutual fund is an investment vehicle that pools investor money and then invests it in a variety of assets like debt, equity, or gold, as per the investment mandate of the select scheme. An SIP, on the other hand, is not an investment vehicle like a mutual fund. Rather, it is an investment route for investing in mutual funds. You can either invest lumpsum money in a mutual fund or you can invest via an SIP. While lumpsum entails investing all your money at one go, an SIP allows you to invest a fixed amount of money in a mutual fund scheme of your choice on a regular basis. The frequency of your mutual fund SIP could be fortnightly, monthly, or quarterly, as per your choice.
No, a demat account is not required for starting an SIP in a mutual fund. You can simply invest in SIP either directly on the AMC website or through advisors and preferred investment platforms.
Yes, you can increase the amount that you invest via SIP. Edelweiss mutual fund offers a top-up SIP facility that allows you to increase your SIP investment amount so that you can save more and reach your financial goals early
Yes, it is very easy to withdraw money from an SIP plans. Below are the steps to withdraw money from SIP:
You can visit any one of the following: i) the relevant mutual fund website, ii) the website of central service providers like CAMS (Computer Age Management Services Pvt. Ltd.), Karvy, etc., or iii) visit the AMC or central service provider offline
If you are redeeming online then log in with your folio number and / or PAN number, select the scheme in which you are doing an SIP, choose the amount or the number of units you want to redeem, and confirm your transaction.
If you are redeeming offline then you simply need to fill the redemption form and submit it at the mutual fund or central service provider’s office.
Another option for withdrawal could be a Systematic Withdrawal Plan (SWP). If you are looking to systematically withdraw the investments that you have made, then you can opt for a SWP. Similar to an SIP, an SWP will allow you to withdraw a fixed amount of money from your mutual fund investments at time intervals that suit your best.
When you are looking to start an SIP in a mutual fund scheme, there are three things that you should look at. The first is the objective of the scheme, so that you can understand whether you are getting what you want. The second is the risk of the scheme. You must ensure that the risk of the scheme is well-aligned with your risk profile. And, the third is the time period for which you want to invest. So, if you have a goal that is coming up in 2 years, then it might be better to invest in a debt fund rather than an equity fund since equity funds are higher risk and are better suited for long-term investments of more than 5 to 7 years.
SIP is a way to invest in a mutual fund scheme while ELSS is a type of mutual fund scheme. When you start an SIP, you invest a fixed amount of money in an investment of your choice. Equity Linked Savings Scheme or ELSS is a type of mutual fund scheme that invests primarily in equities with some exposure to fixed-income securities. Investments made in ELSS can be claimed as a tax deduction under section 80C of the Income Tax Act. Further, these investments are subject to a lock-in period of 5 years. If you invest in SIP in an ELSS, then every SIP instalment will be subject to a lock-in period of 5 years.
Yes, you can do an SIP in liquid mutual funds.
SIP is a way to make investments in mutual funds while PPF is a type of investment. When you start an SIP, you invest a fixed amount of money in a mutual fund scheme of your choice. Public Provident Fund or PPF is a retirement scheme offered by the Government of India where you have to make at least one annual contribution for a period of 15 years and you earn interest on this investment.
Generally, the minimum amount that you can invest in SIP is Rs. 500. Some funds also offer micro-SIPs which you can start with as low as Rs. 100.
When you start an SIP, there is an option to auto renew the SIP on expiry of the chosen term. If you select this option then your SIP will get automatically renewed after the completion of the selected SIP time period.
Generally, if you miss your SIP instalment for a month or two, then your SIP will not go inactive. However, if you fail to make SIP payments for three consecutive months, then your SIP gets automatically cancelled.
No, SIP does not mean investing only in equities. You can invest in SIP in a debt mutual fund or an equity mutual fund. However, the SIP route can be a good way to start your equity investing journey as the fixed instalments reduce the impact of equity market ups and downs on your portfolio.
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