SIP – Systematic Investment Plan

What is SIP?

SIP investment plansSIP or Systematic Investment Plan is an investment strategy to invest a certain amount of money at regular intervals - weekly, monthly or quarterly. SIP investment plans are the smartest and most convenient way of investing in mutual funds. A fixed amount of money is auto-debited from your bank account in case of SIP, and you are assigned a number of units, as per the present Net Asset Value (NAV). Best SIP plans help create a planned approach towards investment and develop the habit of savings in investors so that they can create wealth to achieve their financial goals in the short and long-term.

So here’s what is SIP in a nutshell: It is a smart, or rather hassle-free, mode of investing money in mutual funds, where you are allowed to contribute a pre-determined sum of money on a weekly, monthly, or quarterly basis.

SIPs are flexible in nature, thus, investors can choose to decrease or increase the amount of investment, or stop investing in the plan whenever they want. SIP is the safest and best choice of investment for beginners and for those who are not well-versed in the mechanism of the financial market.

Types of SIP

Systematic Investment Plans (SIPs) are of 4 types and a short description of each of these is given below:

  1. Top-up SIP: This SIP type allows you to increase your investment amount periodically. This also means that you can make the most of your SIP investment by contributing to well-performing mutual fund schemes at certain intervals. You can increase your investment amount when your income increases.
  2. Flexible SIP: This SIP type allows you to increase as well as decrease your investment amount as per the cash flow you have. This way you can skip one or more payments when you face cash crunch due to any reason. Likewise, you can make a bigger contribution to your SIP account when you receive a bonus or an additional income.
  3. Perpetual SIP: SIP investments are, generally, for a fixed period of 1 year, 3 years, or 5 years. A SIP is referred to as Perpetual SIP if you do not mention the end date in the mandate date. This SIP types allows you to redeem your funds whenever required or, particularly, when you have achieved your financial goals. However, it is advisable to set an end date for your SIP contribution so as to build a disciplined, goal-based investment.
  4. Trigger SIP: This SIP type is ideal for investors with limited knowledge of the financial market. You are allowed to set NAV, index level, SIP start date or event, etc. Since this SIP type encourages speculation, it is not desirable or much recommended.

How Does SIP work?

Investing in SIP is very simple and hassle-free. When you apply for one or more best SIP plans, your money is automatically debited from your bank account on a stipulated interval and invested in mutual funds you have purchased. Based on the NAV (Net Asset Value) of your funds, you are allocated a certain number of units at the end of the day. Every time you invest, you choose to invest in best SIP plan in India, and additional units are added to your account based on the current market rate.

The investors don’t require being an expert in the market timing to invest in the Stock Market. Units are purchased at different rates. When the prices are high, the investors buy more units, but when the prices are low, investors buy fewer units.

Two methods that greatly benefit the investors under even best SIP plans are – Rupee Cost Averaging and Power of Compounding.

Rupee-Cost Averaging

The Stock markets in India are unpredictable. Hence, it is often difficult to understand what the best time to invest in is and what is not. Rupee-cost averaging helps investors get rid of this problem. It allows your invested money to earn less units when the price is high and more units when the price is low.

Let’s understand rupee-cost averaging with an example. Let’s assume you are investing Rs.500 each month between November 6, 2018 and October 5, 2019.

Now, check out the average cost per unit for investment. You’ll notice that it is lower than the average NAV of your investment over a period of 1 year.

Date

NAV

Units

Amount

05-11-2013

450.87

2.28

500

06-12-2013

470.83

2.16

500

06-01-2014

480.72

2.07

500

06-02-2014

458.8

2.16

500

06-03-2014

490.57

2.22

500

06-04-2014

525.7

1.82

500

06-05-2014

546.01

1.85

500

06-06-2014

650.6

1.62

500

06-07-2014

646.17

1.31

500

06-08-2014

630.85

1.41

500

06-09-2014

703.34

1.32

500

06-10-2014

703.34

1.42

500

Total

6757.8

21.64

6000

Average Cost

 

 

277.27

Average Price

 

 

563.15

 

Average Cost = Total Amount/Total Units = Rs.6000/21.64 = Rs. 277.27

Average Price = Sum of all NAVs/Investment Span = Rs.6757.8/12 = Rs. 563.15

As you can see the average cost is lesser than the average price per unit. This is how rupee-cost averaging helps you generate greater returns by buying the units on lower costs.

Please note: Aforementioned table and values are only provided for illustration purpose and shoul d not be correlated with performance of any SIP mutual fund scheme.


Power of Compounding

Whatever amount you invest, you earn interest on it. Such interests get compounded and accumulated over a period of time. The longer the tenure is the higher the fund value would be. Therefore, if you stay invested for a longer period of time, you can accumulate more wealth with the power of compounding. Hence, if you start investing early in your life, you will create more wealth than one who comes in later. 

Let’s understand the power of compounding using the table below. This table will help you understand how power of compounding helps you maximize your returns over a longer period.

At end of Year

5%

10%

15%

20%

1

105

110

115

120

5

128

161

201

249

10

163

259

405

619

15

208

418

814

1541

25

339

1083

3292

9540


Best SIP Plans 2018

SIP Plans

Type

3 Year

5 Year

HDFC Small Cap Fund

Equity Fund Name

21.52%

24.31%

DSP BlackRock Midcap Fund

Equity Fund Name

16.77%

25.68%

HDFC Mid Cap Opportunities Fund

Equity Fund Name

14.84%

26.00%

Birla SL Equity Fund

Equity Fund Name

13.70%

21.78%

ICICI Prudential Equity & Debt Fund

Equity Fund Name

11.11%

17.48%

HDFC Balanced

Balanced Fund Name

10.65%

18.96%

L&T India Prudence Fund

Balanced Fund Name

10.03%

18.36%

Birla SL Balanced '95 Fund

Balanced Fund Name

9.42%

16.83%

ICICI Prudential Balanced Advantage Fund

Balanced Fund Name

9.16%

14.39%

SBI Magnum Balanced Fund

Balanced Fund Name

9.10%

17.27%

HDFC Prudence Fund(G)

Balanced Fund Name

9.02%

16.56%

SBI Magnum Gilt Short Term

Debt Fund Name

8.78%

9.38%

Aditya Birla Sun Life Medium Term Plan

Debt Fund Name

8.39%

9.13%

Reliance Credit Risk Fund

Debt Fund Name

7.87%

8.33%

Aditya Birla Sun Life Short Term Fund

Debt Fund Name

7.83%

8.37%

ICICI Prudential Value Discovery

Equity Fund Name

7.34%

21.25%

Reliance Liquid-Treasury Plan(G)

Debt Fund Name

6.82%

7.32%


The route of SIP allows you to efficiently manage your personal finances and build a financial corpus targeted at a safe financial future. Contributing to SIP ensures that you can manage your everyday finances, and that too without any hassle. However, the returns are totally subject to your fund choice. The following is a list of best SIP plans in India to help you choose your ideal SIP investment:


The Benefits of investing in Systematic Investment Plans

1. Disciplined Saving– Planning and discipline play crucial roles in a successful investment. When you invest in one of the best SIP plans, you agree to invest at certain intervals (monthly or quarterly, etc.). This helps you save regularly in a disciplined manner. However, it is important to start investing early in life to get the benefits of SIP.

2. Flexibility– There is no lock-in period under SIP investment plans. However, experts recommend investors to understand how to invest in SIP for a longer duration in order to gain maximum returns for their investment and to achieve their long-term financial goals. Nevertheless, investors can exit the plan any time they want. SIPs also allow investors to increase or decrease the amount of money being invested.

3. Long Term Gains – SIP investment plans are best for long-term investment goals. Since you start investing smaller amount, you may not see much profit initially, but gradually and in the long run you will find a huge growth of your invested money. Rupee cost averaging and power of compounding are the reasons for such a high return on investment.

4. Convenience - SIP is the most convenient and hassle-free mode of investment. You can authorize an ECS mandate from your bank to automatically pay for your SIP investment on a monthly basis.

5. Moderate Risk- Small retail investors generally do not possess the resources to go for active investments. So, they opt for SIP as it allows them to earn above average return on their investments with moderate risks.  

Why should you Consider Investing in SIP?

Everyone likes to talk about maximizing profit, whether the investment is for a long, medium, or small term. SIP investment plans are simplest and the best way to achieve your long-term as well as short-term financial goals. As there are numerous benefits of investing in SIP, one of the major benefits of SIP investment is that it provides a disciplined approach towards investment where a fixed amount is deducted every month from the account of the investors and is invested in their choice of fund options.

Moreover, investing in a SIP can be a great option, as it finances all the major future goals of your life and is ideal if you are a young investor. Besides, the best SIP plan in India gives you the advantage for wealth creation over a long period of time. SIP also minimizes the risks related to equity fluctuations.

7 Mistakes to Avoid when Investing in SIP

Generally, investors pick funds based on their risk profile, investment tenure, and returns offered in the past 5 to 10 years. Although these aspects must be checked, there are several other aspects that need to be assessed as well, in order to avoid the loss of the capital in a market crash.

The following are 7 common mistakes investors make when investing in SIP:

  1. Choose the Wrong Fund

This is the first step to start investing in mutual funds, as you need to choose one or more funds to invest your capital in. Before you make the payment, you must know your investment goal, expected returns, and risk appetite. It is advisable to conduct a thorough research and analysis before starting an investment. If you have long-term goals, choose the wrong fund might ruin your financial goals.

  1. High Investment Amount

Since SIPs allow you to invest small amounts of money systematically in mutual funds, make sure you do not choose an amount of money to invest, which you may not be able to continue investing for the rest of the months of the year. What you need to do is choose an amount that you can easily invest every month so as to reap the returns that you had aimed at initially.

  1. Small Investors’ Thing

There is a common misconception associated with SIPs that it is only small investors’ thing, as they cannot contribute lump sum through SIP. Well, this indeed is not the case.

For example, if you had planned to invest Rs. 5,000 per month, SIP is still your thing because you can invest Rs. 50,000 as a lump sum in SIP. This is mainly because of the principles of SIP – rupee-cost averaging, time value of money invested, compounding.

  1. Short-term Investment

This is another common mistake made by many SIP investors. The value of an investment is subject to the time is remains invested and not the investment amount. In other words, the longer the investment term, the higher will be the investment value.

  1. Set Unrealistic Goals

Immature investors are often seen setting unrealistic investment goals and repenting later. It is advisable not to expect phenomenal returns from your existing investment. Instead, you should expect average returns and continue with your regular investment process. Needless to say, expecting 50% to 100% returns instead of 10% to 20% is unrealistic.

  1. Choose Dividend over Growth

Many investors choose the dividend (withdrawal from the corpus) option over the growth (no dividends are paid) option when they invest in mutual funds through SIP, which runs on the principle of compounding – interest on the interest. On the other hand, the principle of interest calculation in case of the dividend is simple interest, which gives considerably low returns.

You can anytime switch between the dividend and growth options to grow your corpus and achieve your financial goal.

  1. Not to Boost Your SIP

There are times when we go through financially lean and high times. When you are financially high, you have enough funds to contribute a lump sum to your SIP account. There are funds that allow you to add a lump sum to your SIP account under the same portfolio and boost your investment, as the combination of regular funds and a lump sum is bounds to get you more return than a regular SIP.

Can a SIP be Customized?

Investing in SIP is considered as the most promising investment. Instead of keeping your money ideal in a savings bank account, you can invest in a SIP and take benefit of regular savings along with earned interest. However, the perks of investing in systematic investment plan do not stop right there. You can customize a SIP according to your requirements. In case you want to change your fund options or make some other desired changes, even the best SIP plan in India allows you to do so by following some simple steps as mentioned below:

  1. Stop your existing SIP by providing a simple request on a paper.
  2. It takes around 15 days to stop your current fund.
  3. Fill out the new application form for the fund you plan to do SIP, SIP registration form, and OTM/NACH form.
  4. Deposit the fund amount with an authorized representative.

How Much do you Need to Start a Systematic Investment Plan?

Rough calculations or an approximate calculation can be dangerous when you are planning a particular financial goal to achieve. It is always best to make a foolproof financial plan and work with real numbers while operating towards your short-term or long-term financial objectives.

A systematic investment plan helps you achieve these goals sensibly by making you invest in a mutual fund scheme of your choice. And in return, it manages your investment portfolio. You can start investing even in best SIP plan in India with a minimum of Rs. 500. So, by investing even a minimum amount in SIP, you can fix a time period to achieve your goal.

Tax Benefit of Investing in SIP

Tax benefits are only applicable to the investments made in Equity Linked Savings Schemes (ELSS). If one invests in ELSS, government-approved tax saving scheme, they can claim tax deductions under section 80C of Income Tax Act, 1961.

Benefits of Investing in Mutual Fund through SIP

  • Disciplined Investing Approach-

A disciplined investment routine plays the most important role when aiming for high returns. Investing in mutual funds via an SIP helps maintain the regularity of the investments and helps the investors - attain their financial objectives.

  • Offers the Benefits of Rupee Cost Averaging-

Rupee-cost averaging allows investors to invest pre-determined amounts regularly, either quarterly or monthly. So, instead of investing a lump-sum, one can make gradual investments at particular intervals of time over a long period of time. Rupee cost averaging minimizes the need to study and time the market. During market fluctuations, the rupee cost averaging method allows the investors to achieve a lower average cost per unit.

  • Convenient, Simple and Easy to Monitor-

SIP investment plans are a hassle-free mode of investment. One can issue instructions to banks to facilitate the option of auto-debits from the bank account. A SIP investment is an ideal investment option for retail investors who can’t go for active investments.

  • Power of Compounding-

The most appropriate way to create wealth is to invest regularly and to start investing as early as possible. A small amount invested on a regular basis can ultimately double over a long period of time. With the benefit of the power of compounding, one can stay invested in the plan for a longer tenure and can create wealth in the long-term.

Top Five SIP Investment Funds and their Performances

Fund Name

3 Year Returns (%)

5 Year Returns (%)

Birla SL Frontline Equity Fund(Growth)

23.15

18.16

SBI BlueChip Fund-Regular(Growth)

26.25

20.24

BNP Paribas Mid Cap Fund(Growth)

33.82

24.58

Mirae Asset India Opportunities Fund-Regular(Growth)

27.45

19.44

Franklin India Prima Plus Fund(Growth)

27.17

18.56

 

If you are planning to invest through an SIP and a have high to moderate risk appetite, you can invest in the five funds above.  Before investing, always use a reliable SIP calculator to understand the probable return of your investment. However, if you are new in the field of investment, and have low-risk appetite, start with debt funds. Gradually, with experience, start investing in equities for a higher return on your investment. 

How does SIP Calculator Work?

SIP Calculator is an online tool, which enables you to calculate your SIP returns over a period of time even prior to starting your investment. SIP returns calculation is based on the principle of compound interest. You just need to enter the amount you wish to invest, select the investment tenure, and this tool will quickly calculate the returns for you. SIP Calculator is quite helpful for you to decide the amount you want to invest in mutual funds, as you may want to increase your investment amount for much higher returns in the future.