SIP (Systematic Investment Plan)
SIP or Systematic Investment Plan is a process of investment, through which the investors can invest regularly in mutual fund scheme.
What is SIP?
SIP is an investment strategy to invest a certain amount of money at regular intervals of time in mutual fund scheme. In SIP investment a fixed amount of money is auto-debited from the bank account of the investors and is assigned a number of units, as per the present Net Asset Value (NAV). The investors can start investing in SIP in weekly, monthly or quarterly basis. Further in this page, we have elaborately discussed everything you need to know about SIP.
SIP investment plans are the smartest and most convenient way of investing in mutual funds. Best SIP mutual fund 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.
SIP mutual funds 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:
- 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 mutual fund investment by contributing to well-performing mutual fund schemes at certain intervals. You can increase your investment amount when your income increases.
- 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.
- Perpetual SIP: SIP investments are, generally, for a fixed period of 1 year, 3 years, or 5 years. A SIP mutual fund 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.
- 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 mutual fund type encourages speculation, it is not desirable or much recommended.
Best SIP Plans FY 2019-20
|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 mutual fund 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:
Benefits of Investing in SIP
- 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.
- 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.
- Long-Term Gains – SIP mutual fund investment plans are best for long-term investment goals. Since you start investing a 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.
- 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.
- 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 an above-average return on their investments with moderate risks.
- Tax Benefit - Apart from providing a disciplined approach and higher returns on investment, SIP mutual fund investment also helps the investors to avail tax benefit under section 80C of Income Tax Act 1961 in EEE format i.e. exempt, exempt and exempt. The first exemption means that the investments made by the investors are eligible for tax deduction. The second exemption means that the interest earned by the investors during the phase of accumulation is tax exempted and the final exemption means that the income earned from the investment is eligible for tax deduction during the time of withdrawal.
- Lock-In Period- As compared to the different tax saving investment option, SIP investment offers a minimum lock-in period of 3 years. However, in order to gain the maximum returns on investment, it is always advisable that the investors should invest for a longer duration.
- 2X Higher Returns As Compared to RD- As compared to bank FDs and RDs, with a minimum amount of investment per month, SIP investment reaps much higher returns in the long-term. SIP investment helps to deal with market fluctuation and provides returns irrespective of the market performance.
How Does SIP work?
Investing in SIP mutual fund 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.
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.
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 in SIP mutual fund, 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%|
Why Invest Through 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, here are some of the reasons why you should consider investing in SIP.
Provides Disciplined Approach
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.
Initiated with Minimum Investment
The investors can start investing in a mutual fund SIP with a minimum investment of Rs.500 and can continue with their budget planning in a stress-free way. Moreover, over a period of time, the investors can increase the monthly investment installment by 15%. With a minimum investment of just Rs.500 SIP can be a great option of investment, as it finances all the major future goals of your life and is ideal if you are a young investor.
Act as an Emergency Fund
With a simple withdrawal, process SIP can act as an emergency fund in case of any contingencies. 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.
Rupee Cost Averaging
As mutual fund market is volatile in nature, with the benefit of rupee cost averaging the investors can buy more units when the market is low and less units when the market is high. As a result of this, investors can decrease the cost per unit.
Power of Compounding
The basic concept of the power of compounding is that the interest earned on the invested amount gets accumulated and compounded over a long period of time. This will result in greater returns as compared to one-time investment.
One-time or SIP: How to Invest?
Generally, the first time investors often get confused between choosing a one-time investment or SIP investment. For the better understanding of the investors here we have elaborately discussed both the investment option.
|One-time Investment||SIP Investment|
|In one time investment the investors need to invest a lump-sum payment during the tenure of investment.||Sip investment includes period investment, where the investors can invest a fixed amount per month in the fund option of their choice.|
|One-time investment earns better returns on investment at the time when market performs high.||SIP investment earns better returns on investment at the time when market performs low|
|One-time investment can result to loss at the time of market fluctuation.||With the benefit of rupee cost averaging SIP investment helps to deal with the market crash|
How to Choose SIP?
While choosing the SIP plan, there are many different aspects that should be kept in mind. However, if one wants to invest on SIP, here are some of the important points that should be considered.
Duration of SIP
For how long one wants to invest in SIP matters a lot from the perspective of tax, risk, and returns. It is always suggested to invest in Sip for a longer tenure in order to gain the maximum return on investment. Before zeroing in on the SIP plan it is important to consider 5 years reference point and check the performance of the fund across markets.
While choosing the SIP plan, it is very important to check the reputation of the fund house in order to know that whether the funds will be able to handle the market fluctuations without letting the investors face the loss.
Rs.500 Cr Asset under Management
Rs.500Cr. asset size can be considered as an appropriate benchmark while choosing the fund. However, it doesn’t mean that the funds below this asset size are bad, but it may not perform as good as the funds above this asset size.
Process to Invest in SIP
The process to invest in SIP is very simple and hassle-free. The investors just need to keep in mind the below mentioned pints while investing in SIP.
Set Investment Goal
Every SIP mutual fund investment has a set purpose and goal. According to one’s own requirement and goals the investors can choose the fund option to invest in.
Select the Right Plan
As there is wide range of SIP investment plans available in the market, select the right plan by checking the past performance of the funds. Also, according to the set goals of the investors, they should choose the plans that are most suitable for them.
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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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:
- Stop your existing SIP by providing a simple request on a paper.
- It takes around 15 days to stop your current fund.
- Fill out the new application form for the fund you plan to do SIP, SIP registration form, and OTM/NACH form.
- 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.
SIP - FAQs
Q1. Why choose a Systematic Investment Plan?
Ans- Systematic Investment Plan provides a disciplined approach towards investment in Mutual Funds. SIP is a lucrative option of investment as it not only provides high returns on investment but also helps the investors to create wealth over a long period of time. SIP instills the habit of savings, by investing a small amount per month on SZIP mutual fund at a predetermined date
Q2. When should I invest in SIP?
Ans- Timing really doesn’t matter if you are planning to make an investment in mutual fund SIP. While investing through SIP the investors should keep in mind that rather than focusing on the timing of the market they should focus on what they need from that investment. In the SIP plan, one does not need to time the market. So, the investors can choose to invest in SIP anytime according to their stability and requirement.
Q3. Should I invest in SIP for long-term financial growth?
Ans-SIP is best for long-term investment. SIP investment comes with a minimum lock-in period of 5 years and as compared to the short-term investment SIP is known to provide maximum return on investment over a long-term period.
Q4. What are the minimum and maximum amount I can invest in SIP?
Ans- An investor can start investing in SIP plan with a minimum amount if Rs.500 per month and can go up to maximum whatever limit they want to.
Q5. Can I miss the payment of SIP?
Ans- Yes, one can miss a SIP payment and still the account of the investor wouldn’t be deactivated. Various mutual fund schemes offer the facility to pause the payment.
Q6. Are all SIP investment offers tax benefit?
Ans- The investment made through SIP in equity-linked savings scheme (ELSS) offers tax benefit up to the maximum limit of Rs1.5 lakh under section 80C of Income Tax Act.
Q7. How safe it is to invest in SIP?
Ans- SIP is the safest process of investment as it allows the investors to invest a particular amount at regular intervals of time. SIP offers a planned approach towards investment and helps the investors to create a financial cushion by developing the habit of saving.
Q8. How to start SIP investment?
Ans- One can choose the online and offline method to start SIP investment.
For offline method:
- The investor will have to visit the AMC office.
- Thoroughly fill the application form and auto debit form.
- Provide important documents like address proof and ID proof along with a duly signed cheque to the address of mutual fund.
For online method:
- The investor will have to visit the AMC website.
- Enter all the details for online SIP
- Along with KYC details the investors will have to submit the scanned copy of cheque, address 7 ID proof and account number.
Q9. How to shorten the duration of SIP?
Ans- Prior to the next SIP is assigned the investor can either send a written application to the fund manager or raise a request online. However, it is advised that the investor should complete the minimum period of investment which is normally 6 months.
Q10. How to extend the duration of SIP?
Ans- At the end of the tenure of SIP, the investors have the option of renewal of the investment. The investor can fill the renewal form and can choose the required duration of SIP investment.