What is SIP and How Does SIP Investment Work?

SIP is a disciplined way to invest in mutual funds & insurance plans by contributinga fixed amount regularly over time. It's convenient, affordable, and spreads investments across assets to reduce impact of market fluctuations and achieve long-term growth.

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SIP Benefits
Start SIP with as low as ₹1000
Start SIP with as low as ₹1000
No hidden charges
No hidden charges
Save upto ₹46,800 in Tax
Save upto ₹46,800 in Taxunder section 80 C
Zero LTCG Tax
Zero LTCG Tax^ (Unlike 10% in Mutual Funds)
Disciplined & worry-free investing
Disciplined & worry-free investing

  • Insurance Companies
  • Mutual Funds
Fund Name 3 Years 5 Years 10 Years
Top 200 Fund Tata AIA 26.72% 27.01%
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Virtue II PNB Metlife 24.45% 22.83%
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Pure Equity Birla Sun Life 23.41% 19.4%
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Growth Opportunities Plus Fund Bharti AXA 20.27% 18.65%
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Pure Stock Fund Bajaj Allianz 19.12% 17.41%
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Blue Chip Fund HDFC Standard 16.13% 14.55%
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Growth Super Fund Max Life 16.37% 15.04%
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Multi Cap Growth Fund ICICI Prudential 17.36% 13.61%
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Equity Fund SBI 16.9% 14.63%
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Equity II Fund Canara HSBC Oriental Bank 15.99% 12.31%
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Updated as of Apr 2024

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Fund Name 5 Years 10 Years RSI
Active Fund QUANT 27.80% 23.96%
Large and Mid Cap Fund QUANT 23.27% 22.69%
Flexi Cap Fund PARAG PARIKH 23.90% 20.22%
Large and Mid Cap Fund EDELWEISS 20.32% 18.01%
Equity Opportunities Fund KOTAK 20.22% 18.98%
Large and Midcap Fund MIRAE ASSET 21.11% 24.56%
Flexi Cap Fund PGIM INDIA 21.48% -
Flexi Cap Fund DSP 19.48% 17.73%
Emerging Equities Fund CANARA ROBECO 18.91% 22.92%
Focused fund SUNDARAM 18.22% 16.55%

Updated as of Apr 2024

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A fixed amount is auto-debited from your account and invested in mutual funds or market-linked funds. A pre-decided number of units are allocated at the current market price. Since these plans are flexible, you can increase the amount or discontinue investing in the plan whenever you wish.

What is SIP and Why Should I Invest in SIP?

benefits-sip benefits-sip

The meaning of SIP is a Systematic Investment Plan, which can be understood with the following example of a common man Ravi. Ravi, a 32-year-old accountant, lives in a rented house with her lovely wife and a 4-year-old daughter. His primary financial goals for the next 20 years are to buy a car and a house and get his daughter married. He does invest in bonds, but that is it.

When projected into the future, his savings (yield from bonds) will not be enough to suffice his future expenses, and he will fall short of achieving his goals. This will primarily be due to 2 reasons:

  • The bitter fact is that inflation will grow faster than the returns, eventually dwarfing his savings at the end of the investment tenure.

  • Had he invested in equity instruments rather than bonds, he could have earned a higher return.

Ravi justifies his investing in bonds as he believes in playing it safe.

So the question remains: What should he do to achieve substantial growth without getting affected by the turbulence? 

Well, the only way Ravi can achieve his financial goal is by buying a Systematic Investment Plan. And it is a good enough reason for you to get a financial goal: buying a Systematic Investment Plan.

How to Get Started with SIP Investment?

When it comes to SIP, getting prepared is as important as playing the game itself. As we have got an idea about 'what is SIP' and why we should invest in SIP; now let us know about the process to make SIP investment.

You need to follow 4 easy steps before you start investing in SIP:

  • Set your financial goals – Your goals should be specific and attainable.

  • Set a timeline – Decide when you need the money; this will be your investment tenure.

  • Decide how much you need to invest – With the help of a SIP calculator, figure out the amount you need to invest regularly to accomplish your financial goals.

  • Make a choice – Consult your financial advisor and go for a plan that meets your needs well.

After following these simple steps, now you are all set to go. The money can be paid by post-dated cheques or through ECS (Electronic Clearing Service), in which you give a standing instruction to your bank account to auto-debit the investment amount from your account every month. The sum you invest monthly in the chosen SIP is invested in a mutual fund and makes money for you. You can always log on to the company’s website and track your portfolio.

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How Does SIP Work?

The SIP’s full form is a Systematic Investment Plan and it works more or less like a mutual fund scheme. Money handling is done by money market experts and is none of your headaches. But it is good to know how SIP makes your money grow. Well, there are two underlying mechanisms behind the working of SIP.

  1. Effect of Compounding

    Unlike simple interest, compounding involves making the interest earned a part of your base capital, and the subsequent interest is calculated based on this newly increased capital. Therefore, compound interest leads to an exponential growth of your money. The effect of compounding increases as the investment tenure increases. The table below illustrates this fact:

    Particulars SIP Investment Input (Rs) SIP Investment Tenure Rate of Interest Returns (at the end of the tenure) (Rs) Total Output (Rs)
    Simple Interest 100 5 years 10% 50 150
    Compound Interest 100 5 years 10% 61 161

    As can be seen, there is a 7% rise in the total output when the interest is calculated on a compounding basis. This seemingly small difference in the final output becomes staggering as the period of investment lengthens. The table below shows the figures calculated for 20 years. As you can see, the difference becomes even more than twice in the long run when the effect of compounding is playing up.

      SIP Investment Input (Rs) SIP Investment Tenure Rate of Interest Returns (at the end of the tenure) (Rs) Total Output (Rs)
    Simple Interest 100 20 years 10% 200 300
    Compound Interest 100 20 years 10% 573 673
  2. Rupee Cost Averaging

    Consider a scenario – Gaurav decides to invest in a SIP and buys the market units by investing Rs. 1000 per month for 6 months. He will be bagging more units when NAV is low and lesser units when NAV is high. On the other hand, Rashmi makes a one-time investment by buying units for Rs. 6000 at the current NAV. 

    Who do you think is going to end up with a lower cost per unit at the end of the 6 months?

    Month NAV (Rs) The monthly investment made in SIP (Rs) No. of Units Average Cost Per Unit One Time Investment made in a plain Mutual Fund (Rs) No. of Units Average Cost Per Unit
    1st 15 1000 67 12.42 Rs/Unit 6000 400 15 Rs/Unit
    2nd 12 1000 83 - -
    3rd 10 1000 100 - -
    4th 12 1000 83 - -
    5th 15 1000 67 - -
    6th 12 1000 83 - -
    Total   6000 483 - -

    As can be seen from the table above, Gaurav will be enjoying a gain of Rs. 2.58 per unit over Rashmi. Gaurav played smart by investing consistently for some time. 

    In the long run, he will be less and less affected by the ups and downs of the market, as the period will lead to an averaging of market fluctuations. This effect is called Rupee Cost Averaging and is primarily responsible for making SIP a lucrative investment.

People Also Read: SWP Calculator

Perks of Systematic Investment Plan (SIP)

The key benefits of investing in a SIP investment plan are as follows:

  • Flexible and affordable investment options – You can always start with smaller amounts and increase the sum of your investment as your earnings grow with time.

  • Free of entry or exit charges – If you invested in SIP and discovered that it does not work well for you, you can put a brake on making further investments and withdraw every single penny without incurring a penalty.

  • Saves you time – By opting for ECS, you drive hands-free. You can go to your own business while your money takes care of itself.

  • Keeps you stress-free – Unlike a mutual fund, you are free of the tension stemming from the ups and lows of the market.

  • Saves you from overloading your head – You need not have a know-how of the market or the tactics that go into switching between funds. It is all done for you by money market experts.

Things to Keep in Mind for Maximum SIP Returns

Maximum Returns at Minimum Investment with Best SIP PlansMaximum Returns at Minimum Investment with Best SIP Plans

  • Start early, earn more significant returns

  • Stay longer, enjoy the compounding effect

  • Be patient, the money is sure to grow in the long run

  • Be consistent, never skip your monthly payment

In Conclusion

In this article, we have covered topics like what is SIP, why should I invest in SIP, SIP meaning, how to get started in it and the perks of SIP. Like the hare-tortoise story, the success mantra in SIP is not derived from how fast you run but is based on how long you run. Here the race is won by starting early and staying longer.

Frequently Asked Questions

  • What is SIP Full Form?

    The SIP investment in full form is a Systematic Investment Plan. It is a popular investment strategy where you invest a fixed amount of money at regular intervals, typically monthly, into a mutual fund scheme.
  • Can I withdraw SIP anytime?

    Yes, you can withdraw your SIP investments anytime but the following conditions have to be kept in mind:

    You can withdraw your SIP investments from ULIP plans after a fixed lock-in period and from ELSS funds after a 3-year period.

    Also, some mutual funds charge an exit load if you redeem your units within a certain period (usually the first year).

  • Is SIP Tax-Free?

    The SIP in Unit-Linked Insurance Plans (ULIP) and Equity Linked Savings Scheme offer tax benefits under Section 80C and Section 10(10D) of the Income Tax Act. SIPs in other mutual fund schemes are not entirely tax-free, and the tax liability depends on the fund type and holding period.
  • What are the disadvantages of SIP?

    The key disadvantages of a SIP investment plan are as follows:

    • Market Fluctuations: SIPs face market ups and downs, meaning temporary losses during downturns.

    • Limited Control: No timing-specific investments, you stick to a fixed schedule regardless of market conditions.

    • Slower Growth: Averaging out cost per unit might be higher than a lump sum investment in a steadily rising market.

    • Potential Lock-ins: Some tax-saving SIPs have lock-in periods, restricting access to your money.

  • What is the minimum investment amount for SIP?

    Minimum investment for SIP is ₹100. The scheme aims to achieve long-term capital growth for its investors.
  • How frequently can one invest in a SIP?

    The frequency of investment depends on the mutual fund scheme that you choose. Generally, mutual fund houses offer SIPs with a monthly, quarterly, or even weekly investment frequency.
  • Can the investment amount be changed during the SIP tenure?

    Updating your SIP amount is not possible. However, you can initiate a new SIP anytime to meet your financial goals.
  • Can one withdraw money from SIPs before the completion of the tenure?

    Yes, you can withdraw money from SIPs before the completion of the tenure. However, the process and the implications may vary depending on the mutual fund scheme that you have invested in.
  • Are there any tax benefits of investing through SIP?

    SIP helps you save on taxes while earning substantial returns on your investments. For instance, if you invest in Equity Linked Saving Schemes (ELSS) through SIPs, you can avail a deduction of up to Rs 1.5 lakh from your taxable income under Section 80(C).

+For Mutual Fund midcap category Returns https://www.morningstar.in/tools/mutual-fund-category-performance.aspx & for Insurance midcap fund category Returns- https://www.morningstar.in/tools/insurance-fund-category-performance.aspx
*Past 10 Year annualised returns as on 01-12-2023
*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
~Source - Google Review Rating available on:- http://bit.ly/3J20bXZ
^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

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