What is SIP?

Systematic Investment Plan (SIP): SIP Meaning & Benefits of SIP Investment

What is SIP?

A Systematic Investment Plan (or SIP) is an investment mode through which you can invest in mutual funds. As the term indicates, it is a systematic method of investing fixed amounts of money periodically. This can be monthly, quarterly or semi-annually etc.  When you invest steadily in this manner, it can become easier to meet your financial goals.

How does SIP work

When you invest through a SIP, you invest a fixed sum of money in a given period. This amount lets you purchase a certain number of fund units. If you continue to do this for a long time, you get to invest in the fund during the highs and lows. In other words, you don’t need to time the market to make your investments. Market timing can be a risky proposition as one can invest at the wrong time. SIP investments remove this factor of unpredictability.

Benefits of Investing in SIP

1) Power of compounding

Compounding occurs when the returns you earn on your investments start earning returns. This is a simple concept in theory. But its practical implications are substantial.

When you invest regularly through SIPs, your returns get reinvested. Over time, this result in a snowball-effect, that may increase your potential returns manifold. An ideal way to maximize this gain is to invest for an extended period. This also means you may benefit by investing as early as possible.

Even a ten-year head-start can have a major impact on your returns. Here’s an example to illustrate the point.

Imagine there are four investors: Vishal, Pinky, Amrit and Mira.

Vishal - 20 years

Pinky - 30 years

Amrit - 40 years and

Mira - 50 years

All of them invest Rs. 2,000 per month in an equity fund through SIPs.

Assuming the equity fund offers an annual return of 12%, here’s how much each one could earn by the time they turn 60: 

SIP Investment Table

The table shown above is for illustration and understanding purpose only

This table clearly shows the exponential nature of SIP returns. Here, Amrit's overall investment (Rs. 4.8 lakh) is exactly half of Vishal’s investment (Rs. 9.6 lakh). However, his wealth creation is way behind that of Vishal’s. Therefore, the earlier you start investing, the higher chance that you could grow your final corpus.

2) Low initial investment

You can invest in mutual funds through a SIP with just Rs. 500 per month. This can be an affordable way to invest each month without hurting your wallet. You can increase your monthly investment amount with a rise in your income via SIP step-up feature. Mutual fund houses allow investors to top up their SIPs on a regular basis. So, even if you start with Rs. 500 or Rs. 1,000 every month, you can invest more over the years. This strategy can help you reach your investment goals at a faster rate.

3) Rupee cost averaging

Rupee cost averaging is a concept where you purchase more units when the Net Asset Value (NAV) of the fund is low, and lesser units when the NAV is high. Essentially, it averages out your purchasing costs over the tenure of the investment period. You don’t need to worry about how to time the market when you invest through a SIP.

4) Convenience

SIP can be a convenient mode of investing. Like most investors, you may not have the time for extensive market research and analysis to adjust or balance your portfolio. So, once you pick a good fund, you can give standing instructions to the bank and let the SIP take care of your monthly investments.

How to start SIP investment

1) Complete your KYC

Every fund house requires investors to complete the KYC documentation process before they can start investing. You need to submit your identity proof, address proof and photograph. These days, the e-KYC option is also accepted. You can complete the formalities online without visiting the AMC.

2) Set your investment goals

The first step is to understand what you wish to accomplish through SIP investments. List down your financial goals. This is necessary because every mutual fund is designed with a specific objective. Identify your goals and look for funds that can help you achieve these goals.

3) Choose the SIP

Once you select a particular fund, choose the SIP parameters. Fill in the details for questions like:

1. Investment tenure
2. Frequency of investment (monthly, quarterly, semi-annually etc.)
3. Investment amount
4. Enter the relevant information based on your goals and financial situation.

SIP vs Lump sum: where to invest

There are two modes to invest in mutual funds: a SIP and lump sum. In a lump sum investment, you invest a large amount of money in the mutual fund at once.

So, which is the better option: SIP or a lump sum? Here are specific parameters that can help you make the decision.

1) Amount of money

SIPs are regarded as the better way to invest if you have a limited amount to invest. It doesn’t matter whether you have just Rs. 500 or Rs. 1,000 to invest every month. You can begin your investment journey starting at Rs. 500.

2) Experience

In a lump sum investment, you invest the entire money in one go. This means you must invest at the right moment to maximize your returns. You can gain good yields if the market performs well. But the downside is you could end up with a significant loss if the market suddenly moves downwards. This can be a suitable strategy for experienced investors with a large amount of money. But if you are a new investor, sticking to SIP investments can avoid unnecessary risks.

3) Investment discipline

In the long-term, SIP investments help investors take better care of their finances. When you invest a fixed amount of money each month, you can manage your money in a manner that can fulfil your investment. Your progress might appear slow, but when you look back after a while; you would have invested a considerable amount. The SIP mode can help you earn a large corpus slowly and steadily.

This sort of investment discipline doesn’t happen for lump-sum investments because most investors may not have a large amount of money to invest consistently.

So, based on your investment amount, risk appetite and experience, you can choose between SIP and lump sum investments. But overall, experts generally recommend investors to invest through SIPs rather than a lump sum.

How to Customize SIP

Several investors (especially salaried people) prefer the monthly format of SIP investments. This is because they can directly transfer the SIP amount to the fund when they receive their monthly salaries. However, there are many other options you can pursue.

Frequency of SIP

Mutual fund houses allow investors to invest in SIPs weekly, fortnightly, quarterly or semi-annually. And if you want to invest for the future without fixing an end date, you can do that too. This is possible through the ‘Perpetual SIP’ option.

Perpetual SIP

Under this option, you can simply transfer a fixed amount into the mutual fund regularly for as long as you want. Give a standing instruction to your bank account and the money gets transferred directly on a specific date. This can be a good choice if you have a significant financial goal in the distant future (retirement, marriage expenses of your child) and you want to create a large corpus.

Step-up SIP

The step-up SIP option allows you to ‘step-up’ or increase your SIP investments on a periodic basis. Imagine you start a SIP with Rs. 1,000 per month. You can give an instruction to step-up the SIP by a fixed amount or a fixed percentage. So, if you choose to step-up by Rs. 1,000 every year, you would have to invest Rs. 1,000 per month in the first year; Rs. 2,000 per month in the second year and so on.

Stepping up your investments in this manner offers two benefits:

1. You could earn a larger corpus during the investment tenure.
2. You could reach your goals at a faster rate.

Choose the step-up frequency and the amount based on your investment goals and budget. You can use an online step-up calculator to get clarity on how your investments can grow over the years.

SIP FAQs (Frequently Asked Questions)

1) Why should I choose a Systematic Investment Plan?

A SIP is a simple and cost-effective way to invest your money in mutual funds. It can be a good option if you want to minimize your risks and invest a fixed amount in mutual funds regularly.

2) What is the best time to invest in SIP?

There is no ‘good’ or ‘best’ time to invest through a SIP. The best thing about SIP investments is that you don’t have to time the market or wait for the perfect opportunity to invest. Once you select a particular fund to invest, you can choose any date of the month and invest regularly. Automate your investments to make the entire process simpler.

3) Is SIP a good investment option for long-term wealth?

Investing through SIPs for the long-term can be an effortless way towards wealth creation. This is because compounding comes into play. The returns you could earn on your investments grow large over time. And the longer you invest, the higher profits you could garner.

4) How much should I invest in a mutual fund through SIP?

Most fund houses allow investors to start investing in SIPs with just Rs. 500. As for upper limits, there are none – you can invest any amount.

5) Can I miss a SIP payment?

Yes. You can miss your SIP payments. And even if you do, your account will not get deactivated. Fund houses also give you the option to pause your payments for a specific period. This is a useful feature you can use in case you are unable to make your monthly SIP payments.

6) Do all investments through SIP have tax benefits?

No. You can avail tax benefits only on SIP investments in Equity Linked Saving Schemes (ELSS). Every year, you can get a tax deduction of Rs. 1.5 lakh on ELSS investments under Section 80C of the Income Tax Act.

7) Is SIP safe?

SIP is only a mode of investment. It is not an investment in itself. For example, you can invest in equity funds, debt funds and hybrid funds through SIPs. So, the risk feature depends on the type of investment you choose.

8) How do I start my SIP investment?

You can start SIP investments by selecting a fund you want to invest. But before that, complete the necessary formalities and furnish your KYC details to the Asset Management Company (AMC).

9) How to shorten SIP duration?

Contact the fund house through a written application or an online request to shorten your SIP duration. However, you need to complete a minimum investment period for this request to be considered.

10) How can I extend my SIP duration?

When you complete your SIP term, you have the option of renewing your investment. Fill out the appropriate form and state the desired tenure for the investment to extend your SIP duration.

Note – SIP does not any assure a profit or guarantee protection against loss in a declining market.