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Systematic Investment Plan SIP

Systematic Investment Plan SIP- Meaning of SIP, Features and Advantages, How does SIP work? SIP Calculator, SIP FAQs 

To fulfil the dreams that we have, including buying a car, home, foreign tour, marriage of self or children, buying properties etc, requires wealth creation. If you want to create wealth using the dynamics of the share market, you don’t have to invest in bulk amounts. Whether you are a salaried person or a businessperson, if you think with a long-term vision, you can still create your targeted wealth using a systematic investment from your regular earnings. That’s where the Systematic Investment Plans SIPs will benefit you. The power of rupee cost averaging and compounding with high long-term market growth will help to achieve financial success in your life.

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What is a Systematic Investment Plan (SIP)?

A Systematic Investment Plan SIP is a systematic yet simple mode of investing in mutual funds to reap the benefits of NAV price averaging, compounding of returns and higher market returns. The process involves the customer investing a certain pre-determined amount in a specific mutual fund scheme on a regular basis – be it weekly, monthly, quarterly etc. SIP lets you invest systematically thereby averaging out your cost of investing and benefiting from the power of compounding. The power of compounding works best as you stay invested helping your money earn more money itself, over the years.

The SIP option allows the investor to invest as low as Rs 500, an affordable amount for any class of investors to get an entry into the world of mutual funds.

How SIP is different from mutual funds?

What are mutual funds?

Mutual funds pool money from multiple retail investors. A mutual fund is an investment vehicle where many investors pool their money to earn returns on their capital over a period. This corpus of funds is managed by an investment professional known as a fund manager or portfolio manager. It is his/her job to invest the corpus in different securities such as bonds, stocks, gold and other assets and seek to provide potential returns.

The gains (or losses) on the investment are shared collectively by the investors in proportion to their contribution to the fund. Retail investors receive a share in the form of units. The fund managers, using their expertise, then invests in stocks and bonds on behalf of the investors. Once the fund earns returns, it is distributed to the investors in the proportion of their investment.

You can invest in mutual funds either in a lump sum or through a systematic investment plan SIP. A lump sum is a one-time investment while a systematic investment plan SIP is a staggering investment wherein you can invest a fixed amount in a specific interval over a chosen period of time.

What is SIP?

We have already defined SIP above. We can also say that SIP is a method of investing in mutual funds. As the name suggests, through a mutual fund SIP you can invest systematically over a period and create a corpus to meet your different financial goals. SIP is not different from mutual funds; it is part of it. SIP is the simple way to begin your journey with mutual funds without the need for large investments,

What are the types of SIPs?

Now that a lot of ground has been covered on what SIP is, how SIP works, and the benefits of SIP, let’s talk about the types of SIPs you can opt for.

a) Fixed SIP

Under fixed SIPs, you need to choose an amount, a date till which you wish to contribute, and the rest of the process is automated. It’s important to keep in mind that unless you set an end date yourself, these SIPs will terminate by default in the year 2099. Though fixed SIPs are also the most popular choice among investors, there are other types that could potentially suit your investment style better.

b) Top-up SIP

Top-up SIPs are great for investors who want to increase their SIP contributions periodically. For instance, if you may have started off with a small amount initially, say Rs 500, and now wish to increase the amount periodically, then, you can use the top-up SIP option. If you wish to increase the SIP of Rs 500 per month by another Rs 500 after six months, for example, you can do so.

c) Perpetual SIP

In this type of SIPs, the date at which the plan ends are not defined. Your bank account will keep debiting periodically until and unless you instruct the fund manager to stop the investments. If you don’t want your investments to be limited to a certain number of years, perpetual SIPs are an ideal option that eliminates the need for repeated renewals. You can redeem your investments anytime you choose, of course.

d) Flexible SIP

A flexible SIP offers you the flexibility to change the amount per contribution or skip a few contributions if you so choose. Flexible SIPs allow you to either top-up or cut down your investment made periodically based on your access to cash. Even though a certain amount is set when you start this SIP, you can change the amount up to seven days before the next instalment begins.

How to choose the best SIP?

SIP is a way of investing; it is not an investment in itself. So, there aren’t many variants of SIP. You can opt for weekly, monthly or quarterly SIPs. Typically, most investors prefer monthly SIPs to coincide with their salary pay-outs.

The following points should be kept in mind while choosing a SIP.

  • You must choose your mutual fund scheme carefully.
  • You should look at the objectives of the fund scheme and how it aligns with your financial goals.
  • Check the past performance of the fund over different market cycles.
  • Compare the fund’s performance with its peers.
  • Check out the rating of the fund.
  • You could also look at the fund’s expense ratio before you opt for a SIP. The expense ratio is annual charges in percentage that are needed to manage or operate your investment portfolio.
  • It is important to look at the fund philosophy, investment horizon and your own goals while choosing a good mutual fund for SIP investment.
  • Rather than focusing on a nice mutual fund for SIP, focus on what fund is in line with your investment principles and timeframe.

If you are satisfied that the fund is right for you, go ahead and start a SIP in it.

Systematic Investment Plan SIP

How does SIP work?

It is highly essential to know how the overall SIP process works before you invest. The stages of SIP investments from the beginning to the point where you complete the investment process are listed below.

a) Set your Investment Goals

Every mutual fund is built around an objective to achieve. You have to analyse your requirements and choose that fund which is in sync with your goals and risk profile. If you are finding it difficult to choose the right mutual fund, then let us know your requirements, we will shortlist funds accordingly.

b) Choose a mutual fund scheme and fund manager

As we discussed earlier, SIP is all about systematically investing in mutual fund schemes. Selecting a mutual fund scheme is the first step toward this process. You should choose a fund considering the same various factors as discussed in the section “How to choose a SIP?” above. Since the future performance of the selected fund scheme will be crucial for the success of your investment plan, this selection assumes utmost importance.

c) Selection of an investment period

The selection of an investment period is important considering your targeted goal. You need to look at your financial goal and the timeframe required to achieve the same. You may use our “Mutual Fund SIP Calculator” to understand how long you need to invest considering the investment size that you can afford.

d) Select an investment period and frequency

The next step to your SIP investment journey is to choose an investment period and frequency you feel comfortable with. The most common frequency for salaried people is the monthly frequency and for self-employed, it varies depending on their cash flow situation. However, if you have reasons to select a different frequency, you may choose to invest weekly, quarterly, semi-annually, or annually.

e) Setup your SIP

The next step is to set up your SIP with the mutual fund scheme that you have chosen initially. You have multiple avenues available to set up the SIP. You can invest through the website of the fund manager, using online platforms, mobile apps, online banking facilities by certain banks etc. If you’re a first-time investor, complete your KYC and enter the bank details along with your SIP contributions and frequency, and you’re done.

f) Auto debit setup

Once the setup process with the mutual fund scheme is over, you need to set up the auto debit to make the monthly payments, if you want such an auto payment system. You may also choose not to go into auto debt and make manual payments every time. But setting auto debit will make the journey hassle-free and comfortable. Once you set up the auto-debit mandate, the funds will keep debiting from your bank account based on the frequency you entered while setting up the SIP.

Features and advantages of SIP

The features and benefits of SIP are not just limited to the instalment system of investing, there are many more benefits to investing in SIPs.

1. Safe entry to share market investments

A Systematic Investment Plan SIP provides an opportunity for retail investors to enter share market investments with lower investments systematically over a period of time. With the power of compounding, cost averaging and professional fund management, SIPs are considered to be a safer option for retail investors to enter into the world of mutual funds.

2. Low entry level

You can plan the amount you want to invest in SIP Mutual Funds and eliminate the burden of lump-sum investments at a single time. A systematic investment plan helps you make small investments regularly over the long term. The minimum amount needed for a SIP in mutual fund investment is Rs. 500 but you can invest any amount higher than that, making it appropriate for all kinds of investors.

3. Disciplined saving

As the name suggests, a Systematic Investment Plan (SIP) makes the investment process more organised and disciplined. If you are looking to create wealth using the discipline of saving money, systematic payments are the best place to start. It will help you save money as well as earn returns on your savings.

4. Rupee cost averaging

NAV cost averaging is one of the most attractive benefits of investing in SIP. The equity markets are always volatile. SIPs can help you escape market volatility by eliminating the guessing game of market performance.

When the markets rise, you get fewer units, and when the markets fall, you receive more units. This minimizes your risk and ensures you acquire investments at a lower average cost per unit. Regular investing ensures that the average purchase cost is evened out in the long run.

The following scenario will make it more clear for you.

Let’s assume that an investor opted to invest Rs 10,000 per month in a SIP starting from Jan 2022. The details of the NAV at the time of purchase and his average cost at the end of year one are calculated below

Month of purchase

Monthly investment (Rs)

NAV on purchase (Rs)

No of units

Cumulative units

Jan

10,000

100

100.00

100.00

Feb

10,000

98

102.04

202.04

Mar

10,000

96

104.17

306.21

Apr

10,000

99

101.01

407.22

May

10,000

103

97.09

504.30

Jun

10,000

101

99.01

603.31

Jul

10,000

92

108.70

712.01

Aug

10,000

91

109.89

821.90

Sep

10,000

94

106.38

928.28

Oct

10,000

102

98.04

1026.32

Nov

10,000

97

103.09

1129.42

Dec

10,000

109

91.74

1221.16

Total

 

1,182.00

1,221.16

 

His average cost of NAV comes to only Rs 98.50 (1,182 / 12), the magic of rupee cost averaging.

5. Power of compounding

This is another prominent advantage of investing in SIPs. The interest/earnings earned over the principal gets reinvested and the returns also fetch you earnings. This means you earn returns on your returns. The longer you invest and hold your investments, the greater the chances of your returns compounding.

The flowing scenario will make it more clear for you.

Mr X started to invest in SIPs at Rs 10,000 per month at the age of 40 with a target to redeem the same upon his attaining 60 years of age. Assuming returns of 9% per annum.

His corpus at the age of 60 years (12 x 20 years investment) will be Rs 67,28,961

Whereas Mr Y started to invest in SIPs at Rs 10,000 per month at the age of 20 with a target to redeem the same on his attaining 60 years of age. Assuming returns of 9% per annum.

His corpus at the age of 60 years (12 x 40 years investment) will be Rs 4,71,64,302

Regular investments spread over longer durations yield greater returns and profits. This is the power of compounding.

6. Convenience

Most other investments require a long process to complete whereas, the investors who invest in SIP mutual funds can find it convenient to invest because it is a hassle-free process. Investors can choose to make the periodical payments through the auto-debit system. Most bankers provide the same. The monthly, weekly, or quarterly SIP is deducted directly from the bank without any manual process. This is a great option for the investors who are busy earning money and let the process be automated.

7. Flexible investing

Unlike recurring deposits (RDs), SIPs can be stopped any time by opting out of the SIP plan. Once stopped, investors can redeem their investments any time they want. In the case of any failed auto-debit payments of the SIP, the investors continue the investments from the next payment period without any penalty from the fund manager.

Calculate your SIP investment returns

You can also adjust the inflation rate to get the inflation-adjusted returns.

SIP CALCULATOR

Investment Amount is required

Expected Annual Returns is required

Investment Period is required

What is SIP Calculator?

A Systematic Investment Plan (SIP) calculator is an online financial tool that can help to calculate the returns you would earn on your SIP investments. The calculator also tells you how much you would need to invest every month to earn a target corpus. Simply put, it provides a roadmap to achieving your various
financial goals.

The calculator can be highly effective in automatically computing complex financial calculations, without the need for a pen and paper. You merely need to provide a few inputs, and the calculator arrives at the result in a matter of seconds.

How to calculate SIP investments?

That is the big question for many investors. The answer is a mutual fund SIP calculator online. A SIP return calculator for mutual funds generally has three input boxes. They are:

  • Monthly investment amount
  • Investment period
  • Expected annual returns
  • Inflation rate in %, if required

You need to enter the amount you wish to invest in a fund every month. For instance, it can be as little as Rs. 500 or as high as Rs. 10,000 (or more), depending on the amount you wish to invest.

 

How is SIP calculated?

The formula to calculate SIP is, FV = P [ (1+i)^n-1 ] * (1+i)/i

Where,

FV – Future value or the amount at the maturity,
P – Amount invested through SIP,
i – Compounded rate of return,
n – investment duration in months,
r – Expected rate of return

SIP FAQs

Frequently Asked Questions on Systematic Investment plans and their answers.

1. What is a systematic investment plan or SIP?

A Systematic Investment Plan (SIP) is a systematic approach to investing in share market and mutual funds and involves allocating a small pre-determined amount of money for investment in the market at regular intervals (usually every month).

2. How is SIP beneficial to investors?

A SIP gives a flexible and convenient way of investing with long-term growth potential, the power of compounding and rupee cost averaging.

3. How is SIP returns calculated?

The formula to calculate SIP is, FV = P [ (1+i)^n-1 ] * (1+i)/i

Where,

FV – Future value or the amount at the maturity,

P – Amount invested through SIP,

i – Compounded rate of return,

n – investment duration in months,

r – Expected rate of return

4. How to calculate SIP returns?

If you are to estimate the returns your SIP investment is going to provide your in future, then you have to follow the simple steps mentioned below:

  • Go to our SIP Calculator
  • Enter the SIP amount of your choice
  • Enter the duration of your SIP
  • Enter the expected rate of return using the sliding scale

Once you have entered the details above, our SIP calculator will show the estimated returns your SIP investment would generate.

5. When can I start SIP- at any time or when the market is high?

SIP can be started at any point in the time and at any stage of the market. The idea of SIP is to avoid the timings of the market and start investing with a purpose. Due to rupee cost averaging maximum benefits are attained irrespective of the market’s condition.

6. What is the minimum amount to start a SIP?

The investors can start investing in SIP mutual funds with a minimum amount of as low as Rs. 500.

7. What is the right time to start a SIP?

Unlike the bulk investments in mutual funds, there is nothing like a right time for SIPs to start investing. Since SIPs have the advantage of rupee cost averaging, you can start investing at any time, whether the market is at a peak or low. Since you invest in SIPs for a longer term, your purchases of units will go through every situation of market performance and that will help to average the price. 

9. What is the frequency of investing in SIPs?

You can invest in SIPs in daily, weekly, monthly or quarterly, depending on your earnings and financial goal.

 

10. Is there any upper limits in SIP investments?

No, this is a misconception that systematic investment plan SIP investments are only done in the case of small amounts. You can invest as much amount as you want, there is no upper limit to the SIP amount. Due to its compounding ability, big investments can lead you to large wealth, so investing big amounts is rather a good option.

 

11. How can I invest in a SIP?

You need to choose the mutual fund scheme after analysing various factors including past performance, expected returns, your financial goals etc. Then go to the website of the mutual fund to start the SIP online. Most of the banks provide the facility on their net banking portals to invest in mutual funds and SIPs. Also, there are lots of web-based platforms and mobile apps that provide the facility of enrolling for SIP. You need to complete your KYC if you are a first-time investor.

 

12. How are SIPs taxed?

Returns on SIPs are taxable. SIPs are taxed on a FIFO (first in first out) basis. This means that if you redeem part of your investment made through SIPs, the earliest SIPs are redeemed first and are taxed first and the later SIPs are redeemed later are taxed later. The SIPs will be taxed only on redemption.

If a SIP of an equity fund is held for less than 12 months, there will be short-term capital gain taxable at 15%. But if a SIP of an equity fund is held for 12 or more months, then there will be long-term capital gain taxable at 10% in excess of Rs. 1,00,000/-.

 

13. What is switching of SIP?

The switch is nothing but exiting from one mutual fund scheme and investing in some other mutual fund scheme. Redemption will be considered from the source scheme and investment will be considered in target schemes

14. What is redemption of a SIP?

Redemption is the return of an investor’s investment value which is dependent upon the market. The redemption of an investment may generate a capital gain or loss, and the taxation of capital gains is reduced by capital losses recognized in the same year. Capital gains and losses are recognized on both fixed-income investments and mutual fund shares. The redemption process can be directly credited to the investor’s bank account within 10 working days.

 

15. How to redeem SIP mutual funds online?

You can redeem the SIP units by logging into your investment account with the fund house or the online portal or mobile app that you used to setup the SIP. Your redemption request will be processed at the NAV prevailing on the day of your redemption request.

 

16. Who is a Nominee in SIP?

Investors can opt for nominees while investing in mutual fund schemes. A nominee may be any person or firm known to the investors. The nominee may not be the ultimate beneficiary of the investment value, but they are the custodian of the units in case of the demise of the unit holder.

17. What is Transmission of SIP units?

Transmission of Mutual fund SIP unit is nothing but the transfer of unit from an investor to the nominee in case of investors demise. To complete the hassle-free transfer of units following are the documents required: –

  • Letter from claimant nominee/s to the AMC/ Mutual Fund requesting for transmission of units,
  • Death Certificate/s in original or photocopy duly notarized or attested by gazette officer or a bank manager*
  • Bank Account Details of the new first unit holder (nominee) as per specified format along with attestation by a bank branch manager* and cancelled cheque or bank statement bearing the account details and account holder’s name.
  • KYC of the claimant(s)/(nominee).

18. How to invest in ELSS through SIP?

An equity-linked savings scheme (ELSS) is a popular tax saving investment eligible for deductions under Section 80C of the Income Tax Act 1961. Sec 80C investment which offers tax deductions of up to Rs 1,50,000 a year. You can save up to Rs 46,800 in taxes a year with ELSS. You can initiate a SIP into an ELSS fund of your choice by creating an investment account with the respective fund houses.

Once you have your investment account and have undergone KYC verification, you can initiate a SIP by linking your bank account with your investment account. Note that the fund units bought by every SIP instalment are locked in for a period of three years from the date of purchase.

 

19. What is SIP top-up?

A SIP top-up is an option which allows you to increase the ticket size of your SIP at predetermined dates. This option helps you stay ahead of inflation as you are automatically increasing your investments.

20. Is it fine to continue an SIP in a small-cap fund when the stock market is at its peak?

Always invest through SIPs in small-cap funds. Never invest a lump sum. Small-cap funds are more volatile. But don’t stop your SIPs and wait for correction. It is very difficult to catch the bottom and the peak. Even if you get lucky with the correction, it will be extremely difficult for you to get in again. So, continue with your SIPs. They will help you average out your buying price and will improve your returns over time.

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