What is SIP in mutual fund investment & how does SIP work?

A Systematic Investment Plan (SIP) is a type of investment that allows you to make small investments in mutual funds at regular intervals. In fact, you can get started with as little as Rs.1000 instalments and decide the periodic interval at which you would like to invest: monthly, quarterly, and so on. Plus, once you set up your SIP in mutual funds, the investment will be automated, and your instalments will be diverted automatically into your chosen mutual fund on the designated date.
SIPs are a suitable option for both novice and experienced investors since they provide discipline to your investment process. SIPs also encourage the practice of consistent saving and investing. You can also benefit from the power of compounding by continually investing a set amount. Over time, compounding can do wonders. Another advantage of SIP investment is rupee cost averaging.

• Table of contents

1. What is SIP?
2. How does SIP work?
3. SIP and rupee cost averaging: An example
4. Types of SIP
5. Features of Systematic Investment Plan (SIP)
6. Benefits of SIP
7. How to start an SIP investment
8. Why you should invest through SIPs

What is SIP?

A Systematic Investment Plan (SIP) is a way to invest in Mutual Funds that allows investors to contribute a fixed amount regularly, such as monthly or quarterly, rather than a lump sum. You can start with as little as Rs. 100 or Rs. 500 per month. The deductions can be automated, meaning that the instalment will be automatically debited from the linked bank account on the due date. SIPs can be a suitable way to potentially build wealth over time through consistent contributions. contributing to optimal returns.

How does SIP work?

When you start an SIP, you typically commit to investing a fixed amount at every interval, such as monthly. Your investment is used to buy units in the mutual fund scheme you have chosen. With each investment, you purchase additional units. On the SIP date, the chosen amount is be deducted from your bank account and used to purchase units at the prevailing Net Asset Value (NAV). When planning an SIP, you can use online tools such as the mutual fund sip return calculator to you’re your investments. Based on your SIP amount, tenure, and expected returns, the calculator tells you how much you can potentially earn on your investments. You can try out different values till you arrive at a suitable plan.

SIP and rupee cost averaging: An example

Let’s assume you are investing Rs 1,000 every month. If the NAV for 1 unit is Rs.10, you will be allotted 100 units for the first instalment. If the NAV rises to Rs. 20, you will be allotted 50 units for the second instalment. Conversely, if the NAV falls to Rs. 5, you will be allotted 200 units for the third instalment. Therefore, by the end of the third instalment, you will have 350 units, which comes to a per-unit price of Rs 8.57 (approx.).

Types of SIP

While traditional SIPs are the most common, some asset management companies offer certain variations to add flexibility to SIP investing. Some SIP types include:

Fixed SIP: You can change the end date of your SIP. If you do not specify it, then your SIP would end in 2099.

Perpetual SIP: This is the SIP type where you can keep investing in mutual funds with no end date. You can also ask the fund house to stop the withdrawals whenever you want.

Top-up SIP: You can set periodic increments in your SIP instalments as your income grows. For instance, you can increase your SIP contributions by 10% each year.

Flexible SIP: This SIP type allows you to change each instalment amount or skip instalments based on your preference. You only need to inform the fund house in advance based on the terms of the mutual fund.

Trigger SIP: Instead of investing a fixed amount at fixed intervals, investors can initiate SIPs based on certain triggers linked to market events. For instance, an investor may set up a trigger SIP that initiates an investment when the NAV falls below a certain level. This can help investors time the market even when investing through SIP.

Features of Systematic Investment Plan (SIP)

SIPs offer convenience, affordability and discipline, which can make them attractive to investors. Here are some of the features of SIP:

1. Regular investments: SIPs allow for disciplined and regular investments, making it possible to build wealth over time with affordable but periodic contributions.
2. Rupee cost averaging: By investing on schedule regardless of market conditions, SIPs offer rupee cost averaging, buying more units when prices are low and fewer units when prices are high.
3. Flexibility: Investors have the flexibility to choose the frequency (monthly, quarterly, etc.) and amount of their investments, making it adaptable to their financial situation.
4. Power of compounding: SIPs benefit from the power of compounding, where the returns generated on investments are reinvested, potentially leading to exponential growth over the long term.
5. Affordability: With low minimum investment requirements, SIPs make it accessible for investors to start with small amounts and gradually increase their contributions as their financial capacity grows.

Benefits of SIP

Investing in mutual funds through SIPs can be an affordable and convenient way to build wealth over time through consistency and the power of compounding. Here are some of the benefits of SIP.

Develop discipline: One of the main advantages of SIP investing is that it instils discipline in your approach to investing. You can create a saving and investing habit by committing to a specific investment amount at regular periods. With this methodical approach, you may avoid the temptation to time the market and maintain your attention on your long-term financial objectives.

Flexibility: Another benefit of SIPs that meets the various needs of investors is flexibility. SIPs give you the flexibility to change the investment amount in accordance with your financial capabilities and goals, unlike traditional investing choices. As a result, depending on your financial circumstances, you can change the SIP amount.

Low entry level: SIPs have enabled people who do not have large sums for investment to start investing in mutual funds. The entry level is low, and you can get started for as less as Rs.1000.

Beginner-friendly: Beginners may find it difficult to read market movements for investing a lump sum in mutual funds. SIP creates a relatively stable way for them to do so. Moreover, an SIP allows you to take advantage of rupee-cost averaging since units are allotted for each instalment based on the prevailing NAV, whether the market is up or down.

How to start an SIP investment

Here are the steps you need to follow to start a systematic investment plan:

1. Define your financial goal linked to your SIP investment.

2. Select the mutual fund house and mutual fund scheme you want to invest in.

3. Choose the SIP instalment amount, investment frequency and SIP time horizon.

4. Set up the auto-debit process from your bank account for SIP contributions.

5. Check your mutual fund account at regular intervals.

Why you should invest through SIPs

Things to consider while starting SIP

Here are some important factors to consider before beginning your investment journey so that your investment aligns with your financial goals and risk tolerance:

Define your investment goal: What are you saving money for, and what is the objective of your investment? You may be seeking to grow wealth over time, or you may be looking for an avenue that has modest growth potential but is relatively stable.

Define your investment horizon: Identify whether you are investing for short-term goals like buying a car or long-term goals such as retirement.

Assess your risk tolerance: Understand your ability and willingness to take risks. Different mutual funds come with varying levels of risk, from low to very high.

Choose the right fund: Select the type of fund that aligns with your goals and risk appetite. For example, equity funds may be suitable for investors with a high risk appetite looking for long-term growth potential, while debt funds may be suitable for conservative investors seeking relative stability of capital invested.

Decide the SIP amount and frequency: Choose an amount that you can comfortably invest regularly without straining your finances. Also determine how often you want to invest (monthly, quarterly, etc.), depending on your income flow and financial commitments.

Conclusion

By now, you know what SIP is in mutual funds and how it is beneficial for all investors. Also, once you set up the auto-debit process, the SIP instalments get debited from your bank account automatically on the specified dates. Through SIPs, even beginners and people who do not have a lumpsum amount handy can invest in mutual funds. Moreover, SIPs help you build the discipline of investing a fixed sum regularly. The best part is that you get the benefit of investing in professionally managed mutual funds in small instalments.

FAQs:

Why should I choose a Systematic Investment Plan?

Choosing a Systematic Investment Plan (SIP) can be beneficial for disciplined investing and achieving your financial goals in a systematic manner. SIPs allow you to invest a fixed amount at regular intervals in a mutual fund, which helps you to average out the cost of investment and benefit from the power of compounding.

What is the best time to invest in SIP?

There is no defined ‘best time’ to invest in SIP. However, the earlier you start investing in SIP, the better corpus you can build in the long run. Since SIPs help average out the cost of investment, it is beneficial to invest in them regularly to achieve your financial goals in a disciplined manner.

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

SIPs can be a good option for long-term wealth creation as they can help create wealth through the power of compounding. They also offer the benefit of disciplined investing and averaging out the cost of investment, which can help reduce the impact of market volatility.

How do I start my SIP investment?

To start your SIP investment, you can choose a mutual fund scheme that aligns with your financial goals, risk appetite, and investment horizon. You can then register with the fund house or a third-party investment platform, or distributors to set up your SIP.

Is SIP in mutual funds taxable?

The SIP investments themselves are not taxable, but mutual fund returns (capital gains or dividends) are taxable. The tax amount depends on the type of scheme and holding period of the investment.

How safe is it to invest in SIP?

All mutual fund investments are subject to market risks. Returns or safety of capital are not guaranteed. Some of the investment risks include:

Market risk: The value of investments can fluctuate with market conditions, impacting returns.
Credit risk: Debt funds may face default risks from issuers of securities.
Interest rate risk: Changes in interest rates can affect bond prices, impacting debt fund returns.
Liquidity risk: Difficulty in selling securities can lead to potential losses.
Management risk: Fund manager's decisions may not always yield positive outcomes.
Inflation risk: Returns might not always outvpace inflation, reducing purchasing power.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.