Systematic Investment Plan
systematic investment plan, commonly called an SIP, is a Godsend to those who wish to multiply their wealth intelligently and efficiently, without putting too much of it at stake at any given time.
Simply put, a SIP is nothing but a plan through which a fixed amount of money is invested into a mutual fund scheme at fixed intervals, for a fixed or variable duration of time (depending on the type of plan/fund scheme). In SIPs, instructions to increase/decrease the value of the monthly instalment, start/stop at predetermined intervals, etc. can also be given.
What is SIP?
SIP or Systematic Investment Plan is a method of investing in mutual funds. Under the SIP investment method, an investor picks a mutual fund scheme and decides to invest a certain fixed amount at fixed intervals. Investing in one scheme through small instalments over time (rather than with a large amount at once) is Systematic Investment Planning.
For example: Mr. Anand wishes to invest ₹25,000 in a mutual fund, but does not have this amount ready to invest at the moment. Mr. Anand can invest ₹2,500 per month for the next 10 months, so the eventual total value of his investment will be ₹25,000. In this way, Mr. Anand has fulfilled his investment goal and also gained many benefits - such as Rupee Cost Averaging, budgeting, etc. (which are explained below). This method of investing a fixed amount over time for a particular goal through a particular mutual fund is called Systematic Investment Planning or SIP.
How does SIP work?
The simplest way to understand the basic workings of SIPs is to imagine a child and a piggy bank. The child ‘deposits’ a certain amount at certain intervals and before he knows it, the contents of the piggy bank have built up to a respectable amount.
In the same way, a systematic investment plan deposits a certain amount of money, which could be as low as ₹500 or as high as the investor wishes, at certain fixed intervals of time, which could be a week, a month, an annual quarter, etc., and allows this amount to build up over time. The biggest difference between the piggy bank and the SIP, however, is the fact that SIPs don’t just keep the money aside for you, but also invest that money into profitable businesses and give you a share of the earnings. Also, with every periodic investment, the amount being reinvested keeps growing larger - which means that returns on the investments grow larger as well.
It’s up to the investor to decide whether he/she wishes to receive these investment returns in a periodic format, or as a lump sum at the end of the SIP’s tenure, when the investment matures.
Of course, the detailed workings of a systematic investment plan that invests in mutual funds
are a bit more complex and they sometimes speak a different language, but understanding the different types of SIPs can help patient investors reap massive rewards.
Why Invest in SIP?
There are many reasons as to why investors prefer investing in mutual funds through SIP, the benefits of SIP are listed below:
Rupee Cost Averaging: SIP investments facilitate a phenomenon called Rupee Cost Averaging. To understand it, let’s first see how mutual funds are purchased and held as investments with an example:
In October 2018, Mr. Anand has ₹60,000 on hand to invest into a mutual fund scheme. He has two options: lump sum or SIP.
Lump sum: He decides to invest it all at one go in October. He goes online, signs up with an online mutual fund investment platform and purchases ‘Units’ of a fund in exchange for his money. These ‘mutual fund units’ represent his ownership of the fund. Let’s assume the NAV in October is ‘200’ and Mr. Anand received 300 units for his ₹60,000 lump sum investment.
SIP: In the same scenario where the NAV in October is ‘200’. Mr. Anand purchased 100 units for ₹20,000. In November, the NAV rose to ‘250’ and Mr. Anand’s next investment of ₹20,000 fetched him only 80 units - for the same price. In December, the NAV dropped to ‘100’ and his ₹20,000 gets him 200 units. So through SIPs, Mr. Anand’s ₹60,000 has bought him a total of 380 units only because of the fluctuating market.
So, for ₹60,000 in total, Mr. Anand received 300 units through lump sum investing at a cost of Rs 200 per unit and 380 units through SIP at an average cost of Rs 157.9. Through SIP, Mr. Anand has the benefit of owning a greater number of fund units because of Rupee Cost Averaging. The cost of funds averaged over time, giving Mr. Anand more units for the same investment amount.
In reality, the NAV of mutual fund schemes rises and drops on a daily basis, and savvy investors get ahead of the game and own more mutual fund units through planning their investments around NAV fluctuations. The NAV of all funds rises and drops based on the performance of its investments. ‘Mutual Fund Units’ represent an investor’s share of ownership in a particular fund and form the basis on which the mutual fund is traded with the investor. When the fund’s investments are doing well, the price of Units increases. This means that the Net Asset Value (NAV) of the fund has increased.
Minimizes risk: Investing small amounts on a monthly basis rather than one large amount at once means that the investments can be stopped at any time the investor desires. In the rare and unfortunate event that a well-performing fund has a change in fund manager, or a risky investment doesn’t pan out well, or the fund displays below average returns for an extended time, the investor can simply stop investing. The SIP can simply be stopped and the investment can be to another well-performing fund to recoup any negative returns.
- Compounding: Earnings in a mutual fund scheme invested through SIP are added back to the investment itself, thus increasing its value. As subsequent investments are made through the course of the investment term, the total value is allowed to keep on growing by adding earnings to itself, to allow for greater growth.
- Budgeting: The importance of proper periodical financial planning cannot be understated. Many would-be investors earn more than enough to invest and multiply their wealth, but because of inadequate financial planning, don’t save enough to invest. Strict monthly budgeting can allow for huge amounts to be earned through investing very little. Systematic investment plans with standing instructions in one’s bank account can take the old saying ‘a penny saved is a penny earned’ to a whole new level.
Financial discipline: By establishing that an investment has to be made every month, a person can establish financial discipline. This is nothing but being disciplined and attentive when handling one’s money - a trait that is, by and large, lacking in modern India. A typical salaried corporate employee between 25-30 years of age typically realises far too late that he/she regularly spends way too much on non-vital and largely unnecessary things. Once this realisation happens, more importance is given to saving and spending only on the essentials. With an SIP, a positive expense is listed as a recurring month-on-month investment. By allocating funds separately for this, the remaining income is divided among vital expenses in a planned and disciplined way.
- Convenience: There is no reason for investors to go out of their way to invest in SIPs. The amount is automatically deducted from the investor’s bank account at a particular date every month. The state of the investment, its returns being generated, etc. can all be tracked online in an efficient and informative dashboard like the one in the FundsIndia mobile app. Investors can also simply sign and submit post-dated cheques set at the required investment frequency to ensure that regular investments are being made.
It is for these reasons, among many others, that the SIP investment route is preferred over the lump sum investment route.
How to start investing in SIP online?
Investing in mutual funds through SIP online is faster, easier, and more efficient than the traditional way. The online SIP investment route doesn’t require a ton of paperwork or frequent trips to an office for signatures. Investors simply register with their email ID and phone number and submit digital copies of ID/address proof online. A secure account is then created and the investor can pick and choose the ideal fund, as all the information is readily available online on FundsIndia itself. What’s more, FundsIndia has a dedicated team of award-winning investment advisors to suggest funds best suited to an investor’s individual needs.
Traditionally, SIP investments required a large amount of paperwork and frequent trips to the fund house, bank, or AMC. But today, SIP investments can be started within a couple of hours in an entirely paperless and fully secure online environment.
To get started, one must meet the eligibility criteria to invest in SIPs in India
, which is as follows:
- The investor must be an Indian Resident, Non-Resident Indian (NRI), or Person of Indian Origin (PIO) who resides abroad on a full repatriation basis.
The investor must be over the age of 18.
The investor must own a bank account with the requisite funds.
The investor must be sure that the SIP instalment amount will be readily available before the investment date.
One must also gather the required to invest in SIPs in India
- Proof of identity: A copy of any of the following documents can be submitted as ID proof:
- Proof of address: A copy of any of the following documents can be submitted as address proof:
How to invest in SIP?
Follow these steps to start investing in SIPs:
Log on to www.fundsindia.com
and create your free account
Submit the required documents online - either scan or send a picture of the required KYC documents for verification
A mutual fund advisor will call you and help you zero in on the best scheme suited to your individual needs and risk-taking ability
Set up the SIP investment by choosing an amount and frequency
- the amount
is ‘how’ much will be invested and the frequency
is ‘how often’ it will be invested (weekly, monthly, etc.)
Track your investments on the interactive online dashboard either on a PC or through the smartphone app
Sit back and watch your money grow!
When to invest in SIP?
This is a very common question and the answer is - “whenever you’re ready”. There is no ideal time of year/season/market condition to start investing in a mutual fund scheme through SIPs, as one of the primary benefits of SIP is the fact that they can minimize the negative impact of market forces over time. SIP investments can be started at any time with minimal risk, provided the scheme chosen is the right fit for the investor. Different schemes appeal to different investors and finding the right scheme for you is as important as the investment itself. For this, FundsIndia has a team of expert market analysts and award-winning investment advisors to help guide investments in the right direction.
The best time to invest in an SIP is as soon as you’ve found the best mutual fund scheme that fulfils all your requirements. Investing as early as possible in SIPs has proven to yield the best results.
Best SIP Plans to Invest in 2021
SIP investments can be started at any time - if you wish to know the eventual total value of a SIP - click here. This SIP calculator
can show the total value that your investments will gain over the years. Simply input your investment amount, tenure, and rate of return. If you already have a financial goal that you're investing towards - for example - if you need Rs.50,00,000 in 10 years to buy a house - this calculator can show you how much you need to invest, and what rate of returns you'll need in order to achieve your goal. Use these investment calculators to get a realistic idea of what your investment will look like over the next few years.
*T&C apply calculator is for informational purposes only.
When is the best time to start investing in SIPs?
The earlier that one begins an investment in SIP, the better. This is primarily due to the positive effect of compounding. Earnings on SIP investment are added back to the investment itself and allowed to grow - enabling the positive and powerful effects of compounding to take place. To make the most of a Systematic Investment Plan, start as soon as possible.
For example, Mr. Anand wishes to purchase a house at the age of 40. He invests just ₹17,000 per month in a mutual fund scheme through SIPs. (assuming a CAGR of 11%)
- If he begins his investment at age 25, he will have earned roughly ₹78,00,000 by the time he’s 40.
- - If he begins his investment at age 27, just two years later, he will only be able to earn ₹58,00,000 - a massive difference just because of a tiny two-year delay.
- - Had Mr. Anand waited until age 30 to invest the same way, he would only have earned roughly ₹37,22,000 by the time he’s 40 years old.
How much can I invest in SIP? What is the minimum and maximum investment in SIP?
To begin investing in mutual funds through SIP, one must assess his/her financial goals and the time in which those goals must be achieved.
SIP investments can be as low as ₹500 and as high as the investor wishes. Whatever the chosen amount, it must be available in the investor’s account on the SIP investment date. SIP investment dates are the dates on which the chosen amount gets deducted from the investor’s account and added to the mutual fund scheme in exchange for units. The frequency chosen by the investor - i.e. the regular cycle on which he/she wishes to invest - can be weekly, monthly, quarterly, biannually, etc., depending on the investor and whether these options are offered by the AMC, bank, or fund house. Most SIPs are invested in on a month-on-month basis - otherwise called a monthly frequency.
Will fluctuating market conditions negatively affect my SIP?
Prevailing market conditions affect the way mutual fund schemes investments perform, and this, in turn, affects the NAV or Net Asset Value of the scheme.
Market conditions will not negatively or positively affect an SIP investment due to the fact that a fixed amount is invested in a certain frequency, despite the current NAV. If the NAV is high in one month, the number of units purchased will be lower; but when the NAV falls, the number of units purchased will be higher. In this way, the number of units purchased for a fixed amount averages out over time. This is the benefit of Rupee cost averaging through SIP.
Is SIP a risky investment?
SIPs are among the easiest and safest ways to invest in mutual fund schemes. It removes the risk of buying at the wrong time when markets are high or not buying when markets are cheap. SIP ensures that you invest through different markets, therefore, minimizing timing risk. The inherent risk involved in mutual fund investing comes from the investments the fund makes. There are high-risk investments that offer the potential for high rewards, and low-risk investments that keep the investment safe but offer returns at a far lower rate.
SIPs are not a risky investment, but the mutual fund scheme in which they invest could carry a greater amount of risk than an investor can handle.
Can the investment amount in SIP be increased and reduced?
The recurring amount being invested in an SIP cannot be reduced, but it can be increased with online SIP schemes by simply intimating the fund house that you wish to do so. An investor can also stop or close a particular SIP investment and start another SIP investment in the same scheme at a lower or higher recurring amount, as is necessary.
In most cases, additional investments can be made in a particular mutual fund even if the investor has an SIP running for that particular scheme. A lump sum investment can be made at any time in addition to the existing recurring SIP investment, and this will increase the value of holding in that fund. The existing SIP orders will not be affected.
What happens if I miss an SIP instalment or payment? Can I miss an SIP instalment or payment?
Nothing happens to your SIP if you miss one SIP instalment. The SIP will only be terminated or cancelled by the fund house if an investor misses/does not pay 3 consecutive SIP instalments.
However, if the SIP instalments were being made through ECS - the bank from which the amount is being auto-debited will penalize you for missing a payment. The mutual fund house or AMC will not penalize you for a single missed payment.
If you are aware that you will have to miss your next SIP instalment, you can pause the SIP by informing the fund house/AMC and submitting a duly filled out request form.
Do I have to pay anything to the distributor, broker, or investment advisor for SIP? Is there a brokerage charged for SIP investments?
As per SEBI guidelines, mutual fund houses, AMCs, banks, etc. are no longer allowed to charge an ‘Entry Load’. An Entry Load was a charge levied as a percentage of the initial investment when buying into a mutual fund scheme.
Commission and brokerage are paid to brokers, distributors, and investment advisors by the bank, AMC, fund house that’s offering the fund.
However, investors can pay for the services of a broker, distributor, investment advisor, etc. if the investor finds that the services offered - such as professional fund management, proprietary technology, intuitive digital services, financial advisory services, etc. - are worth paying for.
Can I invest in SIP online?
SIP investments can be started online. Online SIP investing is the modern and preferred way to invest in SIP, as it involves minimal paperwork and investments made reflect immediately. Online SIP investments can be viewed on a dashboard that constantly tracks all the details about the fund such as NAV, fund performance, etc.
Can I withdraw from an ELSS SIP before 3 years?
No. For an ELSS plan
to reap the full benefit from taxation, it cannot be dissolved, redeemed, or withdrawn from at any time before the completion of 3 years from the investment date.
In the case of SIP investments in ELSS schemes, every instalment has to spend 3 years invested in the scheme before it can be withdrawn. This means that if an ELSS SIP investment started on June 2014, and subsequent instalments were made in July, August, September, October, etc., they can be redeemed in the respective month after 3 years - i.e. the instalment of June 2014 can be withdrawn after June 2017, the instalment of July 2014 can be withdrawn after July 2017, and so on, irrespective of the total value of the sum of all SIP instalments.
How to make payments into the SIP mutual fund scheme? How to pay SIP instalments?
The most convenient and most popular way of paying SIP instalments is via ECS - or Electronic Clearance Service - which is a digital standing order that is placed on your bank account. This standing order directs the bank to automatically transfer ‘Rs.x’ from your bank account to the mutual fund scheme. The ECS can be set up to automatically transfer money on a certain date - meaning that if you receive your salary on the 1st of the month, you can set up an ECS to directly debit Rs.x on the 5th of every month, thus establishing an SIP. The NACH - National Automated Clearing House system works in a similar and reportedly more efficient way. Direct Debit Mandate is another form of standing instruction with the bank and has the same effect.
Another convenient way of making SIP payments is to issue a number of post-dated cheques for the SIP amount. The number of cheques would be the same as the number of SIP instalments due until maturity, and the date on the cheque would be the date the SIP instalment is due.
Alternatively, you could log into your bank account online and manually make the payment on the SIP instalment date every month.
How can I track my SIP performance in FundsIndia?
You can log into your FundsIndia account and check the status, current NAV, number of units you own, etc. of any fund you’ve invested in through FundsIndia or transferred to FundsIndia.
The FundsIndia dashboard is an intuitive and informative online tool created to help keep investors stay abreast of changes and movements in their invested schemes. This dashboard can be accessed through an internet web browser after logging in at www,fundsindia.com or on the FundsIndia smartphone app available for Apple and Android.
What is Step-Up SIP?
Step-Up SIP is an option through which the SIP instalment amount can be increased periodically. The details of when the instalment amount should be increased, and at what frequency, etc. is determined at the time of making the investment.
Most SIP investors decide an amount of ‘Rs.x’ and decide to invest it for ‘y’ number of years without any changes during the course of the fund. Step-Up SIP is an option by which SIP investors can increase the amount being invested every month by ‘x’% or ‘Rs.z’ at periodic intervals.
Step-Up SIPs are preferred as they help investors maintain their current budgeting even after increases to their income - such as periodic bonuses, annual salary hikes, etc.
Step-Up SIP investing is a good way to ensure that your investments are staying ahead of inflation and are using the same percentage of your income.
For example: In 2016, Mr. Anand earns ₹50,000 per month and invests ₹5,000 every month in an SIP scheme. In 2017, however, his salary increases to ₹60,000 but his SIP investment is still continuing at ₹5,000 per month. Instead of having more disposable income in-hand, Mr. Anand wishes to invest it through SIPs in the mutual fund scheme. He leaves Step-Up SIP instructions stating that his SIP instalment amount should be increased by ₹1,000 every year to stay in line with his income that rises by ₹10,000 every year - helping him maintain the same disciplined budget and also increasing the value of his investments exponentially.
WWhat is a Flex SIP? What is Flexi SIP
A Flex SIP or a Flexi SIP is a type of SIP wherein the investor can choose to vary the investment amount before every instalment. This is particularly useful to those SIP mutual fund investors whose income and investible surplus varies month-on-month, i.e. those who do not have a fixed income.
The benefit of being able to choose a higher or lower investment for each SIP is very beneficial even to those investors who seek to maximize their earnings by timing their investments correctly.
Once a Flex SIP or Flexi SIP has been started, the investor can choose the exact instalment investment amount 7 days prior to the date the SIP instalment is due. A minimum amount must be defined in advance so as to ensure investments continue in the SIP, even if the investor does not actively allocate funds for that particular month.
What is a trigger-based SIP? What is trigger based SIP? Is trigger based SIP safe?
SIPs with a trigger facility, or trigger based SIPs, have a special feature through which investments can be made automatically when certain events (or triggers) occur. You can set rules within your SIP that dictate when units should be bought or sold, or when the units in one scheme should be switched over to another scheme.
A ‘trigger’ is nothing but a standing instruction given to the bank/AMC/etc., which states that a certain action must be taken if a certain event were to happen. For example, a trigger could be set up to “Purchase stock” in a particular fund when its price drops below ‘x’ level, so as to gain the first-mover advantage as soon as prices are reported to have dropped. For an investor who doesn’t want to waste any time between market fluctuations and investment actions, trigger-based investing is an excellent service. Instead of reading about the price drop, contacting the fund house/bank/AMC, and then instructing them to purchase or sell units (which could take hours), the investor can perform the same actions in a matter of seconds with an investment trigger.
Investment triggers are a double-edged sword, however, as they have the same potential to ruin an investment as they do to save it.
There are two main types of triggers - alert based triggers and action based triggers. Alert based triggers simply notify you when certain predefined events take place, so that you can take your own actions. Action based triggers perform the activity of buying, selling, trading, or switching upon the occurrence of certain events, without approval from the investor.