SIP - Systematic Investment Plans

SIP - Systematic Investment Plan is one of the most favourable and convenient ways to invest a fixed amount monthly, quarterly, bi-annually, or annually to get the maximum returns. These investments are further directed towards mutual funds that have been particularly selected by the investor, which enables him to earn consistent returns on investments made. This is a pre-planned and systematic way of investment that can be customized based on the stakeholder's requirements and has a risk attached to it. But the more the risk, the higher will be the return, and because of its high rate of returns, SIP has become a favourite investment option for many in India.

What is SIP?

Systematic Investment Plan is a highly convenient investment strategy that is all about putting small amounts of money or income into mutual funds (of one's own choice). It works in a great manner for investors, especially the salaried lot or the middle-class worker who gets a fixed payment per month, and he wants to make a high-value investment for his future needs. The frequency to make these investments varies from monthly to quarterly. There are a few cases where weekly payments are also accepted. Any amount of money can be invested in SIPs irrespective of the time frame involved, and the same is reinvested in the stock market, ensuring returns as per market trends. Putting in small amounts is easier on the budget and gives them many advantages like compounding and rupee cost averaging.

Why Should One Buy a SIP?

Although there are many reasons to buy SIP plans some of the key reasons are listed below: (*Standard T&C Apply) 

Timing of the Stock Market

The biggest risk of investing in mutual funds is to invest at the right time; that is when the stocks are on a high, and investments can ensure the highest returns. But while making a SIP investment, there is no need to be concerned about the right timing of investing in a market as these funds are covered over a long period of time, and the risks of different time periods are all covered. Thus, the risk of having a negative experience with the wrong timing of the stock market is eliminated. Volatility is negated. So, investing a large sum of money scattered over the years in mutual funds rather than making a lump-sum investment is more beneficial and ensures good returns.

Low Average Purchase Cost of Investing

Investing in SIPs ensures a much lower cost of purchasing the investment as compared to making one-time investments in mutual funds, which are also known as the market cycle - an upturn and downturn of the market trends. These ups and downs of the markets of equities and mutual funds work with the advantages offered to the investor that too long- term benefits.

Compounding Benefits

Compounding helps create and grow wealth over time by investing in equity markets due to compounding - which means earning interest on interest. By investing funds over a long period of time through SIPs provides benefits of earning more returns on investments from one or more cycles and trends of the market.

SIPs are Quite Affordable

One can invest as low as Rs. 500 per month in a SIP, and hence, it an affordable option even for the average earning individual. In fact, even a student can invest in SIPs and save his pocket money to earn a higher return level, thus enhancing his investments in the long run.

Innovative SIPs

SIPs are not of a single category but offer many options of investments like the NAV limits, daily, weekly, fortnightly, quarterly, monthly, annual investments, direct bank debits, and much more. These give a wide range of options to invest in as per the investor's saving and income capacity.

Salient Features of SIP

SIP comes packed with a wide range of salient features to offer. The key features of systematic investment plans are as follows:

  • SIPs have the power of compounding interest, which implies earning interest is interest already earned by investments over a long period of time.
  • The individual can start by investing minimum Rs. 500 per month and relieve himself of the burden of making heavy investments. This can be increased with an increase in income and manipulated as per convenience.
  • With SIP investments, the individual learns the discipline of investment and gets into the habit of making sound savings while earning great returns on the funds invested. Automatic deductions from bank accounts are also available as an option, which means the investor does not have to remember the dates to make the investments as SIPs are automatically deducted from the account.
  • SIPs are an emergency fund for future contingencies like medical, accidental, educational, marriage, vacation, or any other contingency.
  • Just like the equity market, which is highly volatile, SIP investments are volatile. Buying more units of funds or equities during a recession and fewer numbers when the market is on a high. This decreases the cost per unit of the fund market, and thus it benefits the investor hugely.
  • These investments can be made in small amounts regularly.
  • With SIPs, a budget can be planned better, and expenses can be well managed.

Core Benefits of SIP

Apart from the aforementioned features, a Systematic Investment Plan (SIP) offers benefits to its investors. Some of the benefits offered under SIPs are as follows:

Compounding Interest Benefits

Compounding interest means interest earned on interest. When an investment is made early in life, the funds get a longer time to mature and earn much higher returns as compared to other investments. Aggressive returns can be expected from long term SIPs all due to compounding interest.

*Standard T&C Apply

Rupee-Cost Averaging Benefit

Since the investor is investing funds in SIPs over a long period of time, the benefit of balancing any kind of losses arising out of fluctuations of the market, inflation, and volatility is noteworthy. The amount is invested in mutual funds, and thus a greater number of units can be purchased when the price falls and when the price falls, the number of units purchased can be mitigated. This creates a balance, and this reduces the average cost, giving the benefit of rupee cost averaging benefit.

Systematic Savings Benefit

Investing in SIPs develops a good habit of making systematic savings and investments, and thus it encourages the stakeholder to indulge in disciplined investments. The frequency at which money is invested, the automatic transfer facility availability, and the expectation of a high return can further motivate the investor and encourage him to invest more.

Flexibility and adjusting with Volatility Benefit

SIP investments are highly flexible as far as the amount invested is concerned (which can be reduced or increased in the long run). The payment cycle can be modified, and the investor can choose to withdraw or discontinue with the SIP anytime he likes. SIPs also take volatility and inflation into consideration and prepare funds of the investor balanced in the investment tenure.

Long-Term Returns Benefit

This will benefit from considering long-term goals and objectives as SIP, once invested, should be forgotten for a long time, and one should be regular with his contribution, which should be increased from time to time. The longer the SIP term, the higher benefits can be reaped for meeting retirement and old age goals.

Convenience and Simple to use Benefit

To make investments in SIP is easy and does not require much documentation. There is no need for the investor to have complete knowledge of the stock market as his funds will be managed and invested by a professional. The investor can set the time period, after which the funds will be automatically debited from his account. So, it is a fairly simple and convenient process which will be beneficial for all.

Best SIP Plans

*Standard T&C Apply

Some of the Best Mutual Schemes for SIP Investments are:

Name of the Investment in SIP

3-year Rate of Return

Aditya Birla Sun Life Medium Term Plan

8.39%

Aditya Birla Sun Life Savings Fund

7.53%

Aditya Birla Sun Life Short-term Fund

7.83%

Axis Blue Chip Fund

7.53%

Axis Focused 25 Fund

-9.74%

Birla SL Balanced ’95 Fund

9.42%

Birla SL Equity Fund

13.70%

DSP Equity Fund

-9.97%

DSP Strategic Bond Fund

7.70%

Edelweiss Large and Mid-cap Fund

1.70%

HDFC Balanced

10.65%

HDFC Mid-cap Opportunities

14.84%

HDFC Prudence Fund (G)

9.02%

HDFC Small Cap Fund

21.52%

ICICI Prudential Balanced Advantage Fund

9.16%

Kotak Standard Multicap Fund

-1.28%

L&T India Prudence Fund

10.03%

Mirae Emerging Bluechip Fund

1.80%

Motilal Oswal Focused 25 Fund

-8.25%

Nippon India Low Duration Fund

7.50%

Reliance Credit Risk Fund

7.87%

SBI Bluechip Fund

-3.94%

SBI Magnum Balanced Fund

9.10%

TATA Large & Mid Cap

-2.45%

Disclaimer: PaisaWiki does not endorse, rate or recommend any particular insurer or insurance product offered by an insurer.

Types of SIPs

There are different types of SIPs in the market. The basic types of SIPs are as follows:

Top-Up or Step-Up SIP Plan

This is beneficial for self-employed or who enjoy a highly variable income, which can help them add to the amount invested whenever they like. This also means that the investor can shed a percentage of extra profits, or incentives, or even an increment added to the SIP fund and enhances it, further ensuring higher returns in the long run. Investments under this can be adjusted well and as per the convenience of the investor.

Flex SIP

Also known as the flexible SIP, this type of SIP helps regulate the SIP as per the investor's financial situation and circumstances. In case of a dearth of funds, the investor can hold payment for a few months or till the time he does not get his income stabilized. Similarly, in the case of excess funds, the same can be further invested in the same SIP portfolio to cover up for the time when income was low.

Trigger SIP

This category is most suitable for people who possess a good knowledge of the stock market, market fluctuations, and the right fund to invest in. He can set a NAV, index level, or even a date to initiate the SIP. He can further increase, decrease, or trigger the amount of investment as per the rise and fall in the stock market.

Perpetual SIP

Normally, the SIP tenure is for a term of 1 year, 3 years, 5 years, 10 years, 15 years, and so forth. The policy comes with a start and an end date to decide the tenure of the SIP. If we keep the end date blank, it remains active till 2099 and becomes a perpetual SIP. So, there is no hassle of reinvesting the maturity amount or when people forget about the last date, and the funds are kept wasted in the accumulated SIP, not generating any more wealth.

Pause SIP

Many mutual funds have the facility of pausing or temporarily stopping the SIP for 1 to 3 months, which removes the hurdles of restarting SIPs and following the same documentation procedure. Not all SIPs have this option, and so a bank mandate needs to be duly filled and signed and submitted to raise a request for a pause in the SIP.

What is not covered in the SIPs?

While making investments in SIP, one must avoid these mistakes:

*Standard T&C Apply.

Too Small or too Large Amount Invested

If the amount invested is too small, it will not generate the required returns (although it can be started with a small amount). If it is too large, the investor might fall short of expenses and income, and there could be a chance that the investment may have to stop midway.

Short Investments will Yield Less Profit

To expect a decent return, long term investments in SIPs should be made. A minimum of 3-5 years of investment is required for SIP, and if it is extended to a long period of time, it will be more beneficial.

Not Increasing the Investment Amount in SIP from Time-to-time

Even if the investment is started at a small amount, it should be enhanced and increased in value with time and with an increase in income. If the amount is not increased with enhanced income, the SIP investment fund may not be able to keep up with the volatility and inflation of the market.

Tax Benefits and Taxation on SIPs

The tax benefits and taxation on the SIPs are discussed below:

  • Taxes on SIPs depend on the kinds of funds that are invested in - equity or non-equity.
  • Mostly SIPs are based on equity funds, and the taxation rules are capital gains up to Rs. 1 Lakh is exempted, and the remaining amount will be taxed at 10% as per the taxation ruleson Equity funds. If the amount is redeemed in less than 1 year, then the taxation will be done at 15%, and no exemption on tax will be provided.*Tax benefit is subject to changes in tax laws.

Table of Taxation

*Standard T&C Apply

Scheme

Features

Short Term Capital Gains

Long Term Capital Gains

Equity Schemes

Holding Period

Rate of Tax

Up to 12 months

15%

More than 12 months

10%

Non-Equity Schemes

Holding Period

Rate of Tax

Up to 36 months

Income tax slab rate

More than 36 months

20% after indexation

Steps to Invest in SIP

Primarily, the investor must follow these steps before entering into a SIP Investment:

  1. The investor should set his financial goals - short term and long term, which are practical and attainable.
  2. The investor needs to decide a timeline or tenure for these goals to be fulfilled and estimate the funds he would need to achieve his objectives.
  3. Decides on the amount of investment he can afford to make each month, keeping his monthly income and expense in mind.
  4. If there is any confusion, the investor can also take the help of a financial advisor.

Mode of SIP Investments

SIP Investments can be made using the following methods:

Offline Investing

This can be done through a broker where various plans are offered at different returns, and varied expenses can be taken up. The investor can visit the nearest branch or office to make the investment, along with important KYC documents like:

*Standard T&C Apply

  • Aadhar card as an Identity proof
  • Cancelled Cheque
  • 4-5 Passport size photographs
  • PAN Card
  • KYC documents for verification purposes.

Online Investing

To avoid paying extra charges like brokerage or commissions, the investor can visit websites like Paisawiki and choose from 1700 different SIP funds to choose from.

Who Should Invest in SIPs?

Here is a rundown to who can or should invest in SIPs:

  • Investors looking for long-term investments and the creation of wealth
  • People who can shell out a minimum payment each month instead of a heavy one-time investment
  • Auto debit facility available - so beneficial for the salaried
  • Anyone who has or who does not have information about mutual funds and the stock market
  • Anyone who wants to derive the benefit of compounding interest
  • For people who want to become disciplined savers and lead a budgeted and a hassle-free life

How to Compare Plans and Choose the Best SIP?

Out of the various SIP plans available in the market, it could get difficult to analyse the best plan to invest in. So before investing funds, one must consider the following:

*Standard T&C Apply

  • The fund must have a benchmark of Rs. 500 Crore asset size. Funds under this amount will not be profitable, but it is recommended to choose a high asset size fund.
  • Duration of SIP - This is the most crucial factor that can affect a SIP investment. It affects the risk factors, taxability, and return on investments. 5 years should be a minimum reference point, and then a check should be maintained accordingly.
  • Fund House - The reputation, goodwill, and credibility of the fund house matters a lot while choosing a plan. This helps the investor in dealing with the highs and lows of the market without bearing an impact on the invested funds.

*PaisaWiki does not endorse, rate, or recommend any particular insurer or insurance product offered by an insurer.

Plans with the Lowest Premium

A few SIP Plans offer a low amount of premium, which can be Rs. 500 per month, which are as follows:

  • Axis Midcap Direct Plan
  • Edelweiss Government Securities Fund
  • HDFC Gold Direct Plan-Growth
  • ICICI Bluechip Prudential Fund
  • IDFC Government Securities
  • Kotak Gold Fund Direct-Growth SIP
  • Parag Parikh Long Term Equity
  • Quantum Gold Savings Fund
  • Reliance Banking Fund

FAQs

  • Q1. What is the difference between Mutual Funds and SIP?

    Ans. The difference between a Mutual Fund and SIP is:

    Mutual Fund

    SIP

    These are money-making investments or a group of assets monitored and regulated by a group of experts

    Investors invest small amounts of money over some time in a mutual fund at a regular interval

    Different investors can purchase it

    A pre-determined amount will be paid, which is different from mutual funds wherein a lump-sum amount is given

    Net Asset Value (NAV) is calculated at the end of the trading day

    The flexible way to invest and can withdraw or reinvest as per the will of the investor

    One-time investment needs to be made

    Payments can be made in different modes, auto-debited, and can also be made daily/weekly/monthly.

    With high markets - these investments are more profitable.

    More profitable in high volatility.

  • Q2. What are the pros and cons of SIP Investments?

    Ans. Pros and Cons of investing in SIPs:

    Pros

    Cons

    One must make the investment and forget about it

    Requires a long term commitment

    Encourages disciplined investment and avoids emotion

    Large sales charges can be levied

    Works well with small amounts too

    Early withdrawal penalties

    Cost of investment reduced

    Buying new opportunities and bargains can be missed

    Less risk of capital

     

    Higher Returns

     

  • Q3. How to shorten or extend the tenure of SIP Investments?

    Ans. A written application needs to be submitted to the fund management company requesting a decrease or increase in the SIP time period. A minimum investment period of 6 months should have been completed to be eligible to make such a request. An option of renewal of the SIP is also provided at the end of the tenure of the Sip, and the investor can fill out a form to do the same.

  • Q4. What if a SIP payment is missed?

    Ans. A missed SIP will not affect the working of the Sip, and it will still be in good working condition and remain activated. However, due to a lack of funds, if a person wants to skip a few payments, he has the option of making a pause in SIP investments. Later, when the income sources stabilize, the same can be compensated by investing higher funds than required to compensate with the missed payments.

  • Q5. What is the difference between SIP and Recurring Deposit (RD)?

    Ans. The main points of difference are:*Standard T&C Apply

    SIP

    Recurring Deposit

    You can invest using a daily, weekly, fortnightly, monthly deposit in a mutual fund

    Money is invested in a deposit plan on a monthly basis for a definite period of time

    The risk involved as per the type of mutual funds invested in

    Risk-free investments

    Fixed-Rate of Interest and Fixed Returns

    Interest and Returns based on Market Performance

    Pre-closure comes with an extra charge

    No pre-closure charges

    More suitable for short term goals

    More suitable for long term goals

  • Q6. When is the best time to invest in SIPs?

    Ans. There is a good time, but yes, the earlier these SIPs are invested in, the higher will be the return on investments. These are long-term investments, and whenever the stakeholder feels he has ample funds to invest in mutual funds taking a low-moderate risk, he can make this investment. Automated transfers can be made, and there is also the feasibility of making customized payments.

  • Q7. Do all SIP investments give the benefit of Tax Exemptions?

    Ans. No, only ELSS investments made through SIP are exempt up to a limit of Rs. 1.5 lakhs every year under section 80 C of the ITA. "Tax benefit is subject to changes in tax laws"*Standard T&C Apply

Written By: Paisawiki - Updated: 08 April 2021