What is Systematic Investment Plan (SIP)?
SIP stands for Systematic Investment Plan. This is a convenient method of investment in which the investor can invest a predetermined amount of money in mutual funds at regular intervals.
The investment can be made on an annual, half-yearly, quarterly, monthly or weekly basis. This pre-planned, systematic method of investing in mutual funds enables the stakeholder to earn regular returns on investment.
What is SIP?
Systematic Investment Plan is the abbreviation. In this approach of investing in mutual funds, a set amount is consistently put down at regular periods (monthly, quarterly, etc.). SIPs support disciplined investing and rupee cost averaging.
Types of SIP
Understanding the various types of SIPS can aid in selecting the most suitable scheme based on individual goals. Below are the types of Systematic Investment Plans available:
- Top-up SIP: The Top-up SIP permits investors to periodically increase their investment amount, providing the flexibility to invest more when their income or available funds increase. This strategy maximizes investments by consistently investing in top-performing funds.
- Flexible SIP: As implied by its name, the Flexible SIP plan offers flexibility regarding the investment amount. Investors can adjust the investment amount according to their cash flow requirements or personal preferences.
- Perpetual SIP: A Perpetual SIP Plan enables investors to continue investments indefinitely, without a specified end date. Typically, an SIP has an end date after 1, 3, or 5 years of investment. Consequently, investors can withdraw the invested amount whenever they wish or as per their financial objectives.
When to Start Investing in SIP?
SIP investments can be initiated at any time, offering minimal risk when paired with the appropriate scheme plan tailored to the investor's needs. It's crucial for investors to select a scheme that aligns well with their long-term objectives.
Therefore, there isn't a specific timeframe within which an investor should begin a SIP investment plan; the earlier, the better.
How Does SIP Work?
A Systematic Investment Plan offers flexibility to the investor in terms of managing assets and investing money in mutual funds. This method is convenient since the pre-fixed amount will be debited automatically from the investor's bank account and this will be used to make an investment in a particular mutual fund portfolio.
A Net Asset Value (NAV) will be assigned to the investor based on the existing market conditions. When an investment is made, additional units of an asset available under the mutual fund scheme will be purchased and added to the investor's mutual fund account.
This also ensures that the units accumulated are bought at different prices. Therefore, the investor will benefit from the purchase due to the Compounding factor and also due to Rupee-Cost Averaging.
Example:
Suppose you wish to invest in a mutual fund, and you have allocated a sum of Rs. 1 lakh for this purpose. You have two options for making this investment. Firstly, you can opt for a one-time payment of Rs. 1 lakh into the mutual fund, commonly referred to as a lump sum investment. Alternatively, you can choose to invest through a Systematic Investment Plan or SIP.
With SIP, you initiate regular contributions of a predetermined amount, let's say Rs. 500, from your account. This amount is automatically deducted and credited to the chosen mutual fund on a fixed date each month. This systematic investment continues for a specified duration.
Benefits of Systematic Investment Plan (SIP)
Compounding Benefits
Since the investor will make an investment over a regular interval, the investment accrues more money over time. The sooner an investment is made, the longer the funds have to mature and earn aggressive returns.
Example: Person A, aged 40 years, invests Rs. 10,000 in a SIP, at an interest on investment worth 7%. He will earn Rs. 52, 40,000 by the time he reaches 60 years of age.
Now, Person B who is 30 years old, invests Rs. 10,000 in a SIP, at an interest on investment worth 7%. When he attains 60 years of age, the returns accrued on his investment will be worth Rs. 1.22 Crore.
Hence, with a ten year time difference, Person B gains more than 2X the returns gained by Person A.
Rupee-Cost Averaging
When an investor goes for an SIP, he/she need not rely on speculation in order to invest money in mutual funds. Since the stakeholders will make regular investments, the volatility of the market will not affect the average cost per unit.
The investor can purchase more units when the price is lower and less units when the price is high. This is a balances any loss the investor might incur due to market fluctuations.
Systematic Savings
SIP mutual funds encourage regular savings so that investments can be made at the chosen frequency. This leads to disciplined saving which alternately results in successful mutual fund investments.
Flexibility
Investors can invest in mutual funds over a prolonged period of time. However, there is no time limit during which an investment has to be made. The investors can also choose to discontinue the plan at any point of time. The pre-determined amount that is invested regularly can also be changed as per the investor's choice.
Long-Term Gains
Due to the benefits of compounding and rupee-cost averaging, the investor can accrue good returns on investment in the long-term.
Convenience
The mode of investment in mutual funds is very convenient. The investor can place a standing instruction to his/her concerned bank and the amount will be auto-debited from the account.
Disadvantages of SIP
Formal systematic investment plans, despite aiding investors in maintaining a consistent savings regimen, come with several drawbacks.
- Firstly, they typically demand a long-term commitment, often spanning from 10 years to 25 years.
- While investors do have the option to exit the plan prematurely, doing so may result in substantial sales charges, sometimes reaching as high as 50% of the initial investment if done within the first year.
- Additionally, failure to make a payment can result in the termination of the plan.
- Establishing systematic investment plans can also incur significant costs.
- The creation and sales charges alone can amount to half of the initial 12 months' investments.
- Moreover, investors should be wary of mutual fund fees, as well as custodial and service fees, where applicable.
Can a Systematic Investment Plan be Customised?
Customers are allowed to customise their SIP. Although most people who invest in an SIP invest a fixed sum each month, you can customise the manner in which the money is put into your SIP. A good number of fund houses across the country enable investors to put in money every month, every fortnight or twice a month based on their preference and convenience.
Besides, Step-up SIPs enable investors to raise the amount invested in SIPs on a periodical basis. One of the most popular methods is 'Alert SIP' under which an investor receives an alert to purchase more when the markets are down.
Another method is 'Perpetual SIPs' under which investors will not be required to select the date on which the SIP ends. Once the SIP meets the investor's goals, it can be stopped by submitting a written communication to the company or fund house.
Best SIPs in India
The following are Top 10 SIPs in India and their Return Rates:
SIP | 5-year monthly SIP (XIRR) | 10-year monthly SIP (XIRR) |
Aditya Birla SL India GenNext Fund (G) | 19.02% | 16.27% |
Tata Equity P/E Fund (G) | 23.62% | 17.06% |
Reliance Growth Fund (G) | 30.60% | 20.77% |
Quantum LT Equity Fund (G) - Direct Plan | 20.56% | 14.30% |
Templeton India Growth Fund (D) | 27.62% | 17.58% |
SBI BlueChip Fund - Reg (G) | 17.79% | 14.1% |
ICICI Pru Dynamic Plan (G) | 22.75% | 16.58% |
Aditya Birla SL Top 100 Fund (G) | 18.19% | 14.01% |
ICICI Pru Top 100 Fund (G) | 26.13% | 17.52% |
Canara Rob Emerg Equities Fund - Reg (G) | 19.58% | 16.99% |
Disclaimer
Mutual Fund investments will be subject to market risks. Any mutual fund listed in the document does not guarantee fund performance or its underlying creditworthiness. Do read the mutual fund document thoroughly before investing. Specific investment needs and other factors have to be taken into account while designing a mutual fund portfolio.
GST rate of 18% applicable for all financial services effective July 1, 2017
FAQs on SIP
- What is the minimum amount to invest in an SIP?
Based on the mutual fund, there may be different minimum investments required for SIPs. The minimum amount usually varies from Rs.100 to Rs.500 per month.
- What is a Top-up SIP?
Mutual fund companies offer a Top-up SIP, which allows investors to increase their monthly contributions to an already-existing SIP. An investor may choose to increase their investment by a particular amount or a portion of their initial SIP amount.
- Is SIP better than FD?
A Systematic Investment Plan (SIP) is typically considered better than Fixed Deposit (FD) for long-term wealth creation due to the potential for higher returns from equity investments compared to fixed interest rates offered by FDs.
- Can I withdraw SIP anytime?
Yes, you can withdraw from your Systematic Investment Plan (SIP) at any time, subject to the terms and conditions of your mutual fund scheme. However, early withdrawals may attract penalties or exit loads.
- Is SIP risk-free?
Systematic Investment Plans (SIPs) are not entirely risk-free as they are subject to market fluctuations. However, they are considered relatively safer than lump sum investments due to rupee cost averaging and disciplined investing.
- Which bank's SIP is best?
The best Systematic Investment Plan (SIP) depends on various factors such as risk appetite, investment goals, and performance of mutual fund schemes. It's advisable to research and compare different SIP options offered by various financial institutions and banks.
- What is the 8 4 3 rule in SIP?
The 8 4 3 rule in SIP refers to investing 8% of your monthly income, choosing four diversified equity funds, and investing for a period of at least three years to achieve financial goals through mutual funds.
- Can SIP go in loss?
Yes, Systematic Investment Plan (SIP) investments can incur losses, especially during market downturns or fluctuations. However, staying invested for the long term can mitigate the impact of short-term market volatility.
- Is SIP 100% safe?
Systematic Investment Plans (SIPs) are not entirely risk-free, as they are subject to market risks. However, they offer a disciplined approach to investing and can provide relatively safer long-term returns compared to lump-sum investments.
- Is SIP taxable?
Investments made through Systematic Investment Plans (SIPs) in equity mutual funds are liable to capital gains tax. Short-term capital gains, applicable to investments held for less than one year, are taxed at a rate of 15%. Meanwhile, long-term capital gains exceeding Rs. 1 lakh and held for more than one year are taxed at 10% without indexation.
- What is the lock-in period in SIP?
Systematic Investment Plans (SIPs) do not have a specific lock-in period. However, the lock-in period depends on the mutual fund scheme in which the SIP is invested. For example, ELSS (Equity Linked Savings Scheme) mutual funds have a lock-in period of three years.
- Can I do SIP for one year?
Yes, you can start a Systematic Investment Plan (SIP) for a duration of one year. However, longer durations are generally recommended for the benefits of rupee cost averaging and compounding to materialise.
- What happens if I pause my SIP?
Pausing your Systematic Investment Plan (SIP) may disrupt the investment discipline and impact the long-term returns temporarily. It's advisable to continue with SIPs even during market downturns unless there are financial emergencies.
- When should we stop SIP?
Systematic Investment Plans (SIPs) should be stopped if there are significant changes in financial goals, risk appetite, or liquidity requirements. Additionally, if the mutual fund scheme consistently underperforms or there are better investment opportunities, stopping SIPs may be considered.
- Is SIP return guaranteed?
Mutual fund investments are facilitated through Systematic Investment Plans (SIPs). As these investments are linked to the market, there is no assurance of fixed returns. However, many experts suggest that the average return from SIPs is around 12%, significantly surpassing the returns from assured return investment schemes.
- What distinguishes SIP mutual funds from traditional mutual funds?
A method of investing in standard mutual funds is through SIP mutual funds. Unlike normal mutual funds, where you can invest a lump sum or a particular amount at any time, a SIP requires that you invest a fixed amount at regular intervals.
- Can I trust SIP mutual funds?
Market risks can affect mutual funds, including SIP mutual funds. The returns are not assured, and they change according to how well the underlying assets perform. SIPs, however, aid in minimising the long-term effects of market volatility.
- What duration should SIP mutual funds have?
SIPs are ideal for generating long-term wealth. To take advantage of the power of compounding and prospective market upswings, it is advised to hold onto your investments for at least 5 to 7 years, if not longer.
- Can I alter my SIP frequency or quantity later?
Yes, you can change your SIP amount or frequency with the majority of mutual fund companies. According to your convenience, you can alter the interval and adjust the amount.
- How frequently should I examine my SIP mutual fund holdings?
Your SIP mutual fund investments need to be periodically reviewed, but not too frequently. Every six to twelve months, review them to evaluate performance and make any necessary changes in light of your financial objectives.
- Are SIP mutual fund investments subject to taxes?
Yes, capital gains tax is applicable to SIP mutual fund investments. The holding term for mutual fund units and the type of mutual fund (equity or debt) affect the tax rate.
- Is it possible to withdraw SIP investments before the tenure is over?
You can indeed withdraw your SIP investments prior to the end of the contract. To benefit from compounding and potentially bigger profits, it is advised to stay invested for the long run.
Disclaimer
Credit Card:
Credit Score:
Personal Loan:
Home Loan:
Fixed Deposit:
Copyright © 2025 BankBazaar.com.