SIP Benefits: What is Systematic Investment Plan & How SIP Plans Work
What is SIP?
A Systematic Investment Plan or SIP is a mode of investment in mutual funds. This article will help you know everything about SIP: its benefits and how it works.
An investor may choose to invest a lump sum amount or through the SIP mode. In a SIP, an investor invests a certain amount on a specified date in a specified mutual fund scheme for a limited time. So, the SIP parameters include:
- Investment amount: The SIP investment amount is specified at the time of starting the SIP. For example, an investor may choose to invest Rs. 5,000 per month through a SIP.
- Investment date: The investor has to select a date on which the SIP amount will be debited from his/her bank account every month. For example, an investor may choose to invest Rs. 5,000 on the 5th of every month through a SIP.
- Mutual fund scheme: The investor has to select the mutual fund scheme for his/her SIP. For example, an investor may choose to invest Rs. 5,000 on the 5th of every month in HDFC Flexi Cap Fund through a SIP. The investor also needs to select whether he/she is investing in a direct plan or regular plan. The investor needs to choose either the growth, dividend, or dividend reinvestment option.
- SIP tenure: The investor has to select the tenure for which his/her SIP will continue. For example, an investor may choose to invest Rs. 5,000 on the 5th of every month in HDFC Flexi Cap Fund for 20 years through a SIP.
As per AMFI data published for April 2021, the total mutual fund SIP accounts stood at 3.80 crores and the monthly amount collected through SIP was Rs. 8,596 crores. The number of new SIPs registered in April 2021 were 14.08 lakhs. The total amount invested through SIPs in FY 2020-21 was Rs. 96,080 crores.
How does SIP work?
When an investor starts a SIP, the money is debited on a specific date periodically. This money is credited directly to the selected mutual fund scheme. In return, the investor will be allotted the scheme units. The number of units will depend on the amount invested and the net asset value (NAV) on the allotment date.
The exact process is repeated every month. This will continue till the SIP end date or till the investor pauses the SIP or redeems the units.
Benefits of a SIP
A SIP comes with many benefits, some of which include:
- Low minimum investment amount: Most AMCs allow investors to start a monthly SIP with a minimum amount as low as Rs. 500. This is affordable to most people across various income groups.
- Inculcates disciplined investing: In a SIP, the investor’s bank account is debited automatically every month. This teaches the habit of disciplined investing towards achieving financial goals.
- Convenience: Starting a SIP provides comfort. At the time of starting the SIP, you need to do a one-time auto-debit setup. After that, it will operate on auto mode. Thus, you can concentrate on your work without having to worry about the monthly operation of the SIP.
- Can be paused or stopped at any time: Most AMCs allow the remaining of a SIP for 3-6 months without having to break it. So, if you have a temporary financial crunch, you may ask the AMC to pause the SIP temporarily. Then, if the financial crunch continues for a longer time than expected, you can stop the SIP. Thus, a SIP can be paused or discontinued at any time.
- Power of compounding: A SIP helps you benefit from the power of compounding. With a monthly SIP, over time, you would have invested a substantial amount. Also, over time as markets do well, the magic of compounding will start working, and you will accumulate a handsome amount for fulfilling your financial goals.
- Removes element of market timing: As a SIP works on auto mode, the investment will happen on a specified date, every month, irrespective of the market level. Thus, a SIP removes the element of market timing which anyways is futile and rarely works.
- Dollar-cost averaging: A SIP provides the benefit of dollar-cost averaging. When the market is in a down phase, you will accumulate more units for the same amount due to a lower NAV. As a result, your average cost of acquisition of each unit will go down. Subsequently, when the market enters an up phase, you will make handsome returns on the units that you accumulated at a lower NAV during the down phase. Thus, a SIP helps you benefit from dollar-cost averaging.
Types of SIP
To provide convenience to the mutual fund investors, all AMCs started offering a regular SIP. But, with time, as investor preferences changed, AMCs started providing customised SIP solutions to them. Over time, apart from regular SIP, different types of SIPs have emerged. Some of these include:
- Regular SIP
The most basic form of a systematic investment plan (SIP). AMCs started offering SIP mode of investment, starting with regular SIP. In a regular SIP, the SIP parameters like the investment amount, investment date, tenure, etc., have to be specified before starting the SIP. All these parameters stay constant during the entire SIP tenure and cannot be modified.
- Step-up SIP
A step-up SIP allows you to increase your SIP investment amount by a specified amount at specified intervals. For example, Rajesh has started a monthly SIP of Rs. 5,000. He has chosen the step-up SIP option to increase his SIP amount by Rs. 500 every year. In this case, Rajesh’s bank account will be debited by Rs. 5,000 every month in the first year, Rs. 5,500 every month in the second year, Rs. 6,000 every month in the third year and so on.
If you wish to increase your SIP amount annually along with the growth in your annual income, then the step-up SIP option is the way to do it. A step-up SIP will help you reach your financial goals faster than a regular SIP. A step-up SIP is helpful for salaried people where there is a certainty of monthly cash flows.
As can be seen from the above chart, a top-up SIP (Orange bars) can help you accumulate a higher amount as compared to a regular SIP (Blue bars) in the same period. All the amounts shown are in Rupees lakhs. The regular SIP amount considered is Rs. 10,000 per month and step-up SIP starts with Rs. 10,000 per month and increases by Rs. 1,000 every year. The accumulated amount is for both SIPs running for 10 years, 15 years and 25 years. The assumed CAGR is 10%.
- Flexible SIP
A flexible SIP allows investors to change (increase/decrease) whenever there is a need for it. This SIP option is useful for self-employed professionals or business persons whose monthly cash flows are uneven. For example, if the investor’s monthly income is low in a particular month, he/she can request the AMC to reduce the SIP amount for that month and vice-versa.
If you opt for flexible SIP, the AMC may require you to inform them about the change in SIP amount within a specified number of days of the SIP date. For example, if your SIP date is the 10th of every month, the AMC may require you to intimate them at least 7 days before the SIP date, i.e. on or before the 3rd of every month. The prior intimation allows the AMC to make adjustments in their systems to accommodate the modified SIP amount.
Some investors also use the flexible SIP option to time the market. If the investor feels the market is overvalued, then he/she will reduce the SIP amount. If the investor feels the market is undervalued, then he/she will increase the SIP amount. However, please note that market timing is a futile exercise and will not work.
Under the flexible SIP option, some AMCs allow you to change the monthly SIP date. Furthermore, some AMCs also enable you to change the SIP frequency like daily, weekly, fortnightly, monthly, quarterly SIP etc.
- Trigger SIP
A trigger SIP is based on the happening of a specified event. Examples of different events are the index level, scheme NAV, specific date, capital appreciation/depreciation, or any other occasion. Based on the happening of the specified event, an investor can set a trigger for buying/redeeming/switching units.
Trigger SIP is suitable for those investors who have an in-depth understanding of the market. It has an element of speculation. Ideally, retail investors should not opt for a trigger SIP.
- Perpetual SIP
A perpetual SIP has a start date and no end date. While starting a perpetual SIP, the investor chooses the start date, and the SIP continues till the investor decides to pause it or redeem it. However, while starting a SIP, if you don’t choose an end date either deliberately or otherwise, then the SIP by default becomes a perpetual SIP. Such SIPs usually have an end date of 2099.
Why Should you Invest in SIP Mutual Funds?
Since the SIP concept is founded on the "Save First, Spend Next" philosophy, people should invest in SIP mutual funds. Instead of making a single donation, a SIP allows you to contribute small amounts on a regular basis (weekly, monthly, or quarterly).
- Power of Compounding: When you invest over a long period of time, you obtain rupee cost averaging. When opposed to a lump-sum investment, this ensures that you will receive significantly higher returns.
- It actually starts with Rs 500 every month: With a SIP, you can very easily start investing in mutual funds with as little as Rs 500. Once you start understanding what mutual funds are capable of, you can gradually increase your monthly SIPs with time.
- Rupee Cost Averaging: The stock market is quite volatile. When you engage in a systematic investment plan (SIP), you can buy more units in a downturn and fewer units in a boom, lowering your cost per unit over time.
- Become a disciplined investor: Investing with a systematic investment plan (SIP) will help you be more disciplined in your financial management. You won't have to deal with the headache of manually investing every month if you use automated payments.
- Acts as an Emergency Fund: You have complete control over when and how you discontinue your SIPs, and the fund company has no say in the matter. You can also withdraw your money at any time (if there is no lock-in period).
Who Should Invest in SIP?
SIPs are a good way for new mutual fund investors to get their feet wet in the industry. This stands ideal for people who have a regular source of money, such as a salary. You can invest a portion of your regular income in mutual funds by beginning a SIP. Furthermore, you will be required to place money aside at regular intervals, which will aid in the long-term development of a sense of financial discipline.
SIP vs One Time Investment
Choosing between a SIP investment and a one-time commitment can confuse first-time investors.
One-time investment: There is also an option of one-time investment, where you can invest a good amount of money (usually a huge amount) all at once.
Monthly SIP: In a SIP, on the other hand, a set quantity of money is put in a mutual fund plan at regular intervals. In summary, a one-time investment method can be chosen if you have money available to invest right now, and a SIP can be chosen if you anticipate a regular input of funds in the future. The SIP method is recommended for first-time investors.
How to Choose Best SIP Mutual Funds?
While choosing the best SIP Mutual Funds for oneself, we need to ensure that the fund we choose fits the criteria listed below.
- What Goals are we Investing for: We must select funds that will assist in achieving objectives. Therefore, before starting a SIP into a fund, one must first examine the needs and match them to the fund's goals in question.
- Risk Appetite that one has: It is important and noteworthy that you only invest in funds whose risk level is very much aligned to your risk appetite. If you're a risk-averse investor, you must put your money into funds that have little to no risk.
- The Duration of SIP: The more time the SIP lasts, the better. It is often advisable by the experts to keep the SIP going for as long as possible. One can continue to invest in investment even if one doesn’t invest. In this manner, the investment has more time to grow into a substantial quantity.
- The Fund House: The fund house's reputation is a crucial consideration when selecting a plan. It indicates how well they handled market highs and lows without causing their investors to feel the effects of market swings.
How one can start Investing in SIP?
To start investing in SIP, the following steps can be taken:
- Complete your KYC: Each fund institution requires investors to complete the KYC documentation process before they may begin investing. Proof of identity, proof of address, and a photograph are all required. The e-KYC option is now accepted as well. You can complete the formalities online instead of coming to the AMC.
- Set Investment Goals: The first step is to figure out what you want to achieve with SIP investments.Have a list of your financial goals created at once. This is important because each mutual fund has a different goal. Determine your objectives and seek financial aid to assist you in achieving them.
- Select a SIP: After you've chosen a fund, you'll need to set the SIP parameters. Consider questions such as:
- What is the set duration of the investment?
- What is the Investment frequency (monthly, quarterly, semi-annually etc.)
- What is the Amount of the investment to be done?
- Fill in the necessary information based on your goals and financial situation.
Start your SIP today with the Glide Invest App
To achieve your financial goals, you can start your SIPs with the Glide Invest App. Within the Glide Invest App, you can choose from various financial goals or define your own financial goals and start a SIP to achieve them. With Glide Invest, you can plan and systematically invest towards your financial goals. You will get guidance for:
- A personalised risk profile assessment
- Identifying your financial goals
- Appropriate asset allocation
- Making a financial plan for each goal
- Automating the financial plan
- Review and analysis of your financial plan
- Hand holding you till your financial goals are achieved
SIPs are an excellent way to get started with mutual funds. This not only instils the habit of saving regularly, but it also allows the investment to increase over time. As a result, SIP stands for little investments with big rewards. So invest today in a SIP and receive the benefits later!
Q1: What are the benefits of implementing a systematic investment plan?
A1: Investing in mutual funds using a systematic investment plan (SIP) is a simple and cost-effective method. If you want to restrict your risks and invest a specific amount in mutual funds on a regular basis, this is a great option.
Q2: When is it the best time to start investing in a SIP?
A2: There is no such thing as the "ideal" or "best" time to begin a SIP. The best thing about SIPs is that you don't have to time the market or wait for the perfect opportunity to invest. You can invest on any day of the month once you've chosen on a certain fund to invest in. Automate your process to make it go faster.
Q3: Is SIP a good long-term wealth investment option?
A3: Investing in SIPs for the long term could be a straightforward way to build wealth. This is due to the fact that compounding is involved. However, the potential returns on your investments over time can be significant. You'll make more money if you invest for a longer period of time.
Q4: How much should a person put into a mutual fund using a systematic investment plan (SIP)?
A4: SIPs can be started with as little as Rs. 500 at most fund companies. You can invest as much as you like because there are no upper limits.
Q5: Is it possible for me to skip a SIP payment?
A5: It's possible that you won't be able to make your SIP payments. Even if you do, your account will not be deactivated. Some fund institutions also allow you to pause payments for a predetermined period of time. This is a useful item to have if you are unable to make your monthly SIP payments.