Your Complete Guide to Systematic Investment Plan (SIP)

investment

What is SIP?

A SIP or a Systematic Investment Plan is that particular type of investment instrument which allows the investor to periodically invest small amounts of money for a considerable period rather than investing a huge amount in one shot. The frequency of the investment varies from weekly, monthly, quarterly, half-yearly or annually. This sort of investment option creates a significant wealth corpus in the long run.

SIP is just a way of investing. SIP can be done in equity as well as debt mutual funds. It is not a specific mutual fund scheme but just a way of investing the money in the chosen scheme.

Benefits of SIP

  1. RUPEE COST AVERAGING

Any SIP investment ensures that the cost gets averaged out. It is directly dependent on the market trend. Therefore, if the investment is done during the downward phase of the market, then more units will be allotted to the investor when compared to the bull market trends. This is how the cost becomes averaged out.

During the change of the market cycle from bearish to bullish, the averaged out cost creates room for considerable returns. This eventually helps in the enhancement of the wealth corpus. Therefore, while making any SIP investment, the market trend factor must be considered for maximum benefit.

  1. POWER OF COMPOUNDING

Under this technique, the investor not only receives returns on the invested fund but also on the profits. This enhances the overall wealth corpus in the long run.

If INR 1 lakh is invested for 1 year in the mutual fund, the return is 15%. Therefore, at the end of the year, the value amounts to INR 1 lakh 15 thousand. During the second year, the power of compounding will be calculated at INR 1 lakh 15 thousand rather than the original investment value of INR 1 lakh, assuming the rate to be 15% p.a. By the end of the second year, the total fund will amount to INR 1 lakh 32 thousand. The power of compounding creates exponential corpus growth.

  1. DISCIPLINED INVESTING

SIPs create a habit of disciplined investment by keeping careful monitoring on the incomes and expenditures. It curtails the habit of reckless expenditure that helps a lot in the wealth management sector in the long run. Once the habit of first saving and then spending is inculcated, it will ease out the possibilities of a lot of financial hardships in future, by maintaining a healthy financial security

How does SIP work?

SIPs generate investments in the mutual fund sector, enhancing the overall wealth corpus in the long term. One thing gets clarified here that creating wealth and generating returns are not the same. FD investments will only generate returns but for wealth creation, SIP is the option. The amount gets auto-debited from the associated bank account and the fixed interval selected. If the investor selects a monthly SIP on the 1st of every month, the necessary amount will automatically get debited from the bank account and deposited towards the SIP.

Most common myths on SIPs debunked

  1. Myth: SIPs are only for small investors

Fact: SIP schemes are suitable for everyone and not only the small investors. Exactly like a recurring deposit, SIP investments generate the habit of saving and investing at the same time. Moreover, it offers an enhanced rate of returns than FDs. It helps to build the wealth corpus making the financial targets more achievable in the future.

  1. Myth: Rupee cost averaging is allowed in stocks too—so why choose to SIP?

Fact: A single scrip tends to be more volatile when compared to SIP in mutual funds. It offers reduced risk because of expert fund management, diversification and liquidity. On the other hand, a strategic portfolio can be structured depending on the investor’s financial goals and risk appetite, based on the market cap bias. Therefore, SIP investment in mutual funds attracts 2 highlighting benefits—compounding factor and rupee cost averaging.

  1. Myth: SIP mutual funds differ from the lump sum mutual funds

Fact: There is no such proof of the fact. SIP is simply a mode of investment without any special schemes for it.

  1. Myth: Lump-sum investments cannot be done in any scheme with the co-existence of a SIP account

Fact: SIP is simply a mode of investment. So, accumulating a lump-sum amount for mutual fund investment is possible where SIP exists. If an investor who possesses a SIP of INR 1,000 suddenly receives a surplus of INR 25,000, the lump-sum can be pumped up on the continuing INR 1,000 scheme.

  1. Myth: There are charges on missing one or two SIP dates

Fact: While settling for investing in any SIP module, all the necessary details need to be furnished including the starting date and the ending date of the scheme, the invested amount, the relevant contact details, the bank details, the tenure, the frequency of payment, etc. In any case, if an investor fails to fulfil the SIP requirement within the due date, the folio account remains active for the rest of the term. There is no penalisation like missing an EMI. There is even the provision for a SIP pause facility in case of short-term financial drawbacks.

  1. Myth: Markets are high, to begin with, a SIP

Fact: This sort of thought is normally not encouraged in financial prospects. If the market corrects the investor with an enhanced number of a unit collection with every NAV fall, ensuring the investor to lower the average purchase cost. During the bull market phase, there will be profits as the yield is supposed to be higher. 

  1. Myth: In a tax-saver SIP, the entire value can be withdrawn after 3 years

Fact: In case of a SIP in ELSS, the amount cannot be withdrawn after the lock-in period of 3 years has elapsed. Rather, every instalment of the SIP needs to be completed within the lock-in phase. 

Are SIPs taxable?

SIP is not a specific scheme. It is just a way of investing in a specific scheme. So, taxability depends on the mutual fund.

If you choose to invest in an ELSS scheme (Equity Linked Saving Scheme) through the SIP route, you will get 80C benefit for the entire amount invested in that particular year upto INR 1.5 lakhs a year. 

To understand the mutual fund SIP taxability, you need to understand what is long term investment and what is short term investment.

FundsShort-term if the investment is:Long-term if the investment is:
Investment in Equity Mutual fundsLess than 12 months12 months and more
Investment in Balanced Mutual funds (equity-oriented)Less than 12 months12 months and more
Investment in Balanced Mutual funds (debt-oriented)Less than 36 months36 months and more
Investment in Debt Mutual fundsLess than 36 months36 months and more

Mutual Fund schemes are taxed at the time of redemption as per their taxability norms. As of now, the taxability norms are:

 

Equity Mutual Funds

Debt Mutual Funds

LTCG (Long Term Capital Gain) Taxation

10% of Tax above INR 1 lakh of Capital Gains

20% of Tax after Indexation Benefit

STCG (Short Term Capital Gain) Taxation

15%

As per the individual’s tax bracket

5 SIP features that every investor should know

  1. STEP UP SIP or TOP UP SIP

This enables the SIP amount at regular intervals. It comes in handy during goal planning. Therefore, it can be started with a small amount with a gradual increase in future. This will enable them to maintain a better financial position and good protection against difficult days.

The top-up option must be mentioned at the time of investment. The amount can be just INR 500 and in multiples of INR 500 only. Once the enrollment is settled, the top-up option cannot be modified. 

  1. FLEX SIP

This technique allows modification of the instalment, offering the trigger-based option. The investor is flexible to either decrease or increase the fund in any specific month, by still staying invested. If an investor is awarded a bonus of INR 50,000 through flex SIP, the investible surplus can be allocated directly into one of the funds of the existing portfolio.

  1. TRIGGER SIP

With this, the investor can set either NAV, the index level, any event or date. This system encourages the advantage of any anticipated movement. A trigger target can be set for any specific fund in terms of percentage in NAV depreciation or appreciation. 

  1. PERPETUAL SIP

While settling for any SIP, the necessary mandate forms need to be submitted furnishing all the relevant information including the start date and the end date, which is usually a pre-decided time frame of 1 year, 2 years, 5years, etc. On maturity, several investors tend to procrastinate the reinvestment because of several operational hassles. But if the end date is kept blank in the SIP mandate, the investor by default chooses perpetual SIP. The standard assumption of the fund houses is that the fund will continue till 2099 unless otherwise requested for. Once the goal corpus is achieved, the funds can be redeemed accordingly.

  1. PAUSE SIP

There is a standard provision that SIPs can be stopped for up to 1-3 months till a jeopardised financial situation returns to normalcy. By opting for the pausing option, there is no need to undertake all the associated hassles of re-starting any SIP. 

The steps to pause SIP

  1. Submit the duly filled pause form to the concerned fund house of the mutual fund or AMC
  2. Submit the bank mandate

Once these forms are submitted, the bank needs to be notified regarding the same for pausing the auto-debit option. Once the pause period is over, the SIP can be resumed.

Although the pause SIP option provides suppleness while sailing through tough times, yet it is better to avoid pausing. It hinders the money management and corpus growth in the long run. Prudent budgeting and careful monitoring of the overall financial health are the key tools in this regard.

Are there any best SIPs?

As explained, SIP is simply a mode of transaction, a convenient medium for mutual fund investment. Therefore, there is nothing called ‘best SIPs’. Depending on the financial targets and risk appetite of the individual investor, careful selection of the investment tool needs to be made. This is where the entire game lies.

How does one select the best mutual fund schemes to SIP?

Putting blind faith on the mutual fund star ratings is not the most ideal way in this regard. It does not provide a coherent wholesome picture of the situation. “One size fits all” approach is highly detrimental to fulfilling individualised financial targets. Certain factors need to be carefully studied before investing in SIP:

  • PERFORMANCE: The previous performance record of any particular fund is an essential tool. However, that’s not all. It gives an idea of the capacity of the fund. A well-established track record encourages a bright future. Under this factor, multiple aspects need to be considered:
  1. Comparison: Comparative study of multiple likely funds provides a meaningful inference. However, the comparison must be done within the same genre.
  2. Tenure: For equity-oriented funds, long-term investment of at least 3-5 years is ideal. Long-term evaluation of the funds is a crucial factor. However, it never implies ignoring the short-term aspect. A careful study of the fund during different market cycles proves to be beneficial.
  3. Returns: This is one of the most crucial parameters for selecting and evaluating any fund. Although one of the most important factors yet it is not the only one. Along with the returns, the risk parameters should also be carefully evaluated.
  4. Risk: Risk is an unexpected outcome, a deviation from what has been expected. It is generally measured by Standard Deviation and signifies the amount of risk exposure. This is a crucial factor as the risk parameters of the fund need to be in tandem with the risk parameters of the investor for optimum benefit.
  5. Risk-adjusted return: This is generally measured by Sharpe Ratio, which signifies the total return delivery of a particular fund vis-a-vis the risk undertaken. The higher the ratio, the better the fund performance.
  6. Portfolio concentration: Funds with a heavy concentration on certain particular stocks tend to be more volatile and quite risky. Investors with a very high-risk appetite can only choose this. The basic concept of ideal investment is not to hold all the eggs in one basket. Diversification is the key to avoid such risks.
  7. Portfolio turnover: This is the rate of the frequency with which the stocks transactions occur in a particular fund’s portfolio. The higher the rate, the more the volatility.
  • FUND MANAGEMENT: The overall performance of any mutual fund scheme largely depends on the fund manager and his team. The team should be competent enough to sail through the ups and downs of the market with effortless ease, without hampering the profit margin of the scheme. 
  • COSTS: If two mutual fund schemes are almost identical in most of the contexts, it is not viable to choose the scheme with marginally higher costs associated with it only for marginally better performance. The 2 chief costs incurred are:
  1. Expense ratio: the annual expenses that are involved in the running of any mutual fund include management salary, administrative costs, overheads, etc. Expense ratio stands for the percentage of the assets that fulfil these costs. The higher churning of any fund results in paying higher costs of the investor along with the higher risk factor associated with it.
  2. Exit load: SEBI has banned the entry loads but exit loads are there in circulation. The exit load is chargeable to the investors while selling the units of the mutual funds within a specific span. Most of the funds become chargeable if they are sold within 1 year from the purchase date. As exit load is a fraction of the NAV, it affects the overall investment value.

SIP Vs. Recurring deposits—which is better?

CRITERIASIPRECURRING DEPOSIT
TypeInvestment is done in a mutual fund for a fixed period after a fixed interval—monthly, quarterly, half-yearly or annually.A type of deposit plan where the investor deposits a fixed amount every month for a predetermined tenure.
RiskThe risk factor is dependent on the nature and type of mutual funds where the investment has been made. The risk factor may alter from low to relatively high, depending on market performance.Contains less risk; considered to be one of the safest investment options as the rate of interest are guaranteed.
Payment frequencyThe payment can be made either monthly, quarterly, half-yearly or annually.The payment has to be made every month.
ReturnsThe returns are dependent on market performance. Moreover, it is also influenced by the nature of the fund chosen.The rate of interest and returns remain fixed, irrespective of the market outcome. The banks revise their interest rates at any point in time.
Flexibility/WithdrawalOffers a higher degree of liquidity when compared to RDs. Without penalisation, any investor can withdraw the SIP and discontinue the account.Premature liquidity options are available but they are subject to penalisation and exit charges.
TaxationAttracts both LTCG and STCG. Only the ELSS module offers tax benefits on investments up to INR 1.5 lakhs, under Section 80C of the ITA.The interest earned through RDs is considered to be a part of the taxable income. 


From the above comparison, it can be observed that both types of investment options offer their individual sets pros and cons. Depending on the risk appetite, the financial targets and the total valuation of the invested assets of the investor, it is said that diversification is the key in the investment market. Considering all the associated factors, it is best to invest up to a certain percentage in both the fields.

SIP V/S Lump-sum

CRITERIASIPLUMP-SUM INVESTMENT
Cash flowRegularOn-time
Required risk appetiteLow to moderateModerate to high
Time of investmentSignificantly immune to the volatility of the marketDeeply affected by market situations and performances
Cost of investmentLow because of rupee cost averagingHigher than SIP, as this is a single-time high payment
Flexibility of investmentHighLow

The SIP is the ideal way to beat the market volatility and yet enter the market to build a healthy investment portfolio. So, even if you have a lump sum amount of money, you can invest it systematically by using the Systematic Transfer Plan route, wherein you invest the money in a liquid fund without any exit load and then systematically transfer the same to your target fund over a period of time.

Types of SIPs

WEEKLY SIPMONTHLY SIPDAILY SIPQUARTERLY SIP
The amount to be invested gets automatically deducted from the bank account every week for a specific span.The amount to be invested gets automatically deducted from the bank account every month for a specific span.The amount to be invested gets automatically deducted from the bank account daily for a specific span.The amount to be invested gets automatically deducted from the bank account every 3 months for a specific span.
Helps in risk reduction of the market timing.Ideal for any salaried employeeIdeal for the daily earnerCan be chosen ideally by the business persons
The profits can be maximised by averaging the purchase costsHelps in avoiding distractions caused due to short-term fluctuations.Inculcates the habit of savingsWill provide a shorter account statement than the daily or monthly SIPs.
Difficult to keep track of the investmentLoads of paperwork need to be fulfilledIncreases the number of transactionsEasy to monitor and process.
Short-term fluctuations might be distractive in the process of investmentDoes not require constant monitoringOffers risk-adjusted returnsIn the case of wild market conditions, quarterly SIPs may fetch lower NAVs than daily or monthly plans

How to start SIPs?

There are broadly two ways to invest in SIPs—online and offline. 

For the online approach, the interested investor needs to log in to the respective site of the particular mutual fund house or any other transaction platforms like MFU or choose the services of certain Robo-advisory platforms and follow the relevant steps accordingly.

For the offline approach:

  • After careful consideration, select a mutual fund scheme that will supposedly fulfil the individual financial targets of the investor
  • Submit the duly filled SIP form or the Common Application Form carefully furnishing all the relevant details
  • Provide the NACH mandate form mentioning all the necessary SIP details
  • Submit the forms directly to the office of the mutual fund agent/distributor/investment advisor/relationship manager/ Certified Financial Guardian or directly to the Registrar and Transfer Agents/AMC.

Can SIPs be stopped?

Yes, SIPs can be stopped as and when required, unlike FDs and RDs. After stopping to pay the instalments of a SIP, the investor can either choose to redeem the fund or decide to remain invested in the plan. 

KYC requirements for starting a SIP with documents

Any first-time mutual fund investor needs to provide the following documents for starting SIP :

Identity proof

  • PAN card
  • Latest photograph
  • Passport/Aadhar Card/Voter ID/ Driving License

Address proof

  • Aadhaar
  • Passport
  • Driving license
  • Ration card
  • Voter ID card
  • Utility bills—gas bill/telephone (landline bill)/ electricity bill (maximum 3 months old)
  • Bank account statement/passbook (maximum 3 months old)
  • For NRIs—a copy of the passport along with overseas address proof and a copy of the PAN card.

Exit load of SIPs

The exit load of any SIP is directly dependent on the mutual fund. If the mutual fund custom states an exit load for a specific span, then the exit load will be applicable on the SIP too. Most of the equity mutual funds possess an exit load of 1% if the fund is redeemed within 1 year of the investment and zero exit load if it crosses the 1-year mark. The exit load gets calculated upon the redeemed value.

If the redemption value amounts to INR 1,00,000 within a year, the exit load at 1% will amount to INR1,000.

For SIP, every SIP instalment is counted as a separate investment.

If an investor starts a SIP from January 2017 till December 2017, the 1% exit load will be applicable to one of the investments and no exit load after that phase. If the amount is redeemed in April 2018, there will be no exit load on the investments made during January 2017 and April 2018 period. However, since it would not have completed 1 year since the investor invested the instalments on and after May 2017, exit load will be calculated upon them.

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