Urban Money

Systematic Investment Plan - SIP

Recently, Systematic Investment Plans (SIPs) have become one of the most popular investment tools in the financial market. This can be attributed to the benefit of compounding interest, rupee cost averaging and the ability to offset any potential losses. 

In place of investing in a lump sum amount during market highs and lows, an SIP enables investors to invest systematically throughout the business cycle and distribute the cost evenly. They also help effectively balance out long term risks, providing stable and steady returns.

What is a Systematic Investment Plan (SIP)?

A Systematic Investment Plan or SPI is a convenient investment tool that enables the investor to systematically invest a pre-decided amount of money in mutual funds at regular intervals. The investment can be made in an organised manner on an annual, half-yearly, quarterly, monthly or weekly basis. This allows the investor to earn regular returns via a pre-planned tool and flexibility in asset management and investment amount.

Benefits of Investing in SIP

Given below are some of the benefits of investing in a Systematic Investment Plan:

The Boon of Compounding

One of the most important benefits of investing in an SIP is the compounding interest it offers to investors. Since the investor makes deposits at regular intervals, the investment amount earns more interest over the investment period. The amount invested earlier has more time to aggressively earn interest throughout the tenure. Let's understand this with the help of an example: 

Example: Let's assume that X, 40 years old, invests Rs. 10,000 in a SIP with an interest rate of 7%. They will earn Rs. 52,40,000 when they reach retirement age. Now let's assume that Y, who is 30 years old, invests Rs. 10,000 in the same investment scheme. They will earn Rs. 1.22 crore upon maturity. Due to the significant ten-year difference in the investment period, Y earns more than double what X gains with their investment.

Rupee-Cost Averaging

When you decide to invest in an SIP, you should not rely only on hearsay and speculation to invest your hard-earned money into mutual funds. Volatility is a constant in any equity investment option. Therefore, mutual funds use the rupee-cost averaging method, which relies on averaging the price at which you purchase units of a mutual fund. The fundamental law of demand states that the price of a commodity goes down when purchased in large quantities. This method will account for any losses that an investor may incur due to the market's volatility.

Inculcates Systematic Saving

Since investors can choose to invest a particular amount at a predetermined frequency, they enjoy more financial flexibility. This allows the investor to plan their monthly expenses around their investment and earn significantly.

Flexibility and Convenience

Even though investors can hold their investments in SIPs over a long-term period, there is no specified duration during which the investment has to be made. Investors can choose to withdraw from the investment plan at any given point. 

The regular investment amount can also be changed according to the investor's choice. Additionally, the investor can place standing instructions to their bank so that the investment amount is auto-debited on the investment date.

Types of SIP

The Systematic Investment Plans available in the country can be broadly classified based on investment objective and instalment flexibility:

Based on Investment Objective

SIPs can be defined as mutual funds with an interval-based mode of payment. The underlying funds in an SIP can be debt-focused, equity-oriented or balance oriented. These are categorised according to the underlying asset class. 

Equity funds usually offer high-risk high returns, while debt options offer low risk and comparatively lower returns. Balanced SIPs are less riskier than equity funds but are more volatile than debt funds. 

Further, some Systematic Investment Plans can be used as tax-saving instruments or insurance products like the ULIPs (Unit Linked Saving Schemes) and ELSS (Equity Linked Savings Scheme). These investment schemes are tax-exempt as per Section 80C of the Income Tax Act.

Based on Instalment Flexibility

SIPs offer the investor a reliable method where they can fix a predetermined amount to be invested consistently. The various kinds of SIPs based on instalment flexibility are as given below:

Regular SIPs

In this investment plan, the investor decides an investment amount and makes recurring payments. They do so by giving standing instructions to their banking partner or enabling the electronic transfer of funds from their account to the SIP account. Since the regular intervention is not required from the investor, it is a fairly simple and hassle-free process. An equal amount of money is invested in the case of market highs or lows. This effectively averages out the cost of SIP units purchased.

Flexible SIPs

This investment allows the investor to change their investment amount as per their requirements. This way, the investor can purchase more units when the market is at a low and vice versa. This is dictated by a predetermined formula that enables the investor to react according to the market's volatility. 

You can modify your investment amount according to the ever-changing market conditions and financial conditions. When facing a financial crisis, you can decrease the investment amount and increase it when the situation improves or you have a surplus. For this, you will have to inform the fund manager at least a week before the investment deduction.

Step-up SIP

A Step-up SIP or Top-up SIP is a kind of investment scheme that enables the investor to increase the investment amount when required. You can start the investment at a regular amount and go for a top-up option. 

For example, if you invest in a monthly SIP with Rs. 5,000, you can ask the provider to increase the amount by Rs. 1,000 every 12 months. This is ideal for salaried professionals who expect annual appraisals or bonuses. You can eventually increase your contributions to the SIP account as per increased spending power and gain more returns by investing more money.

Perpetual SIP

Usually, SIPs require investors to state the investment tenure they wish to park their investment. However, in the case of Perpetual SIPs, the investor is required to mention the investment start date but not the end date. 

In fact, if no maturity date is mentioned on your offer documents, it is considered to be a Perpetual SIP. This implies that this investment scheme will continue till the investor requests the asset manager to discontinue the SIP. If the investor does not wish to limit their investment post the maturity date, they can voluntarily choose a Perpetual SIP and go for a longer duration.

Trigger SIP

As the name suggests, in this investment scheme, the stakeholder gets to trigger an investment clause to account for the highs and lows of the market. You can trigger the clause by redeeming units, starting the SIP or transferring to another plan. 

This is ideal for seasoned investors who have a knack for predicting market behaviour and can set triggers for specific events. You can effectively set triggers if you have a firm understanding of market conditions and know when to buy or sell the units of an SIP.

Multi SIP

This investment scheme enables the investor to invest in multiple funds of a provider via one SIP. For instance, if you invest Rs 4,000 monthly in a multi SIP, it may be split up into four units of Rs. 1,000 each. This way, the investor can avoid the massive paperwork and hassle of managing multiple SIP accounts. Further, this is also a convenient way to diversify your investment corpus.

How Does an SIP Investment Work?

One of the best features of SIP is that it offers the investor flexibility with respect to asset management and investing money in the mutual fund. This is ideal since the pre-decided amount will be automatically deducted from the investor's bank account on the investment date and used to make investments in a mutual fund portfolio. 

A Net Value Asset (NAV) is then allotted to the investor based on existing market conditions. Additional units under the existing fund will be purchased and added to the portfolio when an investment is made. This ensures that the units in a portfolio are purchased at different prices. Therefore, the investor benefits from the dual characteristics of rupee-cost averaging and compound interest.

How to Choose an SIP?

Given below are some of the key factors that you should keep in mind while choosing the right SIP to invest in:

  • The mutual fund you choose to invest in should be active in the market for at least the last five years.
  • Ensure that your bank operates the mutual fund you choose to invest in. To verify this information, you can cross-check the plan's details with your relationship manager at the bank.
  • The asset management company you have chosen should be reputable and recognised in the industry. Usually, if the organisation is reputable, you can be assured about the performance and the returns it will provide throughout the investment.
  • Try going through all the details of the plan you are interested in and avoid those with high volatility and low liquidity.
  • Consider funds that have a decent CRISIL rating. Funds ranking from 1 to 3 are considered ideal investment options.

Mistakes to Avoid While Investing in SIP

Given below are some of the common mistakes that you might want to avoid while investing in mutual funds through SIPs:

Waiting for the Right Time

This is one of the main investing mistakes to avoid while investing in mutual funds. By planning to time the market to invest in the mutual funds, you are defeating the primary function of SIP investments, i.e. investing across changing market conditions. 

As the old saying goes, 'the best time to plant a tree was 20 years ago; the second-best time is now. The same philosophy applies to mutual fund investments. Instead of waiting for the right time to invest, the present should be considered the best time. 

This enables the investor to start investing at an early age and allows the stakeholder to gain more aggressive returns due to compounding over a long time.

Discontinuing SIP in Volatile Conditions

Usually, investors discontinue or terminate their investment during volatile or shaky market environments. Simply put, this is another case of investors trying to time the market by avoiding future investments to limit the losses.

However, what most investors fail to realise is that when the market is down, it is a good opportunity to purchase more units at lower costs and average out their investment cost. Further, abruptly withdrawing from the SIP may pause the journey towards achieving the financial goals. Investors should really start believing in the long term growth stories of the market and continue mutual funds investment through SIPs.

Unrealistic Investment Goals

Usually, to achieve higher returns in a shorter investment period, investors tend to set higher investment goals without considering other factors like income and other monthly commitments. While one may be able to stretch the investment for a couple of months, it may lead to the investor prematurely terminating the investment before the goals are achieved. As such, the investor should be realistic with their financial goals and plans; else, they may have a rough investment journey.

Not Opting for Step-Up SIPs

A Step-up SIP is an investment scheme in which the monthly investment increases at regular intervals or specific triggers. Using this means, the investor can raise the investment amount in accordance with a rise in fixed income, which will occur over time. Choosing this investment scheme increases the monthly savings quota and helps reach the desired investment corpus. 

 For instance, if you invest Rs. 5,000 per month for 30 years, you will accumulate an investment corpus of Rs. 1.76 crores for a total investment of Rs. 18 lakhs. This is assuming that the returns are earned at an annual rate of 12% per annum. 

Alternatively, if the investor raises the amount by 10% per year, i.e. Rs. 5,000 in the first year, Rs. 5,500 in the second year, Rs. 6,050 and the total portfolio value will be Rs. 4.42 crores against an investment of Rs. 98 lakhs.

Lack of Portfolio Performance Review

Just like it is imperative to make regular investments, it is also important to review the portfolio to ensure that the financial plan stays on track to achieve long-term goals. Every investor should review their portfolio at least once a year so underperforming units can be identified and replaced with better alternatives. Further, such a review can also aid the investor in gauging the gaps between investment and financial goals and taking appropriate measures.

Tax Benefits of Investing in SIP

Apart from helping the investor be more disciplined with their investments, SIPs can also help you save taxes. SIPs in an equity-linked savings scheme are eligible for tax exemption in accordance with Section 80C of the Income Tax Act. Investments of up to Rs. 1.5 lakhs are eligible for tax exemption under this provision. 

Further, it will be highly beneficial to start your SIP at the beginning of the financial year so that the accumulated investment corpus provides you with a significant tax deduction at the end of the year. When you know your investment amount in advance, you can plan your expenses accordingly and make sure that you get more benefits under Section 80C.

Systematic Investment Plan Vs Lump Sum

Given below are some of the key differences between investing in mutual funds via the lump-sum method and through SIPs:

Basis of Comparison SIP Lump Sum
Market Monitoring It is imperative to keep a check on the market cycle throughout the investment tenure of the SIP. It is not necessary to monitor the market as these investments are generally long-term.
Flexibility This method is more flexible as compared to the lump sum method as the investment amount can be changed according to the financial condition of the investor. There is little room for flexibility in the lump sum investment method.
Volatility The SIP performance does not get affected by market volatility. The lump sum investment method is highly responsive to market changes.
Financial Discipline SIPs help in inculcating a sense of financial discipline in the investor, as it builds a regular saving habit. There is no aspect of financial discipline involved as it is a one-time investment method.

Top SIP Mutual Funds in India

Given below are some of the top SIP mutual funds investment plans available in the country in 2022:

Name of Mutual Fund Previous 5-Year Annual Return of the Fund Investment Amount SIP Value at the End of 5 Years Capital Gains (%)
ICICI Prudential Technology Direct Plan Growth 35.2% Rs 3 lakh Rs 8.54 lakh 184%
Aditya Birla Sun Life Digital India Fund Direct Growth 34.3% Rs 3 lakh Rs 8.06 lakh 168%
Tata Digital India Fund Direct Growth 36.2% Rs 3 lakh Rs 8.35 lakh 178%
SBI Technology Opportunities Fund Direct Growth 30.8% Rs 3 lakh Rs 7.49 lakh 149%
Quant Infrastructure Fund Direct Growth 27.9% Rs 3 lakh Rs 6.9 lakh 130%

FAQs

How long does one need to stay invested in SIP?

Even though there is no fixed lock-in period for investing in an SIP, the longer you stay invested, the better the returns. It is advisable to consider SIPs with a minimum investment duration of 5 years. Mathematically also, it takes around five years to account for the losses and market risks and the benefits of compound interest to kick in.

Can I start with Rs. 500 and keep adding?

Yes, you can start with any minimum amount and keep on adding. The Flexi-SIP option enables the investor to start with a regular investment amount and add or decrease the value according to financial and market conditions.

Are SIPs better than fixed deposits?

Both SIPs and fixed deposits are good investment options and have their own merits. SIPs are generally more flexible and liquid as compared to fixed deposits. The amount gets credited to the bank account within three days for equity security options, while the same takes two days for debit funds options. Since SIPs are financial instruments linked to the market, the returns you get from your investments are subject to a comparatively higher risk. Fixed deposit options offer more investment safety and guarantee higher returns.

Is SIP tax-free?

The ELSS scheme is one of the best tax saving SIP options available. You can claim a tax exemption up to a limit of Rs. 1.5 lakhs in a financial year, in accordance with Section 80C of the Income Tax Act.

What happens if I miss an SIP payment?

If, as an investor, you cannot provide funds for a particular investment date, that investment will be skipped. The process will continue whenever the next SIP payment is due. If the funds are available, the SIP will continue as opted initially.

Should I invest in SIP when the market is high?

The very purpose of investing in SIPs is to enable the investor to stay invested throughout varying market conditions. In fact, since SIPs require minimal investment from your regular savings, you should always have a broad investment horizon. This way, you can generate wealth from your savings.