Systematic Investment Plan (SIP) is an investment route offered by Mutual Funds wherein one can invest a fixed amount in a Mutual Fund scheme at regular intervals– say once a month or once a quarter, instead of making a lump-sum investment. The installment amount could be as little as INR 500 a month and is similar to a recurring deposit. It’s convenient as you can give your bank standing instructions to debit the amount every month.
SIP has been gaining popularity among Indian MF investors, as it helps in investing in a disciplined manner without worrying about market volatility and timing the market. Systematic Investment Plans offered by Mutual Funds are easily the best way to enter the world of investments for the long term. It is very important to invest for the long-term, which means that you should start investing early, in order to maximize the end returns. So your mantra should be - Start Early, Invest Regularly to get the best out of your investments.
How Does a SIP Work?
SIPs operate on the principle of Rupee Cost Averaging, which means that when the market is low, you buy more units, and when the market is up, you buy less units while investing the same amount of money every time. In this manner, you average out the cost of acquisition and benefit from the market's ups and downs without the stress of timing. However, the investments you make in mutual funds through the SIP manner would also be subject to market volatility and risks.
Let’s understand how an SIP investment works with an example.
Monthly SIP investment: ₹1,000
Investment period: 5 months
Let's assume the market price of the mutual fund units fluctuates over these 5 months.
| Month | Investment (₹) | Price Per Unit (₹) | Units Purchased |
|---|---|---|---|
| Month 1 | 1,000 | 50 | 20 |
| Month 2 | 1,000 | 40 | 25 |
| Month 3 | 1,000 | 20 | 50 |
| Month 4 | 1,000 | 25 | 40 |
| Month 5 | 1,000 | 50 | 20 |
| Total | 5,000 | 155 units |
Therefore, you can see that -
Total Investment: ₹5,000
Total Units Purchased: 20 + 25 + 50 + 40 + 20 = 155 units.
Average Cost per Unit: ₹5,000 / 155 units ≈ ₹32.26 per unit.
How Mutual Fund SIP Investments Can Benefit You
Investing in Mutual Fund SIPs offers various benefits, and the list of the benefits is given below:
1. Disciplined Approach to Investing: SIPs tend to promote regular and disciplined investing. Through a fixed amount regularly, investors can build the habit of investing.
2. Compounding Benefits: The power of compounding works best when the investments are made for a long period of time, on a regular basis. SIPs let investors benefit from compounding returns, as the returns generated are reinvested.
3. Rupee Cost Averaging: SIPs help investors with rupee cost averaging. Rupee cost averaging means that when the market is down, you will buy more units, and when the market is up, you will buy fewer units with SIPs. This helps to spread the effect of market movements on the investments.
4. Convenience: SIPs are a more convenient form of investment. You can automate SIPs to a mutual fund scheme through a bank mandate and ensure that a fixed amount is deducted from your bank account and invested in the chosen mutual fund scheme.
5. Lower Investment Capital: SIPs come up as affordable investments since you can start investing with a small amount, which makes it affordable. This can mainly be useful for young investors, or those with limited funds to begin investing.
6. SIPs Offer Flexibility: SIPs offer flexibility in terms of the amount of SIP you want to invest and the frequency of investment, such as monthly, quarterly, and more. You could also increase or decrease your SIP amount according to your financial situation.
7. SIPs Offer Diversification: Investing through SIPs in mutual fund schemes offer diversification across different asset classes based on the kind of mutual fund it is - such as, sectors, geographies, and more.
8. Professional Managed Investment: Mutual fund schemes are managed by professional fund managers, and they have expertise to analyze and select the best investment opportunities, providing investors with more possibilities of achieving their financial goals.
9. Passively Managed Funds: Passively managed mutual funds are investment funds that aim to replicate the performance of a specific market index or benchmark rather than trying to outperform it. The primary goal of these funds is to mirror the returns of the chosen index as closely as possible, and investors can invest in these funds through SIP method too.
Types of Mutual Fund SIPs
Here are the main types of Mutual Fund SIPs:
1. Regular SIP: In this SIP, you will invest a fixed amount at regular intervals.
2. Flexible SIP: This SIP allows investors to change the investment amount or skip investments at their convenience.
3. Perpetual SIP: Regular SIPs usually have an end date, but perpetual SIPs continue until the investor decides to stop them.
4. Trigger SIP: This allows you to set certain triggers for investments, such as a particular date, NAV level, or index level.
5. Multi SIP: You can use a single SIP to invest in multiple mutual fund schemes.
6. Step-up SIP: This form of SIP is like a top-up SIP, but the increase in investment amount is predefined and occurs at regular intervals.
How to Invest in Mutual Funds through SIP?
You can invest in Mutual funds through the SIP mode in the following manner:
- Select a mutual fund scheme based on your investment goals, investment horizon and risk tolerance.
- Complete the KYC needed and other requisites on the platform.
- Submit the necessary documents requested by the platform/Mutual Fund/MFD for investment.
- Set up your SIP with the amount you want to invest on a regular basis, choose the frequency of your investments, and the duration for which you want to continue the SIP.
- Provide standing instructions or an Electronic Clearing Service Mandate to your bank to debit the specific amount from your bank account on the selected dates. On the selected date, the amount will automatically be debited from your account and invested in the mutual fund scheme.
- The mutual fund will allocate units to your account according to the fund's Net Asset Value.
Notes: You can increase or decrease your SIP amount, or even stop or pause the SIP at any time without any penalties. You can even estimate your SIP investment returns after a particular period of time with the use of a SIP calculator, to forecast your next move in the investment. Can withdraw the amount invested subject to exit load and tax implications.
After your SIP has begun, the only thing you need to do is monitor and review the performance of your investments regularly.
Conclusion
You can benefit from SIP investing in various ways, such as flexibility, affordability, and more.
Each type of SIP offers different benefits, and comes with different sets of features, management fees, tax implications and this will allow you to choose an SIP that suits your needs the best.
Disclaimer
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
