What is a Systematic Investment Plan (SIP)?

Retail investors often shy away from the world of investing because they believe that you need a lot of money to start investing in the stock market. And while that may be the case for stocks like MRF Ltd. where you need Rs. 87,880 (as of 29th December 2022) to buy one share, investors often forget that there is a way for them to invest in expensive stocks with just Rs 500. We are referring to Systematic Investment Plans or SIP offered by mutual funds. Popularised by the slogan, ‘mutual funds sahi hai’, India has seen a phenomenal growth in the number of registered SIPs. In fact, as per the Association of Mutual Funds in India (AMFI), the total number of mutual fund SIP accounts in India stood at 6.05 crore with a cumulative value of Rs. 13,306 crore as of November 2022. And while the concept of SIP is fairly straightforward, investors often fail to understand how SIP works and the different types of SIPs they can register. But don’t worry as in this article we will decode everything about systematic investment plans.

What is a SIP?

A Systematic Investment Plan (SIP) is a method of investing in mutual funds that allows you to invest a fixed amount regularly, such as monthly or quarterly, rather than making a one-time lumpsum investment. Think of it like a recurring deposit you set up with a bank. With an SIP, you give standing instructions to your bank to debit a fixed amount from your account at regular intervals and invest it into a mutual fund of your choice.

SIPs offer several advantages, including automatic investing which ensures disciplined saving and removes the need to time the market. They are affordable, with some SIPs starting as low as ₹ 100, and provide flexibility in investment frequency, such as weekly, monthly, or quarterly. SIPs utilise rupee cost averaging, buying more units when prices are low and fewer when high, averaging out the investment cost over time. They also take advantage of compounding, where you earn returns on your returns, leading to substantial growth over the long term. Additionally, SIPs are convenient to set up and manage, making them an ideal choice for both new and experienced investors.

Read Also: How Does a Systematic Investment Plan (SIP) Work?

Features of SIP

A Systematic Investment Plan (SIP) offers a structured and disciplined approach to investing in mutual funds and building wealth over time. Here are some key features of SIPs:

• Regular Investments:

  SIPs allow you to invest a fixed amount at regular intervals, such as weekly, monthly, or quarterly. This ensures consistent investing without having to time the market.

• Affordable:

  SIPs can start with a minimum investment of just Rs 100 or Rs 500, making it accessible for individuals with varying financial capacities.

• Rupee Cost Averaging:

  By investing a fixed amount regularly, you buy more units when prices are low and fewer units when prices are high. This helps in averaging out the cost of your investments over time.

• Power of Compounding:

  Regular investments over a long period can result in substantial wealth creation due to the compounding effect, where you earn returns on your returns.

• Flexibility:

  SIPs offer flexibility in terms of the amount you want to invest and the frequency of your investments. You can also modify or stop your SIPs as per your financial needs.

• Convenience:

  SIPs are easy to set up with automated bank debits, ensuring a hassle-free investment process. They also eliminate the need to track the market constantly.

• Disciplined Saving:

  SIPs instil a habit of regular saving and investing, which can be very beneficial for long-term financial goals.

• Diversification:

  Investing through SIPs in mutual funds allows for diversification, spreading your investments across various sectors and asset classes, thus reducing risk.

What are the benefits of an SIP?

By choosing the systematic investment plan route, you get the following benefits:

• Benefit of power of compounding:

  Systematic investment plans facilitate the principle of compounding. This means that you earn return on your principal as well as accrued interest amount. To understand the power of compounding, study the below table.

  SIP	Tenure	Return	Total Investment	Future Value
  Rs. 5,000	10 years	12%	Rs. 6,00,000	Rs. 11,61,695
  Rs. 5,000	15 years	12%	Rs. 9,00,000	Rs. 25,22,880
  Rs. 5,000	20 years	12%	Rs. 12,00,000	Rs. 49,95,740

  Assuming you start an SIP of Rs. 5,000 growing @12% every year, the value of your investment after 10 years will be Rs. 11.61 lakhs (on an investment of Rs. 6 lakhs). However, if you extend your tenure by 5 years i.e. make an additional investment of Rs 3 lakhs, your SIP future value more than doubles from Rs. 11.61 lakhs to Rs. 25.22 lakhs. Another 3 lakhs and 5 years later, your investment has grown 50% to Rs. 49.95 lakhs. This is the power of compounding.

• Rupee-cost averaging:

  Like shares have current market price, similarly mutual fund schemes have net asset value or NAV. It is the price of one unit of a mutual fund scheme. Assume you start an SIP of Rs 5,000 in Mirae Asset Large Cap Fund - direct plan - growth option from 1st January 2022. The below table shows the monthly units you will receive as per the respective NAV.

  Month	NAV	Units Purchased
  01-01-22	85.76	58.30
  01-02-22	86.24	57.98
  01-03-22	81.56	61.30
  01-04-22	85.31	58.61
  01-05-22	83.18	60.11
  01-06-22	80.88	61.82
  01-07-22	77.79	64.28
  01-08-22	84.66	59.06
  01-09-22	85.86	58.23
  01-10-22	84.47	59.19
  01-11-22	88.48	56.51
  01-12-22	91.45	54.67
  Total Units Purchased		710.07

  Notice that in July when the NAV fell to Rs. 77.79 you received 64.28 units whereas in December when the NAV was the highest at Rs 91.45, you received only 54.67 units. So, in effect you receive more units when NAV falls and vice-a-versa. In totality, you received 710.07 units. But what if you had invested the entire Rs. 60,000 (instead of Rs. 5,000 every month for 12 months) on 1st January 2022? You would have received 699.62 units instead of 710.07 units. This is how Rupee-cost averaging works.

• Flexibility and convenience:

  One of the reasons why SIP investments are so popular is the flexibility they offer to investors. Not only can you choose the SIP amount but you can also select the period of time you want to continue the investment for. You can also top-up your SIP at a later stage.

• Discipline:

  A systematic investment plan enables you to invest a fixed amount in a mutual fund of your choice. The responsibility of a regular investment, drives better financial discipline and behavior. If you opt for a monthly SIP, you can set aside a fixed amount from your income through a standing instruction and invest regularly.

• High potential for returns:

  The long-term returns from an SIP investment tend to be higher than most fixed-income investment avenues, for instance fixed deposits.

• Eliminates the hassle of timing the market:

  When you invest via an SIP, a fixed amount is debited from your bank account every month (or as per chosen frequency) irrespective of whether the market is up or down. This eliminates the need and hassle of timing the market or sitting on the sidelines whilst you wait for the market to correct.

What are the different types of systematic investment plans?

There are 5 types of SIP that you can opt for:

• Regular SIP:

  This is the simplest form of SIP where a fixed sum is debited from your bank account as per your chosen frequency and invested in your selected mutual fund scheme.

• Flexible SIP:

  In the case of flexi SIP, you can adjust or change the SIP amount as per your convenience. This type of SIP gives you greater control over your investment. For instance, you can increase your SIP amount when markets are going down and benefit from Rupee-cost averaging.

• Top-up SIP:

  Also known as step-up SIP, you can increase or top-up your SIP amount as you progress. For example, say you start an SIP of Rs. 5,000 in Mirae Asset Large Cap Fund on 1st January 2022. Happy with the fund’s performance you decide to step up your SIP by another Rs. 5,000 in July 2022. You can also time your step-up to coincide with your appraisal cycle.

• Trigger SIP:

  This type of SIP is triggered when a specific event is triggered. For instance, say you set up a trigger SIP in Mirae Asset Large Cap Fund to be triggered when the NAV falls below Rs. 85. So, whenever the NAV falls below your ‘trigger price’ the SIP will be executed. This is a way of timing the market.

• Perpetual SIP:

  As the name suggests, this SIP does not have an end or maturity date. It goes on until you give instructions to the fund house to stop the SIP.

If you wish to start investing small amounts of money at regular intervals in a relatively low-risk investment avenue, then a Systematic Investment Plan (SIP) is an excellent choice. With its flexibility, power of compounding, and convenience, you can pursue your financial goals in a systematic manner.

How to invest in SIP?

Investing in a SIP is a straightforward process that can be completed in a few simple steps:

• Select a Mutual Fund Scheme:

  Research and choose a mutual fund scheme that aligns with your investment goals, risk appetite, and investment horizon.

• Complete KYC:

  Complete the Know Your Customer (KYC) process, which is mandatory for investing in mutual funds. You need to provide identity and address proofs.

• Set Up an Account:

  Open a mutual fund account with the chosen fund house or through an intermediary like a bank, broker, or online platform.

• Choose the SIP Details:

  Decide the SIP amount, frequency (weekly, monthly, or quarterly), and the start date for your investments.

• Submit the SIP Mandate:

  Fill out the SIP registration form and submit it along with a bank mandate form, allowing the fund house to auto-debit the SIP amount from your bank account.

• Monitor Your Investments:

  Once your SIP is set up, monitor your investments periodically to ensure they are on track with your financial goals. You can also make adjustments if needed.

• Review Fund Performance:

  Periodically review the performance of your SIP investments. Compare them with benchmarks and peers to ensure they are performing well.

• Consult Financial Advisor:

  If you are unsure about any step or need guidance, consider consulting a financial advisor to help you make informed decisions.

Things to consider before starting a SIP

Before starting a SIP, consider the following factors to ensure it aligns with your financial objectives:

• Investment Goals:

  Define your investment goals, whether it’s saving for retirement, a child's education, or buying a house. This will help you choose the right mutual fund scheme.

• Risk Appetite:

  Assess your risk tolerance. Equity funds have higher returns but come with higher risk, while debt funds are less volatile but offer lower returns.

• Investment Horizon:

  Determine your investment horizon. Longer investment periods can help ride out market volatility and benefit from the compounding effect.

• Fund Performance:

  Research and review the past performance of the mutual fund schemes you are considering. Look for consistent performers over different market cycles.

• Expense Ratio:

  Check the expense ratio of the mutual fund, which is the annual fee charged by the fund house. Lower expense ratios can lead to better returns over the long term.

• Fund Manager’s Track Record:

  Evaluate the track record of the fund manager managing the mutual fund. Experienced and reputable fund managers are often better at navigating market fluctuations.

• Diversification:

  Ensure the mutual fund portfolio is well-diversified across various sectors and asset classes to mitigate risk.

• Exit Load and Lock-in Period:

  Be aware of any exit load (charges for premature withdrawal) and lock-in periods associated with the mutual fund scheme.

• Tax Implications:

  Understand the tax implications of your SIP investments. For example, Equity-Linked Savings Schemes (ELSS) offer tax benefits, while other funds might be subject to capital gains tax.

Considering these factors can help you make informed decisions and maximise the benefits of your SIP investments.