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Systematic Investment Plan (SIP)

SIP or Systematic Investment Plan is a wealth creation tool that allows investors to invest a certain predetermined amount on a regular basis (weekly, monthly, quarterly, etc.) in a mutual fund scheme. SIPs functions quite like a recurring deposit. The main difference is that in SIPs, a sum that you choose gets invested in a mutual fund scheme of your preference on a specified date regularly for the pre-determined duration, and not in a bank deposit, as is the case with recurring deposits. Investments via SIPs in mutual funds are therefore subject to market risk. The minimum amount you can you invest via SIP will differ from one fund house to another, from one scheme to another.

Given its nature of investing, SIP helps impart financial discipline and inculcates regular saving habits. It allows individuals to invest regularly without wrestling with market sentiment, index level, etc. Say, for instance, you have opted for a mutual fund scheme where you have to put a certain sum of money every month. Not only would you have to make time to do it, you may also have concerns about the market conditions and possibly even think about postponing your investments. SIP puts an end to all these worries. The money gets automatically invested in a scheme at regular intervals, without any effort from your part.

Types of SIP

Often times, people confuse SIPs to just being one plan, when in fact, there are four types of SIPs, namely Flexible SIP, Top-up SIP, Trigger SIP and Perpetual SIP. Here is a brief look into what the different types of SIPs are:

Flexible SIP

  • Flexible SIP gives you the option of changing the investment amount, depending on your cash flow. Should you face a cash crunch, you can accordingly adjust your instalment until the financial situation gets better. On the other hand, if you receive bonus, you can deposit the entire amount or part of it into the SIP account. Along with this, there is the trigger-based option, where triggers like broader marker reaching a specific valuation multiple or change in the scheme NAV (by a certain percentage) determines the SIP amount.

  • For example, Mr. Aditya receive a bonus of Rs. 50,000 this month. By making use of the flexible SIP facility, he allocates this bonus amount he has received directly into one of the funds of his existing portfolio.

Top-up SIP

Top-up SIP lets investors enhance the SIP amount during regular intervals. This allows you to make the most out of your SIP investments by increasing your contributions towards those schemes that are performing well. Additionally, you can also increase your investment amount when there is a hike in your pay. An essential point to be noted is that this facility can only be availed for SIPs through direct debit or ECS mode.

Trigger SIP

This kind of SIP is better suited for investors with sound knowledge and awareness of financial markets. Under trigger SIP, you can set target based on pre-specified date, price, NAV and index level. Trigger SIPs are generally not the best option since it encourages speculation. If, for instance, you know that a certain kind of government policy will be in force in a couple of days and that will affect the index crossing a certain mark, you can set it as a trigger date.

Perpetual SIP

Perpetual SIPs are those without a tenure end date. Fund houses mostly assume such SIPs to continue until 2099, unless you have given a written communication to stop them. Perpetual SIPs help ensure continuity of investment for people who find themselves too busy and do not have the time to renew their SIPs. It is, however, always better to start SIP for a fixed period, rather than leaving the end date blank, since SIPs help foster goal-based approach.

How Does SIP Work?

SIPs are effectively regular investments that help you attain your long-term objectives by building your wealth overtime. Investing in a systematic investment plan is quite simple. After you have chosen the investment interval, your money gets automatically debited from your bank account at regular intervals (as decided by you) and gets invested in a specific mutual fund scheme. You will be allocated certain number of units according to the ongoing market rate (called net asset value) for the day. Each time money is invested, units are bought (at the market rate) and added to your account.

Thus, units are purchased at varying rates, allowing you to take advantage of Rupee-Cost Averaging and Power of Compounding.

Rupee-Cost Averaging

This basically has to do with averaging out the cost at which you purchase units of a mutual fund. The stock market is and always has been volatile, reflecting the condition of the economy. An efficient SIP investor is one who takes into account the performance of the equity market and buys 'low' and sells 'high'. This simply means that you need to purchase more units of a mutual fund at the time when the markets are down and fewer units when the markets are up.

TimeAmount PaidCategoryNumber of Mutual Fund Units Purchased
Jan 201810003040
Feb 201810003831
Mar 201810003237
Apr 201810002448
May 201810001861
Jun 201810002056
  • Total investment: Rs. 6,000
  • Total number of mutual fund units purchased: 273
  • Average price per mutual fund unit: 27

Power of Compounding

The earlier you start investing, the more wealth you are able to create for yourself - and that is exactly what the power of compounding does for you. Whatever sum of money you invest, you will earn interest on it. Now, this interest gets compounded, which means the interest that has been added also earns interest. So, when you look at the corpus accumulated at the end of the tenure, you will realize that the wealth accumulation is at its best in the long run. When you invest for a longer period, your wealth builds at an accelerated pace on account of the compounding effect.

To understand how power of compounding works, consider this example:

Suresh has invested Rs. 10,000 in a scheme that generates 10% returns. He decides to reinvest the returns, thus adding it to the principal amount already invested. Suresh wants his stay invested for 30 years. The interest that he earns in the first year from his investment is Rs. 1,000. Considering how the power of compounding works, the principal amount in the second year becomes Rs. 11,000 (principal + interest) and interest will be calculated on the renewed principal amount. As time passes, the principal amount will keep increasing and the final returns he earns will be several times more than what Suresh first invested.

Benefits of Systematic Investment Plans

Systematic investment plan is a method to build an investment portfolio with a small systematic investment in mutual funds at regular intervals. Many investors choose this route to enter the financial markets and benefit from compounding returns the best way. There are several benefits to investing in SIPs. Here's a look at what they are:

  • Disciplined Saving: For any successful investment, discipline is essence. By investing through SIP, you commit to save regularly, and every investment takes you a step closer to reaching your financial objectives.

  • Convenience: Investing via SIPs is a hassle-free process. You can instruct your bank to facilitate auto-debits from your account. You can also visit the website of the fund house you are interested in and click on the link for SIP registration link/tab.

  • Rupee cost averaging: If you choose to invest a fixed amount of money every month via SIPs, you will see that more units or stocks are purchased when the price of the investment goes down. This brings down the average cost of buying the financial asset overtime.

  • Benefits of compounding: To generate wealth, the key is to start investing early and regularly. A small sum of money invested via SIPs on a regular basis can grow into a considerably large sum. Through the power of compounding, your interest earns interest, allowing you to fetch a substantial amount of wealth.

  • No need to time the market: Knowing when the right time is to invest in the market can pose a big dilemma. It is hard to predict when the market will be at its peak or low point. Investing through SIPs keeps you from timing the market. While SIPs are not free from the market volatility, you needn't worry about the market movements.

Why Should You Invest In SIP

For any investment to be a success, you need to follow a disciplined approach. That is where systematic investment plan come to your aid - a fixed amount gets deducted from your account at a predetermined interval and is invested in a mutual fund scheme of your choice. There are numerous reasons why you should consider investing via SIPs. Here is a look at the six most important reasons why you should invest in SIP:

  • Reason 1: Reduces average cost: When you invest via SIP, you invest a fixed sum on a regular basis. You buy more units when the markets are down and NAV is low, and lesser units when the scenario is vice versa. Through this mechanism, you will find that the average cost of units is on the lower side.

  • Reason 2: Minimizes risk of equity fluctuations: When you are investing through SIPs, you make periodic investments in equities through equity mutual fund. This helps you ride through the ups and downs with great ease.

  • Reason 3: Make most of compounding by investing early: If you stay invested for a longer period of time, compounding is easily the biggest advantage. Even if you have invested only Rs. 500 per month, you can enjoy the benefit of wealth creation since your investment compounds over the long term.

  • Reason 4: Helps achieve life goals: You will have certain objectives in mind when you invest, like buying a home, children's education, retirement, etc. Getting large amounts at short notice can be a difficult task, and hence, it is advisable to build a corpus over a period of time by making regular investments via SIPs.

  • Reason 5: Diversification: One of the biggest plus points of investing in mutual funds through SIPs is that you get to enjoy the benefits of diversification, even when your investments are small. The risks, thus, get spread out and you get to make the most of the gains from different holdings.

  • Reason 6: Does not strain daily finances: Fund houses let you invest even small sums on money in mutual funds via SIP, as compared to a one-time large investment if you were to directly buy from the market. This makes investing a lot easier since it does not strain your finances. It is, therefore, an ideal investment option for small-time investors, who otherwise would not have been able to participate in the equity market.

How to Select the Best SIP Plan for Your Investment Goals

When you buy stocks, the most critical factor you need to ensure is that you choose the right one. You, otherwise, could end up with an underperforming investment, or worse yet, an investment where you might suffer a loss. The same holds true when you park your money in a mutual fund. In case you are planning to invest in a systematic investment plan of a mutual fund, you most definitely would want your money to grow as fast as possible, while also being less affected by common mutual fund risks like volatility and low liquidity.

Identifying your investment horizon as well as risk profile will help you figure what kind of fund will be the most suitable for you. Say, if you do not wish to take on much risk and want consistent returns, debt funds might be a better option for you. But if you want to stay invested for the long term and are comfortable with market volatility, then equity funds may be more suited for you.

After you have identified the kind of investment avenue you want to go for, you need to find out which scheme would be a good option for you. It is advisable to go with older funds since they have a historical track record for investors to analyse and take a cue from. It is also suggested to maintain a conservative approach when stating the expected return. Do not go overboard just because one scheme has had an outstanding performance for a year; rather you need to analyse historical figures of a broader time frame.

Top Five SIP Investment Funds and Their Performance

Fund Name1 Year Return (%)3 Years Return (%)5 Years Return (%)Asset Size (Crore) (as on June 30, 2018)
SBI BlueChip Fund-Reg (G)3.88.517.814027.55
Aditya Birla SL Frontline Equity Fund (G)2.78.216.715222.11
Franklin India Equity Fund (G)3.87.718.69282.81
Mirae Asset India Equity Fund - Regular Plan (G)6.411.320.95437.54
HDFC Mid-Cap Opportunities Fund (G)2.912.525.717969.28

If you want to invest through SIP and have a moderate risk appetite, you can consider putting your money in any of the five funds mentioned above. However, if you are starting out for the first time, it is advisable to go for debt funds. Once you are familiar with how it works, you can shift your focus to equities to generate higher returns on your investment.

Best SIP Plans 2018 – Top SIP Mutual Funds to Invest

Following are some of the top performing funds that you can opt for via SIP:

Debt Funds

Fund Name1 Year Return (%)3 Years Return (%)5 Years Return (%)Asset Size (Crore)
Aditya Birla Sun Life Medium Term Plan5.28.49.59571.43 (as on June 30, 2018)
Reliance Credit Risk Fund5.37.98.78744.05 (as on June 30, 2018)
Aditya Birla Sun Life Corporate Bond Fund5.27.98.83734.62 (as on June 30, 2018)
SBI Magnum Constant Maturity Fund5.48.99.6211.59 (as on June 30, 2018)
Reliance Liquid Fund6.06.47.232.74 (as on June 30, 2018)

Balanced Funds

Fund Name1 Year Return (%)3 Years Return (%)5 Years Return (%)Asset Size (Crore)
L & T India Hybrid Equity Fund3.29.518.09775.91 (as on Jun 30, 2018)
HDFC Hybrid Equity Fund7.010.818.716886.6 (as on Mar 31, 2018)
ICICI Prudential Equity & Debt Fund1.79.417.125799.47 (as on Jun 30, 2018)
SBI Equity Hybrid Fund6.58.716.922748.71 (as on Jun 30, 2018)

Equity Funds

Fund Name1 Year Return (%)3 Years Return (%)5 Years Return (%)Asset Size (Crore)
Aditya Birla Sun Life Equity Fund1.511.021.47473.11 (as on Jun 30, 2018)
HDFC Small Cap Fund11.617.222.92867.01 (as on Jun 30, 2018)
ICICI Prudential Value Discovery Fund5.06.722.113496.56 (as on Jun 30, 2018)
DSP BlackRock Midcap Fund1.111.425.14853.39 (as on Jun 30, 2018)
HDFC Mid-Cap Opportunities Fund2.912.525.717969.28 (as on Jun 30, 2018)

What Should You Know about SIP?

Is SIP safe?

SIP is simply a mode of investing in a mutual fund scheme. The risk component will depend on what type of fund you invest in.

SIPs have the same amount of risks associated with them as mutual funds. However, due to rupee averaging method these risks are reduced as SIPs ensure that you swim through the ups and downs of the equity market comfortably. Hence, you don't stand a chance to lose big.

Is SIP taxable?

For every single investment in equity mutual fund, you don't need to pay taxes if the holding period of the units is more than a year. However, you have to end up paying short term capital gains tax if your holding period is less than a year.

How does SIP work in mutual funds?

Systematic investment plan is an investment tool that allows investors to park a certain predetermined amount on a regular basis in a mutual fund scheme. SIPs function quite like recurring deposits. The main difference is that in SIPs, a sum that you choose gets invested in a mutual fund scheme of your preference on a specified date each month, and not in a bank deposit, as is the case with recurring deposits.

How can I open a SIP account?

If you wish to start SIP, follow the below steps:

Step 1 - Visit the website of your preferred Mutual Fund House and open an account by completing the KYC requirements

Step 2 - Look for the right fund

Step 3 - Decide on the investment amount

Step 4 - Fix the payment date

Step 5 - Submit form

How much money is needed to start a Systematic Investment Plan?

You need a nominal amount of Rs. 100 or 500 to start investing in a mutual fund scheme via SIP.

What are SIP tax benefits?

Tax benefits can only be claimed if investments are directed towards Equity Linked Savings Scheme. Investments made in ELSS qualify for tax exemptions under section 80C of the Indian Income Tax Act, 1961.

What is rupee cost averaging?

Rupee cost averaging basically has to do with averaging out the cost at which you purchase units of a mutual fund. The stock market is and always has been volatile, reflecting the condition of the economy. An efficient SIP investor is one who takes into account the performance of the equity market and buys 'low' and sells 'high'. This simply means that you need to purchase more units of a mutual fund at the time when the markets are down and fewer units when the markets are up.

Does SIP come under 80C?

Investments made in ELSS qualify for tax exemptions under section 80C of the Income Tax Act, 1961.

What is meant by systematic investment plan?

SIP or Systematic Investment Plan is a wealth creation tool that allows investors to invest a certain predetermined amount on a regular basis (weekly, monthly, quarterly, etc.) in a mutual fund scheme.

What is the difference between mutual funds and SIP?

Systematic investment plan is a tool by which investments can be made in mutual fund schemes. SIP is a way to invest in mutual funds - not a comparable investment instrument. In a mutual fund, there are two ways to invest - a lump sum or through systematic investment plan. A lump sum is a one-time large investment made by an investor, while SIP allows you to invest a fixed amount in a mutual fund scheme on a regular basis.

Which SIP is best to invest?

If you want to invest through SIP and have a moderate risk appetite, you can consider putting your money in any of the five funds mentioned below:

Fund Name1 Year Return (%)3 Years Return (%)5 Years Return (%)Asset Size (Crore) (as on June 30, 2018)
SBI BlueChip Fund-Reg (G)3.88.517.814027.55
Aditya Birla SL Frontline Equity Fund (G)2.78.216.715222.11
Franklin India Equity Fund (G)3.87.718.69282.81
Mirae Asset India Equity Fund - Regular Plan (G)6.411.320.95437.54
HDFC Mid-Cap Opportunities Fund (G)2.912.525.717969.28

Is SIP a good investment option?

SIPs are a mode of investment. It is the best option for those looking to invest a fixed amount in mutual fund schemes at regular intervals. Given its nature of investing, SIP helps impart financial discipline and inculcates regular saving habits. It allows individuals to invest regularly without wrestling with market sentiment, index level, etc.

Are there any best SIPs?

Following are some of the top performing funds that you can opt for via SIP:

  • Debt Funds
Fund Name1 Year Return (%)3 Years Return (%)5 Years Return (%)Asset Size (Crore)
Aditya Birla Sun Life Medium Term Plan5.28.49.59571.43 (as on June 30, 2018)
Reliance Credit Risk Fund5.37.98.78744.05 (as on June 30, 2018)
Aditya Birla Sun Life Corporate Bond Fund5.27.98.83734.62 (as on June 30, 2018)
SBI Magnum Constant Maturity Fund5.48.99.6211.59 (as on June 30, 2018)
Reliance Liquid Fund6.06.47.232.74 (as on June 30, 2018)
  • Balanced Funds
Fund Name1 Year Return (%)3 Years Return (%)5 Years Return (%)Asset Size (Crore)
L & T India Hybrid Equity Fund3.29.518.09775.91 (as on Jun 30, 2018)
HDFC Hybrid Equity Fund7.010.818.716886.6 (as on Mar 31, 2018)
ICICI Prudential Equity & Debt Fund1.79.417.125799.47 (as on Jun 30, 2018)
SBI Equity Hybrid Fund6.58.716.922748.71 (as on Jun 30, 2018)
  • Equity Funds
Fund Name1 Year Return (%)3 Years Return (%)5 Years Return (%)Asset Size (Crore)
Aditya Birla Sun Life Equity Fund1.511.021.47473.11 (as on Jun 30, 2018)
HDFC Small Cap Fund11.617.222.92867.01 (as on Jun 30, 2018)
ICICI Prudential Value Discovery Fund5.06.722.113496.56 (as on Jun 30, 2018)
DSP BlackRock Midcap Fund1.111.425.14853.39 (as on Jun 30, 2018)
HDFC Mid-Cap Opportunities Fund2.912.525.717969.28 (as on Jun 30, 2018)

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

Identifying your investment horizon as well as risk profile will help you figure what kind of fund will be the most suitable for you. Say, if you do not wish to take on much risk and want consistent returns, debt funds might be a better option for you. But if you want to stay invested for the long term and are comfortable with market volatility, then equity funds may be more suited for you.

After you have identified the kind of investment avenue you want to go for, you need to find out which scheme would be a good option for you. It is advisable to go with older funds since they have a historical track record for investors to analyse and take a cue from. It is also suggested to maintain a conservative approach when stating the expected return.

SIP vs. Recurring Deposits: Which is better?

Mutual fund investments via SIPs are a better wealth creation tool as compared to recurring deposits. Investments through SIPs offer advantages such as diversification, liquidity and better returns (subject to market risks). In the case of recurring deposits, you will invest in a deposit plan that generate fixed rate of returns.

SIPs vs. EMIs: What is the difference?

If you wish to purchase a product or service via EMIs, you will end up spending more than the actual price. However, when you invest in mutual funds via SIPs you create an asset for yourself which will help you attain your financial goals in life through the power of compounding.

Daily SIP vs. Monthly SIP: Which one to choose?

The investment frequency you choose should come down to the frequency at which you earn. If you are confused between the performance of a monthly SIP and a daily SIP, long-term data shows that there isn't much difference in the returns generated by the two. Several reports have suggested that daily SIPs will help in averaging your investment cost better.

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