SIP is not a scheme, fund, stock, or investment avenue, but a style of investment. SIP is a vehicle to periodically invest in a fund or scheme as per your choice. This article sheds light on all the details about SIPs.
What Is SIP – Systematic Investment Plan?
Introducing the concept of Systematic Investment Plan, commonly referred to as SIP, marks a strategic and disciplined approach to wealth creation. What is SIP? It’s an investment avenue that empowers individuals to commit to regular contributions, fostering financial discipline and long-term wealth accumulation. By navigating the volatile terrain of the market with systematic investments, SIP offers the potential for compounded growth. In this introduction, we unravel the essence of SIP, where consistency becomes the cornerstone for realizing financial goals. Explore the world of wealth creation through the lens of Systematic Investment Plan.
SIP, which stands for Systematic Investment Plan, is a popular investment strategy. In India, SIP investment plans enable individuals to regularly invest a fixed amount in their preferred mutual fund schemes or regular-premium ULIP Plans. This method aims to enhance the SIP premium through the power of compounding interest.
In summary, here’s a brief explanation of what SIP entails:
- Mutual Funds: With this option, you can contribute a predetermined sum of money on a weekly, monthly, or quarterly basis.
- ULIP Plans: With this option, you can enjoy the benefits of the plan by making regular premium payments at the frequency of your choice, be it monthly, quarterly, half-yearly, or annually.
Important Features of SIP Mutual Funds and SIP ULIP Plans
SIP mutual funds offer great flexibility to investors, allowing them to adjust their investment amount, either decreasing or increasing it, or even halt their investments whenever they desire.
SIP ULIP plans provide an opportunity for investors to benefit from top-up premium payments, which can be made if they have additional funds available for investment. This allows for the potential of higher maturity returns.
Both SIP mutual funds and SIP ULIP plans are affordable investment options that can help individuals accumulate substantial wealth over the long term.
SIP is considered the safest and most advantageous investment choice, particularly for beginners or those who may not have extensive knowledge of the workings of the financial market.
How Do SIPs Function?
There are two principles one should know about SIP Investments on which they function:
1. Rupee-Cost Averaging
Rupee cost averaging is a concept that allows an investor to take advantage of the market volatility and eliminate the guessing game of market performance. Investing regularly ensures the average purchase cost is evened out in the long run.
Use the SIP calculator and plan your retirement beforehand. Use Vakilsearch’s online SIP calculator to quickly calculate your return on investment.
An investor gets more units when the Net Asset Value (NAV) is less, and fewer units when the NAV is high. In other words, with the rise of the market, you get fewer units, and with the fall of the market, you receive more units. Therefore minimising the risk and ensuring that you acquire investments at a lower average cost per unit.
2. Power of compounding
The concept of the power of compounding means reinvesting the investment leading to the compounding of the interest and helping in long-term wealth creation. There will be an exponential impact on your investment as a result of saving a small sum of money regularly for long periods, because of the effect of compounding.
To understand the power of computing better, let us take the help of a simple example.
Assume that person ‘A’ has decided to invest a monthly SIP investment of ₹1000 on his 30 birthday. Assuming a return of 7%, the total corpus of ‘A’ at the end of 20 years will be ₹5,28,000.
Now assume that person ‘B’ starts investing for his 60th birthday at the age of 20. ‘B’ has decided to make a monthly investment of ₹1000 at the age of 20 in SIP. Assuming returns of 7% for the monthly investment, the total corpus for ‘B’ at the end of 40 years will be ₹26.56.436, which is almost five times the corpus accumulated by ‘A’
This proves that regular investments for longer durations yield more significant profits and returns.
When to Invest in SIP?
SIP investments provide the flexibility to start at any time, minimising the associated risks when paired with a suitable scheme plan tailored to the investor’s needs.
Selecting a scheme that aligns with long-term goals is crucial for investors. Therefore, there is no specific timeframe that dictates when an investor should commence a SIP investment plan; the earlier, the better.
Types of SIPs
Gaining an understanding of the various types of SIP will assist you in selecting the appropriate scheme that aligns with your goals.
Here are the available types of Systematic Investment Plans:
- Top-up SIP:
The Top-up SIP enables you to periodically increase your investment amount, granting you the flexibility to invest more when you have a higher income or available funds. This approach maximises your investments by allocating them to the best-performing funds at regular intervals.
- Flexible SIP:
As the name suggests, the Flexible SIP plan allows for flexibility in the amount you wish to invest. Investors can adjust the investment amount based on their own cash flow requirements or personal preferences, either increasing or decreasing it accordingly.
- Perpetual SIP:
A Perpetual SIP Plan allows you to continue investing without a specified end date. Typically, SIPs have a predefined end date after 1 year, 3 years, or 5 years. With a perpetual SIP, investors have the freedom to withdraw their invested amount whenever they desire or based on their financial goals.
- Trigger SIP:
This type of SIP is suitable for investors with limited knowledge of the financial market. It allows you to set triggers such as NAV (Net Asset Value), index level, SIP start date, or specific events. However, it’s worth noting that since this SIP mutual fund type promotes speculation, it is not generally recommended or favoured.
Benefits of Investing in SIP
Investing in SIP offers numerous advantages compared to lump sum investments. Some of these benefits are outlined below:
- Cultivates Discipline:
SIP serves as an excellent investment option, particularly for individuals with limited financial expertise in navigating market movements. There’s no need to spend time analysing market trends or determining the right timing to invest. With SIP, funds are automatically deducted from your account and directed towards mutual funds, allowing you to relax. Unlike lump sum investments, SIP instils discipline by actively working towards the growth of your investments through periodic contributions.
- Rupee Cost Averaging:
One of the advantages of SIP is the utilisation of rupee cost averaging. By investing a fixed amount consistently over an extended period, you can leverage market volatility. The constant investment amount through SIP averages out the unit values. Consequently, when the market is low, you can purchase more units, and when it’s high, you acquire fewer units. This approach lowers your average cost per unit.
- Power of Compounding:
SIP fosters a disciplined approach to investing, ensuring continuous growth of your investments. The automation aspect helps your investments grow steadily, unlike lump sum investments where there’s a possibility of forgetting to invest periodically. The small amounts you invest regularly accumulate into a substantial corpus over time, thanks to the contributions and compounded returns. For instance, using the Vakilsearch SIP Calculator with a monthly contribution of ₹ 1,000 and an assumed average return of 10%, the projected total after 20 years would be ₹ 7,18,259, highlighting the impact of compounding.
- Convenience and Ease:
SIP offers convenience and ease in managing investments. By submitting an application form, you can initiate auto-debit or provide post-dated cheques to start the SIP. Depending on your desired final amount, you can select an appropriate investment amount to commence your SIP.
What Are the Advantages of SIP Investment?
Here are the benefits one should know about SIP Investments:
- Flexibility: There is a lot of flexibility provided by SIPs. You can decrease or increase the investment amount at any given point in time
- Financial Discipline: Regular investments in SIPs breed financial discipline. It encourages savings and helps you accumulate a corpus without affecting your lifestyle
- Lower risk: An investor fears investing a lump sum amount, as it exposes him to greater capital risk. SIP investments in India are spread over time, therefore reducing the risk of capital and helping you navigate the market volatility better
- Convenience: Unlike many complex investments, investing in SIPs is hassle-free. SIP investments can be made online, with a one-time set of instructions. Once you start, your SIPs will automatically begin accumulating
- Wide choice of schemes: There is a wide choice of schemes in mutual funds you can choose from. You can invest in any of those traits that match your risk profile, financial goals, and investment objectives
- Low investment amount: You can invest in SIP with an amount as low as ₹500 per month
- Diversified investments: SIPs in equity mutual funds allow you to take advantage of investing in various companies and sectors. Therefore your risk spreads across companies, sectors, and market capitalisation
- Inculcates the savings habit: Investing helios inculcates the habit of savings. In SIPs you commit to investing a fixed amount systematically in predetermined periods, therefore inculcating the habit of savings.
How to Choose a SIP – (Systematic Investment Plan)?
Investors can access comprehensive information about various mutual funds and ULIP plans online. However, there are certain factors to consider before making an investment.
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SIP Duration:
The duration of SIP investments in Mutual Funds and ULIP plans is crucial in terms of risk, return, and tax implications. It is advisable for investors to consider a minimum reference period of 5 years and evaluate the fund’s performance across different market conditions.
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Fund House:
Before selecting a plan, it is essential to assess the reputation of the fund house or financial institution offering the investment. The track record of the fund house provides insights into how well the fund managers can navigate market fluctuations and minimise the impact on investors.
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₹ 500 Cr Asset Under Management:
Having a benchmark of ₹ 500 crore in asset size can be considered appropriate when choosing a fund. However, it’s important to note that funds below this asset size may not necessarily be of poor quality, but they may not perform as strongly as funds with larger asset sizes.
Can a SIP be Customised?
Investing in a systematic investment plan (SIP) is widely regarded as a highly promising investment strategy. Instead of keeping your money idle in a savings bank account, you can opt for a SIP and take advantage of regular savings combined with earned interest. However, the benefits of investing in a SIP go beyond that. You have the flexibility to customise your SIP according to your specific requirements. If you wish to change your fund options or make other desired modifications, even the best SIP plans in India offer a simple process outlined below:
- Submit a written request to stop your existing SIP.
- The process of stopping your current fund typically takes around 15 days.
- Fill out the new application form for the desired fund in which you intend to start the SIP, along with the SIP registration form and the OTM/NACH form.
- Deposit the specified fund amount with an authorised representative.
By following these straightforward steps, you can make adjustments to your SIP and align it with your changing investment preferences.
How Much Do You Need to Start a Systematic Investment Plan?
Making rough or approximate calculations can pose risks when planning to achieve specific financial goals. It is always advisable to create a robust financial plan and work with accurate figures while striving towards both short-term and long-term objectives.
A systematic investment plan (SIP) provides a sensible approach to accomplish these goals by allowing you to invest in a preferred ULIP Plan or mutual fund scheme. It takes care of managing your investment portfolio. Even with just a minimum investment of ₹ 500, you can start investing in the best SIP plan available in India. By committing to a SIP, you can set a designated timeframe to attain your desired goal, regardless of the initial investment amount.
Tax Benefit of Investing in SIP
Tax benefits are applicable to SIP ULIP Plans and specifically to Equity Linked Savings Schemes (ELSS) among pure mutual fund investments. By investing in a ULIP plan or an ELSS scheme, which are government-approved tax-saving schemes, individuals can avail tax deductions under section 80C of the Income Tax Act, 1961.
How does SIP Calculator Work?
The SIP Calculator is an online tool that allows you to estimate the potential returns of your SIP investment plan before actually initiating the investment.
Calculating SIP returns relies on the principle of compound interest.
All you need to do is input the desired investment amount and choose the investment tenure, and the calculator will swiftly compute the expected returns for you.
The SIP Calculator proves highly beneficial in determining the appropriate investment amount for ULIP plans or mutual funds, especially if you intend to increase your investment for potentially higher future returns.
FAQs
Which gives better returns, ULIP or SIP?
SIPs are an ideal choice when investing for a short-term period. However, if you are seeking substantial long-term returns coupled with life insurance benefits, ULIPs emerge as the optimal investment plans.
Why choose a Systematic Investment Plan?
A Systematic Investment Plan (SIP) offers a methodical and disciplined approach to investing in Mutual Funds. SIP is an attractive investment option as it not only yields high returns on investment but also enables investors to build wealth over an extended period. By investing a small amount per month in a predetermined manner, typically in SIP mutual funds, SIP cultivates the habit of regular savings.
What is the minimum and maximum amount I can invest in SIP?
Investors have the flexibility to commence their SIP investment plan with a minimum monthly amount of ₹ 500, and they can choose to invest as per their desired maximum limit.
How to start SIP investment?
You have two options to initiate SIP investment, either through online or offline methods. With the offline method, you would need to personally visit the AMC office and complete the application form and auto debit form. Additionally, you would be required to provide necessary documents such as address proof, ID proof, and a signed cheque to the mutual fund's address. On the other hand, for the online method, you would need to access the AMC website and enter all the required details for online SIP. In addition to the KYC details, you would also need to submit scanned copies of the cheque, address proof, ID proof, and account number.
How safe it is to invest in SIP?
Systematic Investment Plan (SIP) provides a secure investment method that enables investors to regularly invest a fixed amount at consistent intervals. By offering a systematic approach to investing, SIP assists investors in establishing a financial safety net and cultivating a savings habit.
How can I make an online SIP investment?
To invest in SIPs online, you can begin by creating an account with your preferred fund company. Prior to initiating a SIP in a mutual fund of your choice, it is essential to undergo KYC verification. This process can be conveniently completed on either the fund houses' or RTAs' websites. To get started with online SIP investments, you will be required to furnish your PAN card, proof of address, and a photo following the specified format. Once your KYC verification is successfully completed, you can proceed to link your bank account with the investment account and commence investing in SIPs.
What exactly is NAV in SIP?
The net asset value (NAV) refers to the price at which an investor can purchase or sell mutual fund units. The net asset value (NAV) of most mutual funds is updated on a daily basis after business hours. All transactions involving mutual funds are executed based on the current NAV. When investing through SIP instalments, the current NAV will determine the cost of your purchase each time.
Conclusion
SIP investments is the key to earning a good return, with lower risks, and a smaller amount of investment. SIPs are a form of passive investment. This is because once you invest your money, you continue to invest in it regardless of how it performs.
SIP is an excellent way of investing for your long-term financial goals such as your children’s higher education, their marriage, your retirement planning, or estate planning. To know better about SIPs, and get clear guidance in your investment plan, you must connect with experts at Vakilsearch.
