A Beginners Guide to Systematic Investment Plan (SIP)
When a person doesn’t want to invest lumpsum amount, Systematic Investment Plan (SIP) allows investor to invest small amount instead of lump sum amount periodically for specific tenure. When you select SIP, payment of investment can be done weekly, monthly or quarterly. Lets read beginners guide for Systematic Investment Plan in detail.
What is Systematic Investment Plan (SIP)?
SIP is Systematic Investment Plan and SIP is a smart mode of investing money in mutual funds. Through SIP, investor can invest pre-determined amount weekly, monthly or quarterly. SIP is flexible option of investment as an investor can increase or decrease amount anytime or stop SIP anytime.
SIP is the best option for new person who is not well aware of financial market as it is a safe option. Why is it safe? Because, you are investing small amount periodically instead of whole lump sum amount at a time.
How does SIP work?
Investing in SIP is very simple and hassle free. When you choose SIP option, the pre-determined amount is automatically debited from you bank account. And, when money is debited from your account, you receive mutual fund units in your account based on Net Asset Value (NAV) of your fund.
Can you invest in more than one SIP?
You can have multiple SIPs. You need to decide goal and plan SIP accordingly. If you plan SIP carefully then just having SIP of Rs 5000 can grow to Rs 1.5 crore. Generally investor should plan a date of SIP after few days of when he receives salary as investor has enough funds in bank account.
What are the types of Systematic Investment Plan?
There are 4 types of Systematic Investment Plan (SIP).
| Regular SIP | This SIP is the simplest form. Investor invests fixed amount weekly, monthly, bi-monthly, quarterly, half yearly. Investor decides the SIP duration, instalment amount and frequency. But investor cannot change the instalment amount in such type of SIP. |
| Top-up SIP | Also known as Step-up SIP. Investor can increase SIP amount periodically. For example, investor has SIP of Rs 5000 and investor instructs fund house to increase amount by Rs 1000 every year then amount of SIP increases every year. It benefits investor to achieve financial goal sooner. |
| Flexible SIP | With this type of option, investor can increase or decrease SIP amount. When investor is facing cash crunch, investor can skip one or more payment and when investor can invest more money when he receives additional money or bonus. |
| Perpetual SIP | When investor fill form of SIP, he has to select tenure of SIP. If it is not specified then it becomes Perpetual SIP. With this option, investor can stay invested in particular type of mutual fund for longer time till investor achieves financial goal. Or, Investor can observe the market and redeem the amount at any time. |
| Triggered SIP | Investor who understands market can select this option. Investor set the SIP start date, redeem or switch SIP once the market even occurs. Investor has to have knowledge and experience to set the trigger. |
| SIP with Insurance | A few mutual fund houses offer free optional in-built insurance cover. It is based on investor’s SIP contributions and tenure. The cost of insurance is borne by fund house. In case of multiple holders, only the first holder will be eligible for the insurance cover. |
| Multi SIP | Allows investor to invest in multiple schemes of fund house. Investors can diversify their investment through single form and less paperwork |
What are the benefits of investing in SIP?
Investor can achieve big returns by investing small amount regularly. It is like saving some amount every month and invest the same. Following are some benefits of investing in SIP:
- Convenient: Many times, investor doesn’t have or want to invest big amount at a time. So, its very convenient way to invest money periodically and achieve high gain. Investor can invest minimum Rs 500. It’s hassle free as investor set amount to be invested periodically and amount gets debited from bank account.
- Rupee Cost Averaging: When you invest money, the units of mutual fund is bough according to market rate. So, when market is performing low, Investor buy more units and when market is performing high, investor buy a smaller number of units. So, it reduces cost of investment and increases high gains.
- Flexibility: SIPs are open ended funds so you can withdraw any time you want. You can withdraw whole or partial amount. If investor doesn’t want flexibility to withdraw amount any time, then this is the perfect option.
- Power of Compounding: As small amount invested regularly can generate more more gains as compared to investment of lump sum amount. The benefit of compound interest ensures long term returns as compared to one time investment.
- Emergency Fund: As written above, SIP is open ended fund so investor can withdraw money any time in case of emergency like health issues or loss of job.
- Higher Return: As compared to traditional fixed deposit, SIP provides higher return.
Below is the table to show how much a person grows his money through SIP. Example given below shows how a SIP of Rs 5000 can generate 1 crore in 30 years. If you plan and invest in top-up SIP like you increase investment every year then you can earn 1 cr in less than 35 years.
| Duration | SIP Amount | Amount Invested | Future Value |
| 4 years | 5000 | 2,40,000 | 2,96,059 |
| 5 years | 5000 | 3,00,000 | 3,90,412 |
| 10 years | 5000 | 6,00,000 | 10,32,760 |
| 12 years | 5000 | 7,20,000 | 13,93,708 |
| 15 years | 5000 | 9,00,000 | 20,89,621 |
| 18 years | 5000 | 10,80,000 | 30,27,840 |
| 20 years | 5000 | 12,00,000 | 38,28,485 |
| 25 years | 5000 | 15,00,000 | 66,89,452 |
| 30 years | 5000 | 18,00,000 | 1,13,96,627 |
| 35 years | 5000 | 21,00,000 | 1,91,41,384 |
7. Discipline: Somewhere investor invests some percent of his/her income in SIP periodically so it incorporates discipline of saving money and investing it for good returns. Investor keeps this pre decided amount separate and plan expenses.
How to invest in SIP for beginners?
- Set financial goal: First investor has to decide for what purpose he/she is investing money. Then, according to purpose and tenure, investor can choose the plan
- Select right plan: There are lot of options available. Investor can take help of expert or advisor to select the fund. The fund is selected depending upon the goal. Investor can study the performance of any fund before investing.
- KYC: For SIP mutual fund investment, net banking account and KYC is mandatory. Investor can do e-KYC by uploading required document.
Read also: Are you aware of Contra Funds?
How to select a Systematic Investment Plan (SIP)?
Mutual Fund Rating: Investor can check the ratings of the scheme given by various credit rating agencies such as CRISIL, ICRA, and much more. These agencies evaluate a scheme on the basis of their predetermined parameters.
Historical Returns: Historical return is not considered as a benchmark for future performance. But still, investor can use it for forecasting future returns.
Fund Age & AUM Fund Age: Investor needs to check for how many years the fund has been existing in the market. The older the fund, the better it is for investors. Investor should try to invest in schemes that has a minimum of 3 years of existence. AUM of scheme should also be considered. AUM or Assets Under Management refers to the total value of the assets of the investment company in the scheme. This helps investor to understand how many people have invested their money in the scheme.
Expense Ratio & Exit Load: The expense ratio of a scheme is related to the management fee and administrative fee of a fund. So, a lower expense ratio results in higher profits and vice versa.
Exit load refers to the charges needs to be paid to the fund house while exiting from the schemes before a certain predefined period.
Interest Rate Scenario & Average Maturity: In case of debt funds, the prices are affected by interest rate movements. Investor needs to consider the average maturity of the Debt fund, before investing, to aim for optimum risk returns in debt funds.
Analysing Ratios: Sharpe Ratio and Alpha help to check whether the fund manager has generated more or less returns in comparison to their set benchmark.
Fund House: Fund House is an integral part of any Mutual Fund scheme. A good AMC gives you with good investment options. It also helps investor to invest smartly and make more money. Investor needs to check the AMC’s age, its overall AUM, a number of schemes offered, and much more.
Fund Manager: Investor should also check the credentials of the fund manager, past records of the fund managers, how many schemes fund manager is managing, fund manager’s track record, and much more.
Investment Process: If there is a well-designed investment process, then one can ensure that the scheme is well managed.
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How much investor needs to start a SIP?
It depends upon financial goal of investor. Fool proof planning with real numbers and facts help investor to find out how much he/she can invest. So, it depends on case to case as per financial goals and needs. The minimum amount to invest in SIP is Rs 500 and there is no limit for maximum. If you are new to mutual funds, market then start with small amount and then increase it.
FAQ
Why select a Systematic Investment Plan?
When you want to achieve your financial goals, you can select option of mutual fund and SIP. SIP allows you to invest small amount periodically. So, instead of investing full amount, you invest small amount periodically.
What are the minimum and maximum amount I can invest in SIP?
Minimum Rs 500 per month and maximum is how much ever investor can invest.
Can I miss the payment of SIP?
Yes, you can miss the payment of SIP and account of investor doesn’t get deactivated.
What are the tax benefits of investing in SIP?
Investment made through SIP for Equity Linked Saving Scheme(ELSS) offers tax benefits under 80C. Maximum limit is 1.5 lakhs.
Is SIP safe?
SIP is very safe option as it is a planned approach to your investment. SIP allows you to invest monthly or quarterly or weekly. It creates the habit of saving.
Is SIP good for long term financial growth?
Yes, SIP provides maximum return on investment on long term period.
