The popularity of mutual funds has gone up in the last few years in India. Systematic Investment Plan, commonly called an SIP, is the most popular way of investing in mutual funds.
Many people have some misconceptions about SIP. They think that it is an investment. Whereas it is a wealth creation tool that allows you to invest regularly in a mutual fund scheme.
Simply put, Systematic Investment Plan is an investment plan which inculcates the habit of savings. It is the best way to save regularly without fail and enter the world of investments for the long term.
Here’s a complete guide to SIPs and how you can invest in mutual funds via SIP to create BIG wealth over a period of time to attain your set goals.
Table of Contents
What is SIP?
Systematic Investment Plan, commonly called an SIP, is one of the most disciplined methods of investing in mutual funds.
It allows you to invest a fixed amount in a mutual fund scheme at fixed intervals. For example, you can invest a fixed amount of money on a weekly, monthly or quarterly basis instead of investing a lump sum amount at a time.
In SIP, a pre-determined amount is deducted from your savings account at regular intervals (monthly, quarterly, etc.) and invested in the mutual fund scheme chosen by you.
To get the maximum out of your SIP investments, you should start early and invest regularly. In simple terms, start investing via SIP in smaller amounts regularly to create a large corpus fund over a period of time.
Here’s all you need to know about Systematic Investment Plans in mutual funds.
Types of SIP
SIPs have been gaining popularity among mutual fund investors due to the convenience, financial discipline and safety they are providing. There are six types of Systematic Investment Plans. Below is a brief description of these Systematic Investment Plans.
1. Regular SIP
In this, you invest a fixed amount of money at fixed intervals (weekly, monthly, quarterly, etc.). The start and end date of the Systematic Investment Plans are pre-determined.
2. Flexible SIP
It gives you the option to increase or decrease the amount every time. Simply put, when you face a cash crunch, you can skip one or more payments. Similarly, you can increase the amount of investment if you have sufficient funds.
3. Top-up SIP
This gives you the option to increase your investment amount at fixed intervals. This allows you to invest more in the mutual fund schemes that are performing well. Additionally, with a rise in your income, you can also increase the amount.
4. Perpetual SIP
In this, you start the Systematic Investment Plan without a tenure end date. In other words, keep paying till you wish. However, it is always better to start SIPs for a fixed period to build a goal-based investment.
5. Trigger SIP
It is ideal for those investors who understand the capital market well. This gives them the option to use that knowledge. In this, you can set a particular NAV or index level or event or a particular date to start your Systematic Investment Plan. For example, you can set to buy units when NAV goes below a certain level.
6. With free life cover
Many fund houses are offering free life insurance cover to the investors with Systematic Investment Plans. AMCs like ICICI Pru, Reliance and Birla Sun Life offer this package of mutual fund and insurance.
How does SIP Work?
Investing in a SIP mutual fund is quite simple. It works on the principle of the regularity of investments. The concept of Systematic Investment Plan is quite like the recurring deposit.
When you start investing via SIP, the amount gets automatically debited from your bank account at regular intervals and invested in a mutual fund you choose to invest in.
The AMC allocates you a certain number of units on the basis of the Net Asset Value (NAV) of your fund for the day. With every investment, additional units are bought based on current NAV and added to your account.
In this way, it helps you in investing in a disciplined manner without worrying about timing the market. You buy more units when the prices are low and lesser units when the prices are high.
Thus, units are bought at different rates, allow you to lower the average cost of your investment and take benefit of rupee cost averaging and the power of compounding.
Why should you invest in SIP?
There are many reasons as to why should you invest in mutual funds via SIP route. Two advantages that greatly benefit you are:
1. Rupee-Cost Averaging
2. Power of Compounding
Rupee Cost Averaging
With the volatile stock market, it is often difficult to time the market. Investing in mutual funds through SIP is the best way to beat this volatility of the market. It allows you to buy more units when the price is low and lesser units when the price is high. This averages out the overall cost of your mutual fund units and there would be fewer chances of loss. This is called “Rupee Cost Averaging”.
Power of Compounding
Power of Compounding is called the eighth wonder of the world by some. The basic principle of compounding is simple, start early and earn more. In simple terms, compounding means earning a return on returns. When you invest in mutual funds through SIP for a long period, you take benefits of the power of compounding. This way you can create BIG wealth to achieve your long-term financial goals.
Benefits of investing in SIP
Systematic investment plans allow you to invest small amounts regularly and reap big returns. There are several benefits of investing in mutual funds through SIP. The benefits are given below:
Disciplined Investing
Discipline is the key to any successful investment. When you invest through SIP, you agree to invest at regular intervals. This makes you disciplined in your investments and helps to create wealth over a period of time.
Convenience
It is a convenient mode of investment. It is convenient as you can give your bank standing instructions to debit the amount at a particular date every month. You can track your investment and its returns online or through monthly statements.
Rupee Cost Averaging
It is practically impossible to predict and time the market. The market may go up after you sell or may go down after you invest. SIP in mutual funds is the way to beat this unpredictability of the market. You buy more units when the price is low and lesser units when the price is high. This reduces your purchase cost and maximizes your returns.
Power of Compounding
To generate BIG wealth, the best mantra is starting early and invest regularly. When you invest a small amount of money through SIP regularly, it can grow into a large corpus fund over a period of time. Through the power of compounding, you earn a return on returns. A regular SIP compounds your money and helps create BIG wealth in the long term.
No need to Time the Market
When you invest through SIP then there is no need to time the market. Investing in mutual funds via SIP route keeps you from timing the market. However, SIPs are not free from the market volatility but there is no need to worry if you are doing SIPs with a long-term time frame of 5 to 10 years.
Affordable
Systematic Investment Plans in mutual funds are affordable. They allow you to invest small amounts every month. You can start investing in a mutual fund scheme via SIP with an amount as low as Rs.500 a month.
Acts as an Emergency Fund
With a simple and easy withdrawal process, your Systematic Investment Plans can act as an emergency fund for any contingencies. You can use SIP withdrawals to tide over the emergencies like a job loss, serious illness, etc.
Flexibility
You can decide the amount, tenure and interval of Systematic Investment Plans as per your financial goals. Besides this, you can increase, decrease or stop the SIP at any time. However, it is always advisable to continue SIP investments for a long period.
Long-Term Gains
Systematic Investment Plans are best for long term financial goals. They have the potential to deliver good returns over a period of time due to rupee-cost averaging and the power of compounding. This shows that through SIP you can achieve your goal by investing a small sum of money every month.
Diversification
Diversification is an important aspect of investing. When you invest in mutual funds through SIP, you get to enjoy the benefits of instant diversification. This diversification allows you to reduce the risk of one particular stock or sector.
How to start SIP?
You need to visit the branch of an Asset Management Company, CAMS, Karvy, bank, mutual fund distributor or agent.
Alternatively, you can visit AMC websites, distributor’s platforms or independent websites to the process online.
Here is a step-by-step process for starting a SIP.
Complete your KYC Compliance
First of all, you need to complete your KYC compliance. KYC verification is a one-time exercise that is mandatory for investing in mutual funds. You can get your KYC done either online or offline.
Offline KYC
You would need the following documents:
- PAN card
- Address proof
- Identity proof
- A passport size photograph
Visit any of the following institutions and submit the KYC application form along with copies of the above-mentioned documents. You also need to produce original documents for verification.
- Asset Management Company (AMC)
- KYC registration agency (KRA)
- Mutual fund distributor or agent
Online KYC
Visit the website of the AMC if it allows eKYC then follow the procedure. You need Aadhaar for this eKYC. You can also do it from Cams KRA. Note that Aadhaar-based KYC allows you to a yearly investment of Rs 50,000 per fund house.
Some AMCs allow IPV (in-person-verification) through video conferencing using a webcam where you have to produce your original documents. This type of KYC removes the Rs 50,000-limit.
Select Mutual Fund Scheme
It is a crucial step in mutual fund investment. Here you need to identify a mutual fund scheme that suits your financial goals. Always select the funds on the basis of your financial goals, investment horizon, and risk appetite.
You also need to decide SIP frequency, date and amount depending on your personal needs. Also, choose the option of direct or regular mutual fund.
Submit the SIP Form / Register & Start SIP online
Once you are KYC verified and have decided on the above details. Submit mutual fund application form, SIP form and investment amount cheque to your AMC or intermediary if you choose the offline mode.
In case of online mode, you need to visit the website of the AMC, R&TA or transaction portals. Look for the registration link for a new account. Register yourself as a new investor by creating your login ID and password.
Once you have created your account, choose the mutual fund scheme of your choice and follow the instructions to start systematic investment plans.
You need to give your bank standing instructions to auto-debit the amount on investment date. This can be done by submitting a mandate to the AMC or intermediary. Alternatively, you can add AMC or intermediary as a biller in your internet banking.
Congratulations! You just started your Systematic Investment Plan.
How to Choose a SIP?
You will find all the details of mutual fund schemes on the internet including their past returns. However, below are some of the important points that you should keep in mind when choosing a Systematic Investment Plan..
1. Fund House
Always check the reputation of the fund house before choosing a Systematic Investment Plan.
2. Fund Type
There are various types of mutual funds. So it is important to know which type of fund is best suitable for your financial goals.
3. Past Performance & Returns
The ultimate goal of investment is returns. Study the past performance and returns of the fund over a 3 to 5 year term. Check how the fund performed across markets.
4. Asset Under Management (AMU)
Rs.500 Crore asset size can be considered as a reasonable benchmark when selecting a mutual fund for investment.
5. Fund Manager
Know the fund manager before selecting a fund for investment. You can do so by analyzing the past performance & returns of funds managed by him.
Final Thoughts
Mutual Fund SIP works best for long-term investment periods. So, to get the maximum out of your SIP investments, you should start early and invest regularly. In simple terms, start investing via Systematic Investment Plan in smaller amounts regularly to reap good returns over a period of time.
Note: This post was originally published on June 5, 2019 and has been completely updated for accuracy and comprehensiveness.
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