What is SIP investing? Systematic Investment Plan or SIP investing is offered by mutual funds, which allow investors to invest a fixed amount in a mutual fund scheme. SIP investing happens at predetermined intervals, such as monthly or quarterly, unlike lump-sum investments.
SIP investing has gained popularity among investors because in the long term it facilitates rupee cost averaging. SIP in mutual funds promotes disciplined investing without the stress of timing the market or being affected by market volatility. SIP offers a straightforward approach to long-term investing by committing to invest a fixed sum regularly for a specified period and adhering to this schedule irrespective of market conditions. By consistently investing through SIPs and allowing the power of compounding to work, investors can potentially achieve their financial goals more effectively.
Similar to SIP, there are two more systematic investment strategies offered by mutual funds namely, Systematic Withdrawal Plan (SWP) and Systematic Transfer Plan (STP) as described in the below table:
| Particulars | SIP | SWP | STP |
|---|---|---|---|
| Purpose | SIP investing is used for making fixed investments regularly (e.g., monthly) into mutual funds. It is primarily aimed at accumulating wealth over the long term through disciplined investing. | SWP is used for withdrawing a fixed or variable amount regularly from mutual fund investments. It is typically used to generate regular income or manage cash flow needs. | STP is used for transferring a fixed amount periodically from one mutual fund scheme to another. It is used to manage investment risk and potentially optimize returns by moving funds between different types of mutual fund schemes. |
| Objective | SIP aims to build wealth over time through regular investments, leveraging rupee cost averaging and the power of compounding. | SWP aims to provide regular income or manage cash flow needs by systematically withdrawing funds from mutual fund investments. | STP aims to manage investment risk and potentially enhance returns by systematically transferring funds between different types of mutual fund schemes. |
| Mechanics | In SIP, investors contribute fixed amounts at regular intervals to purchase units of a mutual fund scheme. The investment amount is deducted automatically from the investor's bank account. | In SWP, investors redeem a fixed or variable number of units from their mutual fund holdings at regular intervals to receive a payout. The redeemed amount is credited to the investor's bank account. | In STP, investors transfer a fixed amount from one mutual fund scheme (often debt funds) to another (often equity funds) at regular intervals. The amount transferred is used to purchase units of the target scheme. |
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Scenarios To Better Explain These Concepts
Case Scenario -1: SIP
Josh is a 30-year-old professional working in an IT company with the following goals-
Goal 1: Buy a house in 15 years
Goal 2: Build a retirement fund over the next 30 years
Investment Strategy:
Josh decides to invest in mutual funds through a SIP to achieve his goals. He chooses a diversified equity mutual fund that historically has provided good returns over the long term.
Details of SIP:
Initial Investment: ₹5,000 in the chosen mutual fund.
Monthly Contribution: He commits to invest ₹500 every month in the same mutual fund through SIP.
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Mechanism:
Every month on the 5th, an automatic debit of ₹500 is made from Josh’s bank account and invested in the mutual fund. The units of the mutual fund are allotted based on the NAV (Net Asset Value) of that day.
Expected Growth:
Given historical returns of around 10% p.a., Josh estimates that his investments could grow considerably over the long term. He aims to have a substantial corpus by the time he is ready to buy a house in 15 years and to continue growing his retirement fund.
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Case Scenario -2: SWP
Tanya is a 65-year-old retiree who has accumulated a substantial amount in mutual funds over her working years. She wants to ensure a regular income stream during her retirement while also preserving her principal.
Goal: Generate a steady income from her mutual fund investments to cover living expenses and occasional travel.
Investment Strategy: Tanya decides to implement SWP from her mutual fund holdings to achieve her income goals.
Details of SWP:
Investment Portfolio: Tanya has invested ₹5,00,00,000 in a balanced mutual fund consisting of both equity and debt instruments.
Withdrawal Amount: She sets up an SWP to withdraw ₹2,00,000 from her mutual fund every month to supplement her retirement income.
Frequency: The withdrawals are scheduled to occur on the first of every month directly deposited into her bank account.
Mechanism of SWP:
On the 1st of each month, ₹2,00,000 is redeemed from Tanya’s mutual fund units based on the prevailing NAV (Net Asset Value). The number of units redeemed is calculated to ensure the desired withdrawal amount is met. The remaining units in Tanya’s mutual fund continue to be invested, potentially earning returns depending on market conditions.
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Expected Income Stream:
Assuming Tanya’s mutual fund portfolio continues to perform well, she expects to receive ₹24,00,000 annually from her SWP. This income helps cover her regular expenses and provides flexibility for occasional discretionary spending. Her investment would also help her cover the impact of inflation.
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Case Scenario-3: STP
Raj is a 40-year-old investor who wants to diversify his investments across different mutual fund schemes offered by a single fund house. Raj has accumulated ₹5,00,000 in a liquid fund, which he wants to gradually transfer to an equity fund for potential higher returns over the long term while managing risk.
Details of STP:
Initial Investment: Raj invests his ₹5,00,000 in a liquid fund, which typically can offer a higher liquidity and a lower risk.
Transfer Plan: He sets up an STP to transfer ₹50,000 every month from the liquid fund to an equity fund of the same mutual fund house.
Duration: Raj plans to continue the STP for 10 months, gradually shifting his investments from the lower-risk liquid fund to the potentially higher-return equity fund.
Mechanism of STP:
On the specified date each month, ₹50,000 is automatically transferred from the liquid fund to the equity fund. The units of the equity fund are allocated based on the prevailing NAV (Net Asset Value) of the day when the transfer is executed.
Expected Outcome:
By the end of the 10-month period, Raj expects to have shifted a significant portion of his investments from the liquid fund to the equity fund, aiming to benefit from potential capital appreciation in the equity markets.
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Rupee cost averaging and SIP Investing
Each SIP instalment buys units of the chosen mutual fund scheme at the prevailing Net Asset Value (NAV) of the fund on that particular date. NAV is the price per unit of the mutual fund scheme on a given day. Since SIP investments happen regularly regardless of market conditions, investors end up buying more units when prices are low and fewer units when prices are high. This averaging out of purchase prices over time is the essence of rupee cost averaging. SIPs benefit from market volatility because during market downturns, more units are purchased for the same fixed amount, which can potentially lead to higher returns when the market recovers.
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Power of Compounding
Compounding is a powerful benefit of long-term investments where the income you earn gets reinvested with your original investment. This accumulated corpus then continues to earn more, creating a snowball effect of growth. The longer one invests, the higher their returns tend to be. The below graph illustrates the effect of investing ₹1000 monthly at 8% interest over 25 years can turn ₹3 lakh into ₹9.57 lakh, tripling your investment. The chart below illustrates how the amount nearly doubles in 15 years but is more than 3X in 25 years.
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Investors use a tool called SIP calculator investors to estimate the potential returns on their investments made through SIP in mutual funds. The users input certain details such as their monthly investment amount, expected rate of return (usually based on historical data of the chosen mutual fund) and the investment tenure.
The SIP calculator uses a predefined mathematical formula to compute the future value of investments. It factors in compounding interest, which means that not only the principal but also the accumulated interest earns interest over time. Based on the inputs provided, the calculator generates an estimated future value of the investments. It typically shows the total amount invested, the expected returns, and the maturity amount. The calculator provides indicative results and actual returns may vary due to market fluctuations. It assumes a constant rate of return, which may not reflect the actual performance of the fund.
*Calculated using the compounding calculator by using the above hypothetical numerical.
Importance of Systematic Investment, Withdrawal and Transfer Plans
1. Risk Management:
SIP, SWP, and STP all contribute to managing investment risk. SIP through rupee cost averaging reduces the impact of market volatility, SWP helps in managing cash flow needs without liquidating large chunks of investments and STP investing assists in balancing risk exposure by systematically reallocating funds between different asset classes based on market conditions, thereby reducing the risk of timing the market.
2. Financial Discipline:
Regular investments (SIP) and withdrawals (SWP) at predetermined intervals foster financial discipline and goal-based investing habits. SIP investing allows investors to start with a small amount and gradually increase investments as per their financial capability and SWP provides a methodical way to withdraw a fixed or variable amount at regular intervals acting as a regular source of income.
3. Tax Efficiency:
Depending on the structure of investments and the duration of holdings, these plans can enhance tax efficiency, particularly in managing capital gains tax liabilities.
4. Goal-based Investing:
Each of these plans can be tailored to meet specific financial goals such as wealth accumulation, systematic portfolio rebalancing and regular income generation.
SIP Inflow over the years in Indian MF Industry
For the fiscal year 2024, the data on SIP in mutual funds showcases significant growth and participation:
1. Net Inflows:
SIPs attracted nearly ₹2 lakh crore in net inflows during fiscal year 2024, compared to ₹1.55 lakh crore in the previous fiscal year.
2. SIP Assets:
As of March 2024, SIP assets totaled ₹10.71 lakh crore. This amount represents more than 20% of the total industry assets under management.
3. Number of SIP Accounts: The number of SIP accounts reached approximately 8.4 crore by the end of fiscal year 2024. This growth includes an addition of approximately 17 lakh new accounts per month.
Details of new SIPs registered and discontinued during last 3 years
| Month | Total No. of outstanding SIP Accounts | No. of New SIPs registered | No. of SIPs discontinued/ tenure completed | SIP AUM (₹ crore) | SIP Contribution (₹ crore) |
|---|---|---|---|---|---|
| Apr 24 -May 24 | 875.89 | 113.39 | 77.21 | 11,52,801 | 41,275 |
| Apr 23 - Mar 24 | 839.71 | 428.09 | 224.37 | 10,71,666 | 1,99,219 |
| Apr 22 -Mar 23 | 635.99 | 251.41 | 143.15 | 6,83,296 | 1,55,972 |
| Apr 21– Mar 22 | 527.73 | 266.36 | 111.17 | 5,76,358 | 1,24,566 |
Source: AMFI India
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Wrapping Up
SIP investing is the cornerstone of mutual fund investments. It integrates the aspects of balancing, averaging and system to the process of investing. While SIP investing can help you systematically invest, STP investing and SWP can help you add regularity and system to transferring your investments from one fund to another and withdrawals, respectively.
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