SIP – Systematic Investment Plan- Definition, types, benefits

A Systematic Investment Plan or SIP is an investment mode that allows you to invest in mutual funds. As the term suggests, it is a systematic way of investing a fixed sum at regular intervals, such as monthly, semi-annually, weekly and quarterly.


In contrast to lump sum mutual fund investment, you spread your investment over time with a SIP. Thus, you are not required to have a substantial corpus to start your investment journey. 


Please go through the following sections to know more about SIP and its benefits.


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How do SIP – Systematic Investment Plan Work?


To know the answer to the Systematic Investment Plan, you should first understand the working of SIPs. It works on the method of consistent and period investments, similar to that of recurring bank deposits.


When you start your investment journey through SIP, you put in a fixed sum for a set period. This amount allows you to purchase fund units. As you continue to put in your money, you get to invest during market highs and lows. You do not need to time your investments, reducing the overall risk of investing.


Further, depending upon your financial goals, you can choose an investment corpus. This amount can be auto-debited from your bank account, and you will receive the corresponding mutual fund units. The number of units you receive depends on your NAV (Net Asset Value).


What are the Benefits of Investing in Systematic Investment Plans?


By investing in SIP, you can start your investment with a small amount and reap significant returns in the long term. They are known to get 2X more returns than FD in most cases. You can also automate monthly payments in SIPs. Mentioned below are a few other benefits of the Systematic Investment Plan:


  • Start from a small amount of money


When it comes to SIP, you don’t need to accumulate substantial money for investment. Instead, you can start by putting in as little as Rs. 100 at fixed intervals. In addition, investing in SIP also allows you to take advantage of the market volatility and eliminates any need to time the market. 


  • Rupee cost averaging


With a SIP, you invest a fixed sum across different market levels. This helps you buy more units when the market is low and fewer units when the demand is high. Over the long term, you will benefit from averaging out the cost of equity funds, thus, lowering the impact of short-term market volatility in your investment.


  • Power of compounding


As you remain invested for the long term, you benefit from the power of compounding. This is the return over the returns already earned by you, similar to compound interest. For instance, suppose you invest Rs. 500, which provides a return of 10% per annum. Now, the profit from the fund is reinvested with a total sum of Rs. 550. The return you earn will be calculated on Rs. 550 and not on Rs. 500.


  • Convenience of investing


SIP investing is a hassle-free and pocket-friendly mode of investing. You don’t have to regularly stay updated with the market and conduct extensive market research to balance your portfolio. So, after you start investing, you can enable the auto-debit facility to deduct the money from your bank account.


  • Allows disciplined savings


If you want to create substantial wealth through investments, discipline is necessary. By investing via a Systematic Investment Plan, you commit to planning your savings regularly. Further, each investment takes you closer to reaching your long and short-term financial goals.


Best Performing Mutual Fund SIPs in India in 2022


The following is a list of the best SIP mutual funds in 2022 on the basis of their 3-year returns. The data in this table is derived from the NAV of these mutual funds as on May 23 2021. 


Name of the Mutual Fund Type of Mutual Fund 3-Year Annualised Returns
Axis Midcap Fund- Direct Plan- Growth Mid cap fund 21.07%
Nippon India Growth Fund- Direct Plan- Growth Mid cap fund 20.26%
Mirae Asset Tax Saver Fund- Direct Plan- Growth ELSS 19.47%
Canara Robeco Equity Tax Saver Fund- Direct Plan- Growth ELSS 18.09%
Kotak Bluechip Fund- Direct Plan- Growth Large cap fund 14.57%
Mirae Asset Large Cap Fund- Direct Plan- Growth Large cap fund 13.58%
Axis Bluechip Fund- Direct Plan- Growth Large cap fund 12.63%
UTI Nifty Index Fund- Direct Plan- Growth Index fund 12.58%
HDFC Index Fund- Direct Plan- Nifty 50 Plan Index fund 12.45%
Nippon India Large Cap Fund- Direct Plan- Growth Large cap fund 11.10%



What are the Different Types of SIP?


Upon knowing the definition and benefits of SIP, the next thing to know is the different types of SIPs. Primarily, there are four types of SIPs that you can opt for. The top SIP would depend upon your individual financial goals.


Find details about the types of SIP below:


  • Flexible SIP


As the name suggests, with a flexible SIP, you can alter the investment amount based on your financial situation and market conditions. It is also called Flexi SIP. You can inform the fund house about the changes in SIP contributions. However, this intimation should be given at least a week before the SIP instalment deduction date. 


Regarding the market conditions, there is a pre-decided formula. This allows investors to invest more when the market is underperforming and lower the amount when the market rises.


For instance, if you face a cash crunch, you can inform the fund house to halt your SIP payments. This allows you to skip the payment without worrying about defaulting. Similarly, if you have surplus cash in your hand, you can increase the SIP amount for a certain period. 


  • Top-up SIP


Also called step-up SIP, it allows investors to increase their SIP amounts periodically. For instance, you might start investing through SIP with an amount of Rs. 1000 and instruct the fund house to increase that amount by Rs. 2000 every six months.


Choosing a top-up SIP will allow you to add increased flexibility to your investment contributions. In simple words, as your income increases, you can improve your SIP contribution. This way, you can create an investment corpus faster due to the power of compounding.


  • Perpetual SIP


While filling out the application form, you must select the investment amount and your investments’ start and end date. If you do not specify any tenure, then it becomes perpetual SIP. Every SIP with no specified end date runs till 2099, given that it is the distant future. 

Thus, your SIP will continue till the previous year until you instruct the fund house to stop the investment. This option provides the benefit of staying invested for a longer duration. Additionally, you can redeem your investment anytime in the future.


  • Trigger SIP


With this option, you can set a trigger for your investment. For example, you can instruct the fund house to withdraw the SIP amount from your bank account and utilize it to purchase units of a particular scheme. The NAV of that specific scheme maintains a certain level. 

Furthermore, you also receive other trigger options concerning levels of the stock market index and specific dates. 


How Can You Start Investing in SIP?


As mentioned above, starting your investment journey through SIP is simple and convenient. So, if you are wondering about how to start SIP investment, follow the steps mentioned below:


Step 1: Complete your KYC


To begin your investment journey through a Systematic Investment Plan, you need to complete the KYC documentation process. Submit your address proof, identity proof, and photograph to proceed. Interestingly, with the advent of technology, this entire process can be completed online.


Step 2: Identify your investment goals


After setting up your KYC, the next step is to determine why you want to invest through SIP. List your financial goals and search for funds that can help you achieve these goals.


Step 3: Choose the plan


In the next step, you must select the investment parameters. You need to choose the best SIP to invest in per your risk appetite and financial goals.


Following this, fill in a few more details, such as:

  1. Tenure
  2. Investment frequency
  3. Investment amount


What are the Disadvantages of SIP?


Apart from the host of benefits, there are also a few disadvantages of SIP that you must know. Find about them below:

  • Stopping SIP payments can bring in added hassles. If you have a fixed Systematic Investment Plan, you do not get the provision to skip payments. Even if you wish to do so due to financial crunches, the only way out is to cancel the SIP.


  • The SIP route works best for individuals with a uniform cash flow. If you have unpredictable cash flows, paying the sum at regular intervals can be worrisome.


  • If you choose a fixed SIP, you cannot change your investment amount, tenure, and payment frequency.


Regardless of these disadvantages, various types of Systematic Investment Plans can help you achieve your financial goals with ease. However, you must understand the working of that particular SIP before making an investment decision.


Frequently Asked Questions


  • Which SIP is best for beginners?

Beginners can start their investment journey by investing in Fixed SIP. This is the basic form of a Systematic Investment Plan and does not carry any complications. However, note that you should choose a plan depending upon your personal financial goals and investment objective.


  • Can I lose money in SIP?

Although investment via SIP reduces the risk of investing in equity funds, it provides rupee cost averaging. However, SIP investors can also lose money depending on the market conditions. 


  • What is the best time to invest in SIP?

The right time to invest in SIP could be when:

  • You do not have substantial funds for investment
  • You do not want to take a risk
  • Mutual fund investments are out of your tray


  • Does SIP have tax benefits?

If you invest through SIP in ELSS or any other tax-saving mutual fund scheme, you will be eligible to claim tax deductions under Section 80C of the Income Tax Act. The maximum deduction limit under this section is Rs. 1.5 lakh.


  • How to shorten SIP duration?

You can decrease your SIP tenure by simply informing the same to the fund house through a written letter.


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