- What is the meaning of SIP?
- How SIP Mutual Fund Works?
- Features of Systematic Investment Plan
- Benefits of SIP Investment
- Factors to Consider While Starting SIP Investment
- How to Invest in SIP?
- How to Invest in SIP Online Through ScripBox
- Which is the Best Mutual Funds to Invest for SIP in India?
- How to calculate capital gain on mutual fund SIP?
- How to withdraw money from a SIP mutual fund?
- How to calculate sip returns?
- Frequently Asked Questions
- Relevant Pages
What is the meaning of SIP?
The full form of SIP in mutual funds is Systematic Investment Plan. It is not an asset class or an investment instrument. It is, in reality, one of the methods of investing in mutual funds. Therefore, SIP refers to investment in mutual funds regularly with a fixed amount of money in a disciplined manner.
The other method of investing in mutual funds is a one-time lump-sum investment.
SIP meaning is it helps you invest a fixed amount of money regularly in various mutual funds schemes depending on your financial goals. You have the potential to create long-term wealth, by investing a small sum of money through SIP.
The SIP investment approach suits people with regular cash flow or a fixed salary.
For example – You want to build a fund of Rs. 5.4 Lakhs in 3 years for foreign travel trip. By starting a monthly SIP investment for Rs. 15,000, you can achieve the goal conveniently.
SIP is the best way to get into the habit of saving and investing regularly. Apart from that, if you start SIP early you have a longer investment horizon to avail benefits of the power of compounding.
Additionally, a SIP investment avoids timing the market. SIP investment is least affected by the market volatility due to rupee cost averaging. When the markets are high, you purchase a fewer number of units as compared to the down market.
How SIP Mutual Fund Works?
The SIP works in three stages. This is how it works;
Stage 1 – SIP Mandate
Investors need to give a mandate (authorization to invest via SIPs) to invest in MF
This can be done online by selecting the “Systematic Investment Plan” option while you are investing. But for the offline method, you need to fill a mandate form and submit it along with the application form.
Also, on the form, you need to indicate your choice for the date (on which the amount will be invested) and the amount.
If done subsequently, then the mandate forms can be submitted online through your MF account.
In the offline method, you need to submit the mandate to the office of the mutual fund house, Karvy, or CAMS.
Stage 2 – Auto Debit/ ECS
When you give a mandate, the fund house auto-debits your bank account for the indicated SIP amount through standing instruction. The funds are then transferred through ECS for investing in a MF scheme.
Likewise, the subsequent investment amounts will also be auto-debited at your indicated SIP interval. This way, you need not worry about missing any payments.
Stage 3 – Allotment of Mutual Fund Units
The SIP amount debited from your bank account is utilized for purchasing MF units. And, you are allotted MF units at the closing NAV of the day of money transfer or realization of the cheque.
Let us understand how it works with the help of an example.
Suppose you start an sip of Rs. 1000 on the 5th of a particular month.
Then Rs. 1000 will be auto-debited from your specified bank account on the 5th of every month and will be utilized in buying units of the MF. Also, the MF units will be purchased at that day’s closing NAV.
With every payment, you will receive units of the particular MF scheme, which will get added to your mutual fund account.
Hence, SIP is like indicating “How Much” and “How Often” you will invest in a mutual fund scheme.
Features of Systematic Investment Plan
1. Small Investment Plan
As the name suggests, SIP full form can also be a Small Investment Plan. SIP helps you start a mutual fund investment with a smaller amount in comparison to a lump-sum where you need a larger sum of money for investment.
You can start an SIP for an amount as small as Rs. 500 per month. As your income grows , you can increase the SIP amount.
2. Regular Investment Intervals – SIP Approach
SIP in mutual fund means it allows investment at regular intervals. You have the flexibility to choose the investment cycle, be it, weekly, monthly or quarterly. A regular investment approach makes you disciplined in savings and investments.
The regular investment is a better option for investors as compared to a one-time single investment. Your investment is spread over time and you benefit from rupee cost averaging.
3. Fixed Investment Amount
SIP investment meaning is that the investment amount is fixed when starting a SIP. However, you can use the “SIP-Top Up option” offered by various mutual fund houses to make an additional contribution.
SIP amount cannot be decreased. You need to cancel the existing SIP and start afresh if you want SIP investment for a lower amount.
4. Option to Pause Investment
You can ‘pause’ the investment for a temporary period of one month to three months. Which is useful if you face financial crunch.
The SIP does not stop during ‘pause’. It starts automatically at the end of the pause period. You need to check with your mutual fund house for the pause facility.
5. Flexibility to Shorten or Extend the SIP Interval
SIP provides you the flexibility in changing your investment intervals into weekly, monthly, or quarterly SIPs.
You can make an online or a written request to change your existing SIP interval.
6. No Cap on Maximum SIP Amount
The minimum amount of SIP investment is Rs. 500. SIP gives you the benefit of investing a smaller amount.On the other side, there is no restriction for the maximum amount for SIP investment. You can choose to invest Rs. 1000, ten thousand, lakhs or even a higher amount using SIP.
As an investor, you have the flexibility to invest any sum of money through SIP investment.
But make sure that you have the fixed SIP amount on a regular basis for the period of the SIP.
7. Cancel SIP
SIP investment comes with the option to cancel. If you want to stop your SIP investment or cancel for any reason, then you can do so by logging into your account online and opting for canceling the SIP anytime.
The offline method would require you to fill the SIP cancel form and submit to the mutual fund house.
Additionally, you can remove the AMC as a biller from your bank account.
Benefits of SIP Investment
1. Brings Financial Discipline
SIP meaning in mutual fund is that you have to invest a particular sum of money at regular intervals. That brings financial discipline where you first allocate money for savings and investing for future expenses.
This means that you are getting financially disciplined and are consciously planning for the financial needs for the coming days. Being disciplined, helps you make logical decisions and make prudent investments.
2. Simple and Convenient
SIP brings convenience while investing, in a sense, you can choose any amount of Rs. 500 or more depending on your cash flows.
Additionally, the SIP investment process is automated. Once set, you do not require to worry at every investment interval.
A fixed amount gets deducted from your bank account. This fixed amount gets deposited to the mutual fund house for purchasing units. The mutual fund units get credited in your mutual fund’s account.
3. Investing across market cycles
When the markets are low the same SIP amount can purchase a higher number of units. In higher market cycles you get lower units.
Overall, the investor is least affected by the market volatility using SIP as compared to a lump-sum investment. Because lump-sum investment could be at a high or low price but in SIP allows the cost to be spread over a period and you get an average purchase price. Thus, this also gives a benefit of rupee cost averaging.
4. Phased Investment
Using SIP you are purchasing a smaller number of mutual fund units every month. Thus helping you to invest in a phased manner over a period of time.
Factors to Consider While Starting SIP Investment
Keep the following factors in mind while investing in SIP:
1. SIP Amount
SIP amount meaning is that You have the flexibility to choose the SIP investment amount. You can start SIP with a minimum amount of Rs. 500.
Pick any amount depending on your monthly income (cash flows) and the investment objective. For example, if you are in a position to save and invest Rs. 5,000 monthly for purchasing your dream car then do that.
SIP Investment Tax Benefits
If your investment objective is tax savings then you can do an SIP of Rs. 12,500 per month to get Rs. 1.5 Lakhs tax deduction under section 80C of the Income Tax Act.
There is no upper limit for the SIP amount.
2. SIP Frequency
The frequency of SIP investment is usually weekly, monthly or quarterly. SIP mode of investment depends entirely on you.
Analyze your cash flows to know when you receive money. For example, the salaried person gets a monthly income. For him, a monthly SIP frequency is best. The best way is to choose a SIP frequency is to pick a period that is aligned with your cash flows.
3. SIP Tenure
The SIP tenure can be one year, three, five or ten years until your investment objective is fulfilled. In case of open-ended mutual funds, you can even have a perpetual SIP that will continue forever until you stop it.
Hence, there is no fixed tenure, you can keep on investing until your financial goal (investment objective) is achieved.
Systematic Investment Plan is not an investment instrument. The SIP objective is the same as the investment objective of the mutual fund.
For example, if you are investing through SIP in Equity mutual funds to build a corpus for retirement, then your SIP purpose is for retirement.
Likewise, if you are investing in Debt mutual funds having an investment objective of providing liquidity (goal – emergency funds). Then your SIP purpose is creating emergency funds.
The SIP process to invest explained in detail as under;
1. Select the Mutual Fund Scheme
SIP investment means it starts with choosing the right MF scheme that matches your financial/ life goals, and investment tenure.
You can take the help of a financial expert to understand and choose a better MF scheme aligned to your financial goals.
Online and Offline
1. Online SIP Investment
You can do Online SIP investment through;
The online investment is quick, hassle-free, and eliminates paperwork or frequent trips to the MF office for documentation.
You can create an online MF account with your email ID and password and submit the KYC documents (address proof and identity proof) online.
For investing in mutual funds through SIP, you need to select the MF scheme aligned to your financial goals.
When you are prompted for payment methods, select the “SIP Investment” method to invest through the SIP route. Finally, you need to transfer money from your linked bank account.
Scripbox is an online mutual fund investment platform that helps you do quick and hassle-free SIP investments.
With Scripbox, the investment is entirely paperless and is made in a secure manner. Additionally, account helps you track, manage, and redeem your mutual fund investments online.
2. Offline SIP Investment
The offline method is a tedious and time-consuming process. Hence offline investment is not recommended.
For information, the process requires you to fill up an “Application form” and the “SIP mandate” form.
On the mandate, you need to indicate your choice for the date, amount, and frequency. All the subsequent SIPs will be auto-debited. This is through a standing instruction provided by you in the mandate.
You can submit the application form and mandate to;
- Local offices of the mutual fund house
- Local offices of Karvy or CAMS
- Your MF agent
3. Select the SIP Investment Option
In the case of an online application, after creating an account and selecting the plan you will be prompted for SIP investment or one-time lump-sum investment.
You need to indicate your SIP investment option in the application form while applying offline.
In any of the methods, make sure that you have checked/opted for the SIP investment.
4. Make Payment / Transfer Money
In the final step, you need to make a payment to make SIP investment.
After receiving money, the mutual fund house will purchase and allot MF units. The units will reflect by the end of the day in your MF account.
How to Invest in SIP Online Through ScripBox
You can use Scripbox’s online MF platform for SIP investments. This online platform is a simple, quick and hassle-free way of making an SIP investment in different MF schemes.
Step-by-step process using SIP to invest in mutual funds through Scripbox:
Step 1 – Visit Scripbox and Begin Your Investment Journey
Visit the Scripbox website and click on “Let’s get started” button. You will see options for your investment objectives based on your life goals.
You can pick any of the options, which is close to your financial goals. For example, you can select the option “Start a SIP” for investing in a mutual fund.
Step 2. Create a Plan
Next, you need to create a plan by providing information like investment amount and the period of investment.
The example shows a SIP investment amount of Rs. 1000 for a period of 10 years. Here you will be prompted for either “Long Term Wealth” or “Short Term Money” option.
The long-term option invests in best equity mutual funds and has the potential to generate a higher return.
The short-term option invests in best debt mutual funds that are safe and provides nominal returns.
You can choose any one option.
For example, when you select the “Short Term Money” option you will get the investment details in the next step.
Step 3. Get Investment Details
Here you will find details of the basket of the best mutual funds suitable for your investment needs. Click on “Continue” to proceed for investment.
Step 4. Create an Account and Proceed for Investment
If you are a first time user, then you need to create an account. The account can be created easily through anl email ID and password.
You also have the option to open an account using your Facebook or Google account.
After login, you can click on the plan details. Which will open the page, as above, where you can choose between SIP and one-time lump-sum payment.
Step 5. Bank Details and Money Transfer
At the last step, you add information of your bank account and PAN details.
The account will be used for investment and crediting the redemption amount by the mutual fund houses directly in your specified bank account.
Which is the Best Mutual Funds to Invest for SIP in India?
Below mentioned are the top performing mutual funds to invest through SIP
|Kotak Standard Multicap Growth.||Multi Cap Fund Growth|
|Motilal Oswal Long Term Equity Fund-Regular Plan-Growth||Saving Fund|
|Mirae Asset Large Cap Fund Regular Growth||Large Cap Fund Regular Growth|
|Axis Bluechip Fund Growth||Large Cap Fund Growth|
|Invesco India Growth Opportunities Fund-Growth||Diversified Fund|
|Mirae Asset Tax Saver Fund – Regular Plan-Growth||Saving Fund|
How to calculate capital gain on mutual fund SIP?
Capital gains are profit made from the sale of an asset such as land, property, mutual funds, shares etc. To calculate capital gains, mutual funds are classified into types, namely, equity and debt funds. For equity funds, the short term is any time before one year from the purchase of the fund. While the long term is after one year from the purchase of the mutual fund. For debt funds, short term is any time before 36 months or three years from the date of purchase. While the long term is any time after 36 months from the date of purchase.
SIP can be done for both equity and debt funds. However, it is usually preferred for equity funds. Capital gains can be estimated using the following formula:
Capital Gains = value of the fund (at the time of sale) – Cost of the fund.
In SIP investment done on a monthly basis, each SIP is considered as an independent investment. For example, when an investment is made in January 2019, the long term for that investment will be in January 2020. Similarly, for a SIP investment in February 2019, February 2020 is when the investment will be considered long term. So when an investor redeems the SIP investment before completion of one year, it is considered a short term.
The number of units Mr Karthik received in January was 1,000 (10,000/10), and February was 909 (10,000/11)
The capital gain for January SIP would be:
(INR 15 – INR 10 ) * 1000 units = INR 5,000
The capital gains for February SIP would be:
(INR 15 – INR 11) * 909 units = INR 3,636
The gains from January SIP would be long term capital gains, and the gains from February SIP would be short term capital gains.
How to withdraw money from a SIP mutual fund?
An investor can choose to withdraw their SIP investments either periodically or as a lump sum. In other words, one can choose the Systematic Withdrawal Plan (SWP) route in case they want to cash out at regular intervals. On the other hand, an investor can also make a lump sum withdrawal in case they need a lump sum amount. Also, in case the SIPs have a lock-in period, then they can withdraw periodically after the lock-in is over. Furthermore, it is important to meet the minimum withdrawal requirement of the funds. This information is often mentioned in the disclosure document. One can redeem their funds by filling the redemption form. They can redeem through any of the following ways:
Asset management company
How to calculate sip returns?
One can calculate SIP returns using the future value of the annuity (FVA) formula.
FVA = C [ ((1+r)^n) – 1] * [(1+r)]/r
Where, C = the SIP investment
r = the rate of interest
n = duration of the investment in months
Let’s take the example of Ms Divya, who invests INR 15,000 per month for a tenure of 30 months and expects a return of 10% per annum. The SIP returns for Ms Divya can be calculated using the above formula.
FVA = 15,000 [((1+10%/12)^20 – 1] * [1+10%12)]/ 10%/12
FVA = INR 5,13,093.17
The investment is INR 4,50,000, and the returns are INR 63,093.17. Hence the total value of the investment after 30 months is INR 5,13,093.17.
SIP stands for Systematic Investment Plan. SIP is a powerful yet convenient method that has the potential to create a long-term wealth corpus. You benefit from rupee cost averaging and power of compounding.
Also, Scripbox, through its blog, creates investor awareness that allows an investor to educate themselves about Mutual Funds.
Scripbox’s MF Calculators like SIP Calculator and Lump sum Returns Calculator allows an investor to check their potential mutual funds returns from a fund. These MF calculators are simple and easy to use. You can start investing in top funds through Scripbox either via SIPs or lump sum.
A SIP is convenient and helps in building a prudent habit of regular saving and investing in the long run. Investing in SIP for long term helps boost your returns.
SIP allows you to make a fixed periodic investment in a selected MF scheme. SIP investment is a powerful method that brings you the benefit of investing in a MF at a low cost and flexibility to choose the investment amount and frequency.
Frequently Asked Questions
No, all SIP plans are not tax saving. Equity Linked Savings Scheme (ELSS) is the only type of mutual fund that qualifies for tax saving under Section 80C of the Income Tax Act, 1961. Investments up to INR 1,50,000 per annum are eligible for a tax deduction. Therefore, only ELSS mutual fund SIPs qualify for tax savings. Also, it is important to note that ELSS funds have a three year lock-in period.
Every SIP investment in a tax saving mutual fund has a three year lock-in period. Therefore, you can withdraw the money after the three year lock period. You can redeem the funds through the asset management company or online portal or agent or demat account or through CAMS. You just have to fill the redemption form or raise a redemption request and submit it. Through online portals such a Scripbox, one can redeem their investments with just a click of a button.
Returns from mutual fund SIP aren’t tax-free. However, the tax rate varies as per the type of fund. For equity funds, short term capital gains are taxable at 15% per annum. And long term capital gains are taxable at 10% per annum (if the gains exceed INR 1,00,000). For debt funds, the short term capital gains are taxable at the investor’s respective income tax slab rates. And long term capital gains are taxable at 20% with indexation benefit and 10% without indexation benefit.