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What is SIP (Systematic Investment Plan) – A Complete Guide

What is SIP
what is sip

What is SIP Investment?

SIP Systematic Investment Plan is not an asset class or an investment instrument. It is, in reality, one of the methods of investing in mutual funds. This is where regular investment with a fixed sum of money is made in a disciplined manner.

The other method of investing in mutual funds is a one-time lump-sum investment.

Systematic Investment Plan helps you invest a fixed sum 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 suit 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.

Systematic Investment Plan 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 conditions 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 Works?

The systematic investment plan 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 mutual fund schemes.

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 mutual fund 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 mutual fund 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 mutual fund units. And, you are allotted mutual fund units at the closing NAV of the day of money transfer or realization of the cheque.

Let us understand how Systematic Investment Plans SIP 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 mutual fund. Also, the mutual fund units will be purchased at that day’s closing NAV.

With every payment, you will receive units of the particular mutual fund 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 (SIP)

1. Small Investment Amount

Systematic Investment Plan 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

Systematic Investment Plan allows investment is 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

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 SIP 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

Systematic Investment Plan 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 Amount of SIP

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

Systematic Investment Plan 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

With Systematic Investment Plan 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

Systematic Investment Plan 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 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.

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 doing investing through Systematic Investment Plan:

1. SIP Amount

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.

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. Systematic Investment Plan frequency selection 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 Systematic Investment Plan 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.

4. Purpose

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.

How to Invest in SIP?

The SIP process to invest explained in detail as under;

1. Select the Mutual Fund Scheme

Systematic Investment Plan investment starts with choosing the right mutual fund 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 mutual fund scheme aligned to your financial goals.

Online and Offline

1. Online SIP Investment

You can do Online SIP investment through;

  1. Online mutual fund investment platforms
  2. Mutual fund AMC website
  3. Karvy or CAMS website
  4. Demat Account

The online investment is quick, hassle-free, and eliminates paperwork or frequent trips to the mutual fund office for documentation.

You can create an online mutual fund account with your email ID and password and submit the KYC documents (address proof and identity proof) online.

For investing in mutual funds through Systematic Investment Plan, you need to select the mutual fund scheme aligned to your financial goals. 

When you are prompted for payment methods, select the “SIP Investment” method to invest through the Systematic Investment Plan 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 investment 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 or systematic investment plans 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 mutual fund 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 mutual fund units. The units will reflect by the end of the day in your mutual fund account.

How to Invest in SIP Online Through ScripBox

You can use Scripbox’s online mutual fund platform for SIP investments. This online platform is a simple, quick and hassle-free way of making an SIP investment in different mutual fund 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.

Best Mutual Funds to Invest for SIP in India

Below mentioned are the top performing mutual funds to invest through SIP

Fund NameCategory
Kotak Standard Multicap Growth.Multi Cap Fund Growth
Motilal Oswal Long Term Equity Fund-Regular Plan-GrowthSaving Fund
Mirae Asset Large Cap Fund Regular GrowthLarge Cap Fund Regular Growth
Axis Bluechip Fund GrowthLarge Cap Fund Growth
Invesco India Growth Opportunities Fund-Growth Diversified Fund
Mirae Asset Tax Saver Fund – Regular Plan-GrowthSaving Fund

Conclusion

Systematic Investment Plan is a powerful yet convenient method that has the potential to create a long-term wealth corpus. You benefit from rupee cost averaging and phased investments.

Also, Scripbox, through its blog, creates investor awareness that allows an investor to educate themselves about Mutual Funds.

Scripbox’s Mutual Fund Calculators like SIP Calculator and Lump sum Returns Calculator allows an investor to check their potential mutual funds returns from a fund. These mutual fund calculators are simple and easy to use. You can start investing in top funds through Scripbox either via SIPs or lump sum.

A Systematic Investment Plan is convenient and goes a long way in building a prudent habit of regular saving and investing. SIP and long term investing help boost your returns.

Systematic Investment Plan allows you to make a fixed periodic investment in a selected mutual fund scheme. SIP investment is a powerful method that brings you the benefit of investing in a mutual fund at a low cost and flexibility to choose the investment amount and frequency.

Published on December 18, 2019