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

What is SIP
what is sip

What is SIP?

SIP, meaning “Systematic Investment Plan,” is a process of investing in various mutual fund schemes. The process allows investors to make a fixed periodic investment in a selected mutual fund scheme.

The SIP amount is fixed at the time of making a mutual fund investment. For making any changes in the fixed amount, you need to request your fund manager.

The minimum SIP amount varies from scheme to scheme. The minimum amount is Rs. 500, and there is no upper limit. Hence, you can choose any amount for SIP. But the minimum amount will differ from one mutual fund house to another and from one mutual fund scheme to another.

Systematic Investment Plan is periodic. This means once you have selected the Systematic Investment Plan frequency, the amount will get auto-debited from your bank account at the same time interval.

The SIP periods can be weekly, monthly, or quarterly.

Before choosing any Systematic Investment Plan, you should ensure that you have the fixed amount in your bank account at the selected SIP period.

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.

Types of SIP

Apart from regular SIP, mutual fund investors have four different types of SIP for different purposes. The types are as under;

1. Top-up Systematic Investment Plan

Top-up SIP is also known as “Step-up SIP.” SIP Topup helps you increase the installment amount.

You can indicate the amount of increment and when to increase at the time of making mutual fund investment.

For example, while investing in mutual funds, you can decide a SIP amount as low as Rs. 500 for five years without any changes during the course of the fund.

Through the Step-Up SIP option, you can increase the amount being invested every month by 10% or Rs.100.

Step-up SIP is helpful in a situation where you get annual salary hikes and periodic bonuses that can be invested in mutual funds.

Therefore, with an increment in your income, you have the option to invest a higher amount. The SIP Topup plan increases the investment amount at regular intervals.

2. Flexible Systematic Investment Plan

On the other hand, if you have a variable income or surplus investment fund that varies from month to month, then flexible SIP is a better option.

A flexible SIP is also known as “Flexi SIP.” The Flexi SIP gives you the flexibility to vary the investment amount before every SIP installment.

Flexi SIP investors can choose the exact installment amount seven days prior to the SIP installment due date.

However, you need to specify a minimum amount in advance to ensure mutual fund investments.

The best part of the Flexi SIP is that you have the choice to pay different SIP amounts every time. You can decide the amount according to your cash flow before the time of payment. You have the advantage of not being bound to pay a fixed amount every month.

3. Perpetual Systematic Investment Plan

Unlike regular SIP that has a fixed SIP term of say 1, 3, or 5 years, “Perpetual SIP” plans do not have any end date. Perpetual SIP continues forever until you choose to stop or redeem your mutual fund investments.

You can continue with Perpetual SIP till your investment objective is not fulfilled. 

4. Trigger Systematic Investment Plan

Trigger SIP has a unique feature of automatic mutual fund investment/ redemption or action on the occurrence of a certain event.

For example, you can set a Trigger SIP for buying a particular mutual fund scheme when the NAV touches a specific level.

Here trigger action is to buy the mutual fund units, and the trigger event is the specified NAV level.

When you set a Trigger SIP, the system waits for the trigger event to happen. When the event occurs, a buy instruction is generated, and the purchase transaction happens.

Likewise, you can set trigger action for selling units or switching mutual fund investments.

Trigger SIPs can be misused for speculation and are like a double-edged sword. A wrong trigger has the potential to ruin an investment; hence they are discouraged.

Benefits of SIP Investment

1. Planned and Disciplined Investing Approach

A systematic investment plan ensures that you are investing in mutual funds in a planned and regular manner.

The approach helps in developing a habit of saving and disciplined investment that is essential for achieving financial goals and long-term wealth creation. Starting a Systematic Investment Plan allows an investor to invest regularly in the mutual funds (equity schemes) of their choice.

2. Power of Compounding

SIP Plans bring the discipline of regular investing and the power of compounding to get you potentially high returns in the long term. Systematic Investment Plan and long term investing help boost your returns. With the compounding effect, your investments, returns, and new investment every month all contribute to future gains. To reap the benefits of compounding, you need to stay invested for long durations. Therefore, maximize the returns with a compounding effect by starting early.

3. Cost Averaging

When you make a SIP investment, you regularly invest in mutual funds (equity schemes) over time, irrespective of market conditions.

When the markets are down, you get more units as compared to when the market is high. In the long run, SIP investment evens out the purchase cost of your mutual fund units. In other words, Sips or systematic investment plans help in rupee cost averaging and reduce cost per unit. 

Rupee cost averaging means when a fixed amount is invested regularly over a period of time through different market cycles, you can get more units when the price is low and fewer units when the price is high. This reduces the average cost per unit of investment in the long run.

4. Low-cost Investment

The investment cost can be as small as Rs. 500 per month.

In Rs 500 you get to invest in government securities, T-bills, shares, and bonds of different companies, which is impossible if you had made an individual investment. Apart from that, mutual fund investment through Systematic Investment Plans gives you the benefit of a dedicated fund manager and professional fund management.

5. Convenience

When you invest in mutual funds via SIPs, you only need to give a mandate indicating the amount, date, and frequency.

On the set date, the amount automatically debits from your bank account for investing in mutual fund units. The units get credited to your mutual fund account the very same day. You need not worry about the investment.

Apart from that, an online mutual fund investment platform adds convenience to track, manage, and redeem your mutual fund investments.

6. Flexibility

These investment lets you choose the investment amount and frequency. The amount can be as low as Rs. 500 and above, with no specific upper limit.

You can choose weekly, monthly, or quarterly the frequency at your convenience.

Apart from that, you have various SIP types that give you the flexibility to modify your SIP investment parameters like amount and frequency to suit your needs.

Who Should Invest Through SIP

1. New Mutual Fund Investors

New mutual fund investors are encouraged to use Systematic Investment Plans SIP because regular SIP investment brings prudent investment practice. You develop a habit of regular savings and investment, which is necessary for long-term wealth creation and fulfilling financial objectives.

In short, anyone who is looking to grow their money in a disciplined manner can use Systematic Investment Plan to invest in mutual funds.

2. Investors who do not want to Time the Market

When you time the market, you can miss the rally. There are chances that you may stay out of the good markets or may enter at the wrong time when the markets are on the verge of declining.

Rather than worrying about all that, Systematic Investment Plans ensure that you are buying units regularly and are investing in every market condition.

3. Investors looking for Flexibility

Mutual fund SIP investment offers flexibility in terms of the amount and SIP frequency.

You can choose a SIP amount of Rs. 500 and above. There is no upper limit to the SIP amount. Depending on your cash flow, you can pick the SIP frequency, which can be weekly, monthly or quarterly investment.

How to Invest in SIP

Online and Offline are the two ways to invest in Systematic Investment Plans.

1. Online SIP Investment

You can do Online SIP investment through;

  • Online mutual fund investment platforms
  • Mutual fund AMC website
  • Karvy or CAMS website
  • 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

Conclusion

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.

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.

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. You can start investing in top funds through Scripbox either via SIPs or lump sum.

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

Published on December 18, 2019