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A systematic investment plan or SIP is a method that allows one to invest a specific sum at fixed time intervals. But, it is imperative to first understand mutual funds before moving on to SIP.
An asset management company forms a corpus of funds from a pool of investors to purchase securities. This corpus is known as mutual funds. Mutual funds are primarily categorised into debt funds, equity funds, and hybrid funds.
Now, we will discuss SIP mutual funds in-depth, along with its types, how to invest in this plan, returns, benefits, and the things to remember before investing. Let’s begin!
Unlike a lump sum investment, you can invest a fixed sum of money over a period of time at specific intervals through SIP. Prospective investors must note that SIP is simply a method of investing in mutual funds and not a type of mutual fund. So, you can think of a SIP mutual fund as an MF scheme that allows individuals to invest in it via SIPs. Moreover, the returns generated through such an investment plan are known as SIP returns.
There are different SIP types available in the money market. These are as follows.
|
Types of SIP Funds |
Details |
|
Regular SIP |
It is the simplest method of investing in mutual funds. With a regular SIP, one can invest fixed amounts at regular intervals. In addition, the frequency of this type of SIP can be half-yearly, quarterly, bi-monthly, and monthly. |
|
Top-up SIP or Step-up SIP |
A top-up SIP allows investors to increase the SIP amount at regular intervals. Moreover, by increasing the amount of investment, one can park larger amounts and achieve his/her financial goals. |
|
Perpetual SIP |
In this scheme, individuals can invest in a mutual fund of their choice without a specified tenure. There is no SIP termination date in such a scheme. |
|
Flexible SIP |
In this plan, investors can increase or decrease the investment amount based on their financial standing or the market condition. The benefit of a flexible SIP is that during a cash crunch, one can easily skip paying the SIP instalment amount. |
After opting for a systematic investment plan, the instalment amount gets debited from your bank account. Then, it gets invested in your preferred mutual fund scheme, following which its units get allocated based on their net asset value (NAV).
For example –
Suppose you have set aside a sum of ₹1 lakh to invest in mutual funds. Now, there are two ways to make an investment. Either you can go for a one-time lump sum investment or opt for a systematic investment plan.
You can begin investing in mutual funds via SIPs with a sum of ₹500. Moreover, the amount will get deducted from your bank account and get auto-credited to your chosen mutual fund at a specific fixed date each month. Thereafter, this process will continue throughout your investment period.
With the basics out of our way, let’s now delve into the types of SIP.
Mentioned below are the benefits of a systematic investment plan:
1. Disciplined Investing: When investing via SIPs, one need not analyse the market or determine a suitable time to invest as the SIP instalment amount gets auto-deducted from your account and goes into mutual funds.
2. Rupee Cost Averaging: Rupee cost averaging is a unique feature of SIPs as an investor can buy more units when the market is low. Similarly, one will buy lesser units during an upswing market. As a result, investors can navigate market fluctuations and make their investments averse to volatility.
3. Benefits of Compounding: This is one of the top benefits of SIP investment. A systematic investment plan operates on the principle of compounding, which takes place when profits earned on an investment are reinvested, thereby increasing potential returns. Therefore, one’s investment will generate earnings not only on that initial investment amount, but on the interest earned subsequently as well.
4. Simultaneous Investments: As one can invest in SIPs with just ₹500, one can invest in multiple funds simultaneously. Thus, you can reap benefits from various mutual funds at a time.
5. Tax Benefits: Before investing, it is important to know the SIP tax benefits. Tax rules are the same in SIP mutual funds. We have mentioned the tax liability based on fund types here.
Pro Tip: Investing in an ELSS through a systematic investment plan can act as a tax-saving instrument. With this investment, investors can claim a deduction of up to ₹1.5 lakh under section 80C of the Income Tax Act, 1961.
Such mutual funds offer considerably higher returns over a period of 5 years. The average rate of return for the best mutual funds with SIP ranges between 20 - 28% over 5 years. Mentioned below are such mutual funds along with their 5 year returns.
[1]
|
Fund Name |
Average 5 Years Return |
|
Edelweiss Flexi Cap Fund |
17.83% |
|
Canara Robeco Flexi Cap Fund |
19.86% |
|
UTI Flexi Cap Fund |
21.34% |
|
Parag Parikh Flexi Cap Fund |
22.89% |
|
PGIM India Flexi Cap Fund |
21.89% |
SIP mutual funds can be suitable for investors wishing to make periodic investments with relatively smaller sums of money. Besides, as mentioned earlier, one can begin investing with SIP instalments of ₹500, which can be a simple way of starting mutual fund investments for novice investors.
Here is everything that you need to know about how to start SIP investment:
In addition, you need to choose a particular date on which the amount will get auto-deducted from your bank account. Furthermore, you must decide on the duration of the scheme.
There are some associated risks of investing in mutual funds, whether you make a lump sum investment or take the SIP route. These risks include the following:
Potential investors must note that there is no one-size-fits-all solution for investing in mutual funds. So, there is no particular time period to invest in SIP mutual funds.
Rather, individuals should take several factors into account before investing, such as their risk appetite, financial goals, and investment horizon. That said, to reap the benefits of compounding effect, it is advised that investors have a long-term investment horizon.
These are the following pointers that you must consider before investing in such funds.
Thus, SIP is a convenient way of investing in mutual funds for novice as well as seasoned investors. That said, to earn the best SIP returns, it is important to research well before choosing a mutual fund and bear the above-mentioned points in mind.
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Disclaimer: This information is added only for informative purposes and collected from different sources across the Internet. Digit Insurance is not promoting or recommending anything here. Please verify the information before making any decisions.
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