Systematic Investment Plan (SIP) in Mutual Funds

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!

What Is SIP in Mutual Funds?

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.

What Are the Types of SIP Funds?

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.

How Does SIP Work?

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.

Benefits of SIP Mutual Funds

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.

Equity Funds: For equity funds, short-term capital gains are taxable at 15%. On the other hand, long-term capital gains up to ₹1 lakh in a year are exempt from tax. Moreover, gains exceeding ₹1 lakh are taxed at 10%.
Debt Funds: With debt funds, short-term gains get taxed as per one’s tax slab, while long term gains get taxed at 20%.
Hybrid Funds: Equity-oriented hybrid funds are taxed as pure equity mutual funds. Likewise, debt-oriented hybrid funds are taxed like debt funds.

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.

Returns from SIP Mutual Funds

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.

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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%

Who Should Invest in SIP Mutual Funds?

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.

How to Invest in SIP Mutual Funds?

Here is everything that you need to know about how to start SIP investment:

First, fill out the application form.
Then submit the monthly SIP amount cheque or fill the ECS form.
After that, you will need to submit a cancelled cheque and residential proof.
Finally, submit your KYC form.

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.

Different Risk Factors While Investing in SIP Mutual Funds

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:

Credit Risk: The issuer of a scheme, especially that of debt instruments, may fail to repay the principal amount or make regular interest payments.
Liquidity Risk: It is a situation wherein investors may face difficulties to redeem their investment without incurring a loss. An investor can face liquidity risk when he/she is unable to find a buyer for his/her security.
Market Risk: It refers to losses incurred by an investor due to poor performance of the market.

What Is the Time Period for Investing in SIP Mutual Funds?

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.

Things to Consider While Investing in SIP Mutual Funds

These are the following pointers that you must consider before investing in such funds.

Risk Appetite: All mutual fund investments come with associated risks. As afore-mentioned, they are exposed to market risk, credit rate risk, and liquidity risk. Therefore, prospective investors must evaluate their risk appetite before investing in a mutual fund scheme.
Expense Ratio: Fund houses levy a fee for their portfolio management services. This charge is expressed in percentage and is known as expense ratio. As a result, this fee increases the cost of investment. So, before investing in mutual funds, investors must check a scheme’s expense ratio.
Experience of the Fund Manager: As a fund manager takes all the investment decisions, he/she should have several years of experience in the industry. An experienced fund manager will have sufficient knowledge and know-how to navigate a mutual fund scheme through market fluctuations.
Financial Goals: When investing in mutual funds, investors should weigh in their investment goals. Additionally, they should ensure that their choice of mutual fund scheme aligns with their short- and long-term financial goals.

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.

Frequently Asked Questions

✓ Is SIP investment plan safe?

A systematic investment plan is considered a safe method to invest in mutual funds. Moreover, you can tackle market ups and downs as instalments are paid periodically.

✓ Is SIP better than FD?

SIP involves risk as it involves market fluctuations and volatility. In addition, investors cannot expect guaranteed returns on their mutual fund investments. That said, they may offer higher returns than fixed deposits. On the other hand, fixed deposits or FDs come with low risk and offer regular returns. The decision, ultimately, depends on one’s investment goals and tolerance for risk.