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What is SIP in Mutual Funds & How Does it Work with Examples?

what is systematic investment plan and how to invest

The Full form of SIP is a "Systematic Investment Plan." SIP is an investment method that allows one to invest a specific amount at fixed intervals. However, it is imperative to understand mutual funds first 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 categorized into debt, equity, and hybrid funds.

Now, we will discuss SIPs in mutual funds, their features and types, how to invest in them, their benefits, and what to remember before investing.

Let's begin!

What is the Meaning of SIP in Mutual Funds?

An SIP, or systematic investment plan, allows individuals to invest a fixed sum in mutual funds at regular intervals. It is possible to begin a monthly SIP investment with a minimum of Rs. 500 and above.

SIPs are ideal investment options for individuals looking to generate wealth for a longer period. Additionally, SIPs allow investors to modify the investment amount depending on the strength of their wallets.

How Does SIP in Mutual Funds Work?

After opting for a systematic investment plan, the installment amount gets debited from your bank account. Then, it gets invested in your preferred mutual fund scheme, after which its units get allocated based on their net asset value (NAV). There are two ideal principles for understanding SIP works:

1. Power of Compounding

Compounding refers to the process where the returns you earn on your investments generate their returns over time. The longer your money stays invested, the greater the growth potential due to compounding. In SIP, as you continue to invest consistently, the returns earned on your previous investments are reinvested, leading to exponential growth over time.

For Example: Imagine you invest ₹5,000 per month in a mutual fund at an average annual return of 10%.

After 1 year, your investment would grow due to the returns on your ₹5,000 contributions each month.
After 5 years, the returns on the ₹5,000 invested in year 1 would earn returns, leading to more growth than if you invested ₹5,000 every year without reinvesting the returns.

2. Rupee Cost Averaging

Rupee cost averaging is a strategy in which you invest a fixed amount in a mutual fund at regular intervals, regardless of the market's ups and downs. You buy more units when the market is low and fewer units when the market is high. Over time, this smoothens the average purchase cost of the units, reducing the impact of market volatility.

For Example: Let's assume you invest ₹5,000 monthly in an equity mutual fund, and the NAV (Net Asset Value) of the fund fluctuates each month:

Month 1: NAV is ₹50, so you get 100 units.
Month 2: NAV is ₹40, so you get 125 units.
Month 3: NAV is ₹60, so you get 83.33 units.

Over time, by investing the same amount each month, you purchase more units when the market is down and fewer units when it's up, averaging out the cost of your units.

In the long run, this reduces the risk of investing all your money at a high price and helps lower your average cost per unit.

With the basics out of our way, let's now delve into the types of SIP.

What are the Types of SIP in Mutual Funds?

There are several types of SIPs, each offering unique features to suit different investment needs. Below is a summary of the most common types of SIPs:

Types of SIP	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. By increasing the investment, one can park larger amounts and achieve his/her financial goals.
Perpetual SIP	In this scheme, individuals can invest in a mutual fund without a specified tenure. There is no SIP termination date in such a scheme. The investor sets a fixed amount to be invested at regular intervals.
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 installment amount.
Trigger SIP	This SIP invests in mutual funds when a specific market condition is met, such as when the market falls by a certain percentage. When the trigger condition is met, the SIP is executed.
Multi-SIP	This allows you to invest in multiple mutual fund schemes with a single SIP. For example, you could invest in an equity fund for retirement and a hybrid fund for car purchases. It reduces the hassle of managing multiple transactions.
Equity SIP	Equity SIPs involve investing in equity mutual funds. They offer high returns but come with higher risks due to market volatility. They are ideal for long-term wealth creation. They require patience and a high-risk tolerance to ride through market volatility.
Debt SIP	Debt SIPs invest in debt mutual funds, such as bonds or government securities. They are a safer option with relatively lower returns than equity SIPs and are suited for conservative investors.

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What are the Benefits of Investing in Mutual Funds SIP?

Systematic Investment Plans (SIPs) offer a disciplined approach to investing. They are ideal for beginners and seasoned investors, helping them achieve financial goals steadily. Here are the key benefits:

1. Disciplined Investing

When investing via SIPs, one does not need to analyze the market or determine a suitable time to invest, as the SIP installment amount is auto-deducted from one's account and invested in 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 fewer 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 occurs when profits earned on an investment are reinvested, thereby increasing potential returns. Therefore, one’s investment will generate earnings on that initial investment amount and the interest earned subsequently.

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. You can diversify across equity, debt, and hybrid funds to balance risk and returns.

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: Short-term capital gains are taxable at 15% for equity funds. 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.

6. Cost efficiency

Owing to its low minimum investment threshold, SIP makes Mutual Fund investments accessible to a broad spectrum of investors. Moreover, breaking the investment into smaller, regular portions helps reduce the influence of market fluctuations.

7. Diversification

SIP enables access to a diversified portfolio of assets, given that mutual funds typically invest in various securities such as stocks, bonds, and other instruments. This diversification effectively spreads investment risk, reducing vulnerability to market volatility.

8. Flexible Investment Tenure

Another benefit of SIP is the flexibility you have to invest in tenure. Some mutual funds might need you to make a minimum investment of 6 SIP installments. However, there is no limit on how long you can continue making systematic decisions.

9. Convenient Investment Method

Another advantage of SIP is that it is a convenient way of investing. Even if you cannot find time for extensive market research and analysis of time markets, SIP investments will happen automatically.

10. Professional management

SIPs benefit from professional management, with seasoned experts overseeing Mutual Fund portfolios. This management ensures that your investments are strategically aligned to navigate market dynamics effectively.

Who Should Invest in Mutual Funds SIP?

SIP (Systematic Investment Plan) is one of the popular methods of investing in mutual funds through regular intervals(monthly). Here are the people who should invest:

1. Young Professionals

Young professionals with steady incomes and long-term financial goals should always invest in SIPs. They have a longer period to make the most of power compounding while withstanding all market fluctuations.

2. First-time Investors

SIPs are a good investment choice for first-time investors. They provide a low-risk entry point, and investing a fixed amount regularly allows first-time investors to minimize the impact of market volatility and build their portfolios.

3. Risk-averse Investors

Investors find SIPs appealing. The investment is diversified across different market conditions. Thus, the chances of a significant loss in one market downturn are low. SIPs also allow investors to invest in diversified mutual funds.

4. Individuals with Steady Income

People with a stable and predictable monthly income, such as salaried professionals, are attracted to SIPs. They facilitate regular, disciplined investing. A fixed monthly amount helps one plan for long-term financial goals.

5. People Saving for Specific Financial Goals

SIPs help people pool money over time with a specific goal in mind, like buying a house, paying for education, or building retirement savings. They are apt for goal-based investments demanding discipline.

6. Tax-Savvy Investors

Certain SIPs in ELSS tax-saving mutual funds offer benefits under Section 80C of the Income Tax Act. Investors keen to reduce taxes and grow their wealth may consider such options.

When to Invest in a Systematic Investment Plan (SIP)?

SIPs suit investors who want to avoid market timing while enjoying the advantages of rupee cost averaging. The right time to invest depends on your financial goals, market conditions, and personal circumstances. Here are key scenarios to consider:

1. Early Age Advantage

SIPs might compound long-term when introduced in the twenties or thirties. With time, one can let that grow into a reasonably significant corpus, ultimately for retirement, to own a house, or to fund one's children's education.

2. Mid-Life Start

On the other hand, if one is late to initiate such investments and in his 40s or 50s, he can start investing to attain a comfortable retirement or whatever financial goals he has targeted. The key is to act sooner rather than later, regardless of age.

3. Stable Income

Ensure a steady income source before beginning SIP to commit to contributions comfortably. Assess the financial situation to ensure surplus income after essential expenses for stress-free investing. This ensures stress-free investing.

4. Beginning of the Month

Start a SIP at the beginning of the month to promote financial discipline and avoid delaying investments. You can benefit from rupee cost averaging by consistently investing early and reducing overall investment costs.

5. Special Occasions

Invest in SIP upon receiving lump sum amounts like bonuses or inheritances to put money to work efficiently. Start an SIP to celebrate special events such as anniversaries or birthdays. Create a habit of disciplined investing while growing your money.

6. Clear Financial Goals

Start SIPs with specific goals such as vacation, home purchase, education funding, or retirement planning. Align SIP contributions with focused and committed savings objectives, ensuring effective wealth accumulation.

How to Invest in SIP in Mutual Funds Online?

Systematic Investment Plans (SIPs) offer an easy and disciplined way to invest in mutual funds. Follow these simple steps to start your SIP investment online in India:

Step 1

Set Your Investment Goals: Identify the financial goals and assess your risk tolerance using online tools from Asset Management Companies (AMCs) or brokers.

Step 2

Collect all Required Documents: During registration, ensure you have your PAN card, Aadhaar, address proof, and bank account details scanned and ready.

Step 3

Conduct KYC: To identify and verify addresses, upload your KYC documents via your bank's app or the AMC's online portal.

Step 4

Register for SIP Online: Register on your selected AMC or broker's official website or mobile app. Create an account and fill in the required details to register for SIP.

Step 5

Select a Mutual Fund: Research multiple mutual funds and analyze their risk levels and past performance. Then, select the one that best aligns with your investment goals.

Step 6

Decide SIP Amount: On the AMC or broker's platform, state the amount to invest and the investment frequency. Choose the frequency of investment, either half-yearly or monthly.

Step 7

Activate Auto-Debit: Use the e-mandate feature to activate automatic deduction to your SIP investments linked to your account.

Step 8

Review & Confirm: Please review the details carefully before submitting the online form to finish the application. Once you successfully register your SIP, a confirmation email will be sent.

How to Invest in SIP in Mutual Funds Offline?

If you are unable to assess the process online, here is the step-by-step process to complete the process offline:

Step 1

For the offline process, go to the AMC or KYC center for an in-person KYC verification.

Step 2

Fill out the SIP registration form and submit it along with copies of your documents.

Step 3

Consult your advisor to select a mutual fund based on performance and risk factors.

Step 4

The SIP amount and frequency are to be finalized, after which the paperwork should be filled in for an auto-debit mandate for seamless payment.

Step 5

Finally, submit the filled-in form to the AMC or broker's office and receive confirmation once it is processed.

What are the Risks Associated with Mutual Fund SIPs?

There are some associated risks of investing in mutual funds through SIP. These risks include the following:

Risks	Description
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	Investors may face difficulties in redeeming their investments without incurring a loss. An investor can face liquidity risk when he/she cannot find a buyer for his/her security.
Inflation Risk	This inflation risk pertains to a situation in which the returns emanating from your mutual fund SIP may not keep up with the growing cost of living as time passes.
Market Risk	Market risk is the risk that your investment might decline in value because of the fluctuations in the financial markets. As mutual funds, especially equity-based ones, are susceptible to market fluctuations, your SIP can experience upward and downward movements.

Difference Between SIP and Lumpsum in Mutual Funds

Here's a table highlighting the key differences between SIP and Lump Sum investments in mutual funds:

Aspect	SIP (Systematic Investment Plan)	Lump Sum Investment
Investment Frequency	Small amounts are invested periodically (e.g., monthly or quarterly).	A one-time, large investment made all at once.
Risk Exposure	Lower risk due to rupee cost averaging, as investments are spread over time.	Higher risk as the entire amount is invested at once, potentially exposed to market volatility.
Investment Approach	Suitable for investors with a steady income and long-term financial goals.	Ideal for those who have a lump sum amount available and prefer making a one-time investment.

Things to Consider Before Investing in SIP

Evaluating certain factors is crucial to making informed decisions before starting a Systematic Investment Plan (SIP). These are the following pointers that you must consider before investing in such funds:

1. Risk Appetite

All mutual fund investments come with associated risks. As mentioned, they are exposed to the market, credit rates, and liquidity risks. Therefore, prospective investors must evaluate their risk appetite before investing in a mutual fund scheme.

2. 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, investors must check a scheme's expense ratio before investing in mutual funds.

3. Experience of the Fund Manager

As a fund manager makes 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.

4. Financial Goals

When investing in mutual funds, investors should consider their investment goals and ensure that their choice of mutual fund scheme aligns with their short—and long-term financial goals.

5. Fund Performance

Fund performance reflects how well a mutual fund has performed in terms of returns over different time frames. Analyze the fund's historical returns against its benchmark and peer funds. A consistently good track record indicates stability and effective fund management.

6. Exit Load

Exit load is a fee mutual funds charge when you redeem your units before a specified period. It is usually a small percentage of your investment value. Understanding the exit load helps you plan your withdrawals without incurring unnecessary costs.

7. Asset Under Management (AUM)

AUM refers to a fund's total value of assets, showing its popularity and reliability. A larger AUM often indicates investor trust, but substantial funds may face challenges in delivering high returns. Consider the AUM size relative to the fund's category.

8. Portfolio Turnover Ratio

The portfolio turnover ratio indicates how frequently the fund manager buys or sells assets in the portfolio. A high turnover ratio increases transaction costs, while a low ratio reflects a more stable approach. Choose a ratio that aligns with your risk and return preferences.

Thus, SIP is a convenient way of investing in mutual funds for beginners and seasoned investors. 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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We do not promote or endorse any financial product or service mentioned in these articles. Readers are advised to conduct their own research, consult with financial experts, and make informed decisions based on their unique financial circumstances. Any reliance you place on the information provided here is strictly at your own risk.

FAQs about SIP in Mutual Funds

What is SIP investment?

SIP (Systematic Investment Plan) is an investment method in mutual funds where individuals invest fixed money at regular intervals(monthly). Also, SIP is a popular investment mode that helps investors to generate wealth over a longer time.

What is the full form of SIP?

The complete form of SIP is a Systematic Investment Plan.

How do SIPs work?

SIPs allow periodic investments in mutual funds, averaging costs over time. They automate contributions, ensuring consistent investments without worries about market timing.

Can I start SIP at ₹500 per month?

Yes, many mutual funds allow SIP investments starting at ₹500, making it affordable for beginners to invest and grow their wealth.

Can I redeem SIP anytime?

Yes, SIP investments can be redeemed anytime, but check for exit load or lock-in periods for specific funds.

What are the risks involved in SIP?

Investing through a Systematic Investment Plan (SIP) involves certain risks, such as:

Market Risk
Performance Risk
Liquidity Risk
Credit Risk
Interest Rate Risk

What are the features and benefits of SIP?

SIPs promote disciplined savings, benefit from rupee cost averaging, offer compounding growth, and are flexible with low entry barriers for systematic wealth building.

Is SIP good for beginners?

Yes, SIPs are ideal for beginners due to their simplicity, affordability, and systematic approach to investing without requiring expertise in market timing.

What is the 7:5:3:1 rule in SIP?

The 7:5:3:1 rule of SIP advocates long-term equity investment, diversification, and incremental SIP growth to maximize returns. It involves a seven-year investment period, diversifying across five asset classes, preparing for three challenging phases, and increasing SIP amounts annually.

What is NAV in SIP?

NAV (Net Asset Value) is the per-unit price of a mutual fund. SIP investors buy units based on NAV at the time of contribution.

Is SIP in mutual funds taxable?

Yes, SIP gains are taxable based on fund type and holding period, such as equity or debt funds. Taxation follows capital gains rules.

Is SIP good for the long term?

Yes, SIPs are excellent for long-term investments, leveraging compounding and rupee cost averaging to grow wealth steadily over the years.

What are the types of SIP?

Types of SIP include regular SIP, flexible SIP, top-up SIP, trigger SIP, and perpetual SIP, each catering to different investor needs.

How to start SIP?

Start SIP by completing KYC, selecting a fund, registering with a mutual fund house, and setting a fixed contribution amount and frequency.

Can I invest in SIP directly?

Yes, you can invest in SIP directly through mutual fund websites or apps without involving intermediaries, saving on commission fees.

Should I invest in SIP?

Yes, if you seek disciplined investments, long-term wealth creation, and diversification, you can start investing in SIPs based on your financial goals and risk profiles.

Is the SIP investment plan safe?

A systematic investment plan is considered a safe method of investing in mutual funds. Moreover, installments are paid periodically, allowing you to handle market ups and downs.

Is SIP better than FD?

SIPs are considered high-risk investment options, but it is suitable for investors who are looking to generate wealth for a longer period. Returns in SIPs are not guaranteed due to market fluctuations and volatility. That said, they may offer higher returns than fixed deposits. Conversely, fixed deposits or FDs come with low risk and offer fixed returns. Choosing these two options may depend on your investment goals and risk tolerance.