Systematic Investment Plan (SIP) – Best way to invest
Systematic Investment Plan (SIP) is a kind of investment scheme offered by all Mutual Funds.
With SIP you can invest a small amount regularly (weekly, monthly, quarterly) into the selected Mutual Fund.
SIP – the Best way to invest
The convenient way to start investing!- You can start with a minimum amount.
- Gain on Rupee Cost Averaging!
The convenient way to start investing!Save Taxes
- Income Tax Saving of up to Rs. 46,800 Per Year
- Lowest Lock-in Period – 3-Years only
- Highest Returns than other 80C Options
Keep Balance & Grow Rich
- Special Selection
- Balanced Risks
- High Returns
Go For Growth
- Take the First Step
- Achieve all Goals
- Cost Same as an Evening Out
Better than Recurring Deposit
- Much Better Returns
- No Lock-in Period
- No Exit Load
Take Early Retirement
- Save Enough
- Invest Every Month
- Generate Wealth
Realize your Dreams
- Fee for Best Schools – No Problem
- Grand Wedding – No Problem
- Buy House – No Problem
Preferable to Saving Account
- Earn on Idle Money
- Huge Returns
- Withdraw Anytime
What is SIP?
SIP or Systematic Investment Plan is the smartest and most convenient facility provided by Mutual Funds Schemes. These schemes invest in a large combination of companies from a variety of sectors like IT, Pharmaceuticals, Manufacturing, etc. This helps us diversify our portfolio even with a small investment.
- With this, we can invest a specific amount at a fixed interval. May be every week, month or every quarter. The choice is ours to make when we start.
- We can choose to start with as little as Rs. 500. The choice, again, is ours to make.
- The amount gets deducted automatically from the bank account. And is invested promptly. So no need to set reminders on the phone. No need to visit the bank every month.
- We can choose from a vast range. Be it Equity, Debt, Hybrid, whichever suits us best.
Remember, SIP is only a mode of investing. Not a plan or scheme.
Benefits of Investing in SIP Online with WealthBucket
The benefits of SIP are innumerable to count. Who doesn’t know the benefits of saving and saving regularly? We have been brought up by our parents and elders continuously reminding us about them. Similar is SIP.
Saving Discipline
Invest in an Even & Disciplined way. SIP allows us to create great wealth over the long term. We just need to be regular. And to stay with the investment. With every SIP installment, more units from the mutual fund scheme of our selection are transferred into the investment portfolio. And we end up accumulating a large corpus without any strain.
Automatic Timing Mechanism
SIP times the market automatically! A fixed amount is being invested regularly. Whether the market is low or up. Thereby, we get to buy more units when the price is down. And fewer units when the price is up. This way the cost of purchase evens out during longer terms. This is also termed as Rupee Cost Averaging. Sticking to SIP and to this simple formula allows us to avoid nervous selling during market panics.
With the SIP amount we invest on a regular basis, more units of our selected scheme are bought and transferred into our account. The rate they are bought at, is not fixed. It changes as per the market conditions. This rate is called NAV (Net Asset Value). The AMC calculates the NAV by subtracting the value of liabilities from the value of the assets and dividing it by the number of outstanding shares. Thus NAV of one unit is arrived at.
Example:
When Rs. 3,000 is invested every month on the 10th of each month. The applicable NAV depends upon whether the 10th of various months is a working or non-working day for the stock market.
If the 10th of a month is a working day, the applicable NAV of that day would be the selected NAV for the investment. In case, the 10th of the month is a non-working day for the stock market. If the stock market is closed due to it being a Saturday or a Sunday or a bank holiday. The NAV our units will be bought at, would be that of the NAV at the closing of the next working day.
Long Term Benefit
SIPs also give us the advantage of the Power of Compounding. Which is, basically, the earlier we start saving, the faster our money multiplies. With time, the impact of this steady investment is amazing.
Liquidity
Only the tax saving mutual funds (ELSS) have a compulsory lock-in period. All the rest of the mutual fund plans do not have this requirement. So the investors can exit the scheme any time they want. However, it is advised to stay invested to gain maximum returns.
Flexibility
SIP investments allow us to increase or decrease the installment amount. So as our income or salary increases with time, we save more and invest more.
Profits on the horizon
SIP mutual fund plans are the best way to achieve long-term investment goals. Because we start with a smaller amount, not much gain is visible initially. But gradually and in the long run, our corpus increases and there is a huge growth.
Moderate Risk
We, as general public investors, do not have the time, effort, knowledge and expertise to go for active investments. So SIP is the solution for us. It lets us earn a good return with moderate risks.
Tax-Saving
Apart from the disciplined procedure and great returns on investment, some SIP investments also help to avail tax benefit under section 80C of Income Tax Act 1961. These are Equity Linked Saving Schemes (ELSS). In fact, The SIP installments, the Returns during the investment period and the Income Earned at the time of withdrawal, all these three, are eligible to claim tax exemption. Hence the short form E-E-E applying.
Hassle-Free Transactions
Unlike opening an Account, Recurring or Fixed Deposits, and other investment options. We can start investing online. From the comfort of our homes. Or the office. On the move as well, if traveling. Even the registration gets completed online. We just need to add SIP Biller. That means authorizing our bank to automatically pay the fund house our SIP investment amount regularly.
The Option of Being Smarter
SIP provides the smartest way of investing too. There are many variants of SIPs available. They apply tools to look at markets more actively. The fund house has devised various plans that invest SIP amount in two. Generally, one is an equity fund and the other a debt fund. It takes into account different elements. Such as Price to Equity (P/E) ratio, Price to Book Ratio, Return on Equity, Cash Flows, etc. And evaluate how much more or less money needs to be invested in what fund option. This is called Smart SIP or AlertSIP!
Don’t Forget the Returns
When compared to Recurring Deposits or other regular saving plans, SIP earns us much higher returns in the long-term. SIP investments provide returns irrespective of the market performance, adjusting according to the market fluctuations.
How does SIP give Better Growth?
Let’s understand the growth with example. This can also be taken as a comparison between SIP investments in Mutual Funds with the Traditional Regular Investment plans. For example, PPF, NPS, etc, which earn us an annual rate of about 8% only.
Keeping the monthly investment amount of Rs. 3,000. And the assumption is that the plan is started at the start of the job or career. So we have 30 years investment period. Simple multiplication will tell us that the total amount we invest will be Rs. 10,80,000.
By staying invested in any mutual fund for this long period, the interest would be at least 12-15% annually.
Now check the difference here, for a total investment of Rs. 10,80,000/- over 30 years:
SIP or Lump Sum: Which is Better?
With SIP we set aside the money regularly towards your investments. Taking the above example, we invest Rs 3,000 monthly. But when we invest lumpsum, we invest a large chunk in one go. For example, we invest Rs 2 lakh at the same time.
To be fair, both these ways to invest should not be compared.
Why such a comparison is unfair is because there is an obvious difference between how this money to invest has been received. With our regular income, we can only keep aside a small portion and invest. That is what SIP is all about. Whereas, when we have money on hand or have received a corpus, which we can invest, that is one time. At least such amount is that we cannot set aside on a regular basis.
So when we do not have lump sum money available to invest, no question arises about investing at one go. Similarly, for those whose future income is uncertain, SIP is out of the question.
Still, some questions never die. Much has been said comparing the two and arguments suggesting which is the better approach. Moreover, some situations arise in everyone’s life, when we are faced with opting for one. So let us check the features to make a better decision in such situations.
| Features | SIP | Lump-Sum |
|---|---|---|
| Investing | Regular | One Time |
| Risk Element | Low to Moderate | Moderate to High |
| Source of Income Uncertain | Not Recommended | Recommended |
| Investment Horizon | Ideal for Long Term | Short term, but Relative to the scheme |
| Flexibility | High | Low |
| Falling NAV | Recommended | Less Recommended |
| During Market Growth | Less Recommended | Recommended |
| Market Volatility Effect | Not much | A lot depends on the market situation |
| Investment Cost | Less due to Rupee Cost Averaging | High because it is big money |
We can say that by investing a lump-sum, our amount is exposed to the vagaries of the market, as there is always a chance of miscalculating the market. This risk is much less with SIPs, because of investment discipline and rupee cost averaging without timing the market.
SWP/STP with SIP for Lump-Sum
SWP or Systematic Withdrawal Plan is a scheme of withdrawal offered by mutual funds. It is ideal for those investors who are looking for regular or periodic income. Investors can withdraw a certain amount as payout at a pre-fixed time intervals. Whether monthly, quarterly, half-yearly or annually.
We can make recurring withdrawals with SWP from our investments. When we have a lump sum to invest in a mutual fund scheme, we set up a withdrawal mandate of a fixed amount from it. It works when we don’t have a regular source of income or may wish to create a monthly pension from the retirement corpus.
A Systematic Transfer Plan (STP) is a very intelligent structuring of shifting part of the current investment into other schemes. This helps us in diversification. With STP, we can switch or transfer a fixed amount of money at regular intervals from the fixed income investments to specified equity and balanced schemes.
STP is of use as a combination of SIP and SWP.
With STP, the idea is to invest a lump sum in one scheme (mostly a debt fund) and arrange to transfer a fixed amount from this one regularly to another scheme (mostly an equity fund).
This way we earn a little extra on the lump sum while it is being put in equity. We earn higher returns from debt funds than keeping the money idle in a normal savings bank account.
Even vice versa can be applied. Then the amount is transferred from an equity fund to a debt fund. To achieve an important goal like a child’s education, buying a home or retirement and the goal date is nearing, we don’t have to wait till the target date. We can start moving money from equity to debt much before the time when we will need the money.
Types of SIP
SIPs are, typically, of 4 types.
Top-up SIP
We can increase the investment amount periodically. Invest more when earning is more. So we can make the most of our investment by contributing to well-performing schemes at specific intervals.
Flexible SIP
We can choose to increase or decrease the SIP amount as per the financial conditions. We can also skip one or more payments in times of a cash crunch. Similarly, when we have a bigger sum, we can invest more, as well.
Perpetual SIP
Perpetual SIP is when no end date is mentioned in the mandate. We can redeem funds whenever required. Or when we have achieved our goals. Though the best mutual fund distributors advise setting an end date to ensure we build a disciplined, goal-based investment.
Trigger SIP
When we don’t have much knowledge of the financial market. It allows us to set NAV, index level, SIP start date or event, etc. Though this SIP is not much recommended because of the speculation involved.
How to Choose SIP
Choosing the right mutual fund to invest with SIP is crucial to ensure high returns. And in this age of the internet, we have an information overload. Every day, hour, minute, we are bombarded with messages telling us where to invest. And each message will state a different investment option as the Best one for you. So how do we actually know which one is really the best one for us? How to select the right one? To answer these questions, we need to keep the following points in mind before making the selection.
Fund Performance
Duration of the Plan
A mutual fund scheme that has been through the market volatility and still survived is the one to go for. This scheme would have seen both the ups and the downs of the market rates. Hence the duration of the existence of the plan is a must to look at. Generally, a plan that has been in the market for 5-years, at least, is advised to be chosen. This is a long enough period for it to see both sides of the market.
AMC
The Asset Management Company or the Fund House of any mutual fund scheme is the decision-maker of the investment approach. With its decisions playing a major role in determining the growth and capacity of the scheme. Therefore, we must look for AMCs with a long and consistent track record. And their performance in their past plans to decide on the most fitting fund house to choose from.
AUM
Looking at the value of Asset Under Management (AUM) of a scheme will tell us what the growth has been so far. That is how many investors are already connected with the scheme. Too big an AUM will mean the growth potential is low and low-risk. Whereas, a smaller AUM implies a high potential to grow. But since not many investors have joined, so there will be a question mark on its growth. Therefore, it will have a higher risk element to it.
Concerned Ratios
Many ratios are there to compare two mutual fund schemes within a category. Most mutual fund distributors would study them before advising the best plan to invest. These are Standard Deviation, Beta, Sharpe ratio, Alpha, R-Square. They are very useful when judging the investment worthiness of a plan.
Expenses
The charges and expenses that investing in SIP require are crucial. There is the Expense Ratio, we should look at. This ratio is what the AMC charges us. A high expense ratio will negatively affect our overall returns. And there is the Exit Load. This charge we need to pay if we redeem the units before a pre-fixed time. Generally 12 months. A higher exit load reduces our final returns.
How much to Invest in SIP to Diversify
The general rule of thumb for investing is to invest 20% of the monthly income in a SIP. We should start with a simple and balanced portfolio of 3-4 funds.
Best mutual fund distributors advise diversifying the savings. Our elders have always been telling us not to put all the eggs in one basket. The same rule applies to investments. So we should put approximately 50% of the savings into Equities. We can choose between Large-Cap, Mid-Cap or Small-Cap. Ideally, we should have a combination of these 3 in our mutual fund portfolio.
Finally, this should become a 70-30 portfolio with 70% in equity, rest located in hybrid funds, debt funds and thematic funds will give this allocation some flexibility. Having a diversified asset class, we can withstand financial chaos and shocks.
The trick is to stay invested for as long as possible to make your money grow.
Taking Help of SIP Calculator
An approximate or rough calculation can be dangerous when we have a well-defined financial goal. It is always beneficial to work with real numbers while working to achieving our short-term or long-term objectives.
SIP Calculator is the online tool, which helps to calculate the Future Value of our SIP. We must take its assistance even before starting to invest.
Finally, this should become a 70-30 portfolio with 70% in equity, rest located in hybrid funds, debt funds and thematic funds will give this allocation some flexibility. Having a diversified asset class, we can withstand financial chaos and shocks.It calculates on the principle of compound interest. We just need to input a few figures. Such as the SIP amount, duration, and past returns. The calculator will quickly calculate the future value of our investment.
When compared with using a traditional calculator, this provides is with automation and speed. Hence the results are far more accurate, quick and simplified.
Reverse SIP Calculator
Suppose an investor has a goal of making a corpus of Rs. 30 lakh in 10 years. So what should be the SIP amount? How much should he/she save and invest using SIP every month from now until then?
To simplify the calculation of the SIP amount is when a Reverse SIP calculator is used. It enables us to understand how much money should we save today to meet our future needs.
Reverse SIP Calculator is of use when we know the amount we need in the future. It will show exactly how much should be the SIP amount to realize those needs. To fulfill our objectives. If we invest a lesser amount, how would we achieve our goal?
An investor might take a SIP plan but fails to reach the goal. Just because the estimate was inaccurate. Such a situation could have been prevented by using a Reverse SIP Calculator before beginning.
Avoid these Mistakes when Investing in SIP
Generally, we consider all the necessary elements such as risk profile, investment tenure, and Annualized Returns in the past to select funds. Because we keep hearing about these terms. And we must check these. But some other aspects also must be considered.
SIP means Small Investment Plan
That doesn’t need to be true. SIPs do not mean that one can invest only small amounts in such plans. That bigger amount shouldn’t be invested via SIP mode. But that’s not what the reality is. With Flexible SIP or Top-Up SIP, you can invest any amount as a lump sum in SIP. And you will receive good returns in time.
Short-term Investment
This is another mistake, many SIP investors commit. The value of the SIP investment increases gradually. So much depends on the time we stay invested. In other words, the longer we keep invested, the higher will be the investment value.
Choose Dividend over Growth
Some may want periodic withdrawal from the investment amount. This is called the Dividend option. On the other hand, we have the Growth option. Here the returns are invested right back into the fund. As SIP runs on the principle of compounding, Growth is the option it is meant for. While opting for Dividend gives us many low returns.
Though one has the choice of switching between the dividend and growth options.
Process & Documents Required to Start SIP
KYC Documents. To start investing in a SIP, we need our
- PAN card,
- an Address Proof, (copy of Adhaar Card, Utility Bill, etc is valid),
- one Cancelled Cheque,
- one Passport size Photograph,
- filled-up KYC-form-For-Individual, and,
- SIP Application Form: In this form, certain details are to be given. These are Name, Date of Birth, Address, and Mobile Number, etc.
Submit a cheque of monthly SIP amount (in case Offline Mode is being selected to pay the SIP) or fill-up the SIP Biller or the OTM (One Time Mandate) form (for payment of SIP through Online Mode).
Once the KYC has been completed, we don’t need to go through the process again. It will be valid and applicable to all further investments.
All the process can be completed online as well, by just uploading soft copies on this portal.
FREQUENTLY ASKED QUESTIONS
Further, SIP is comparatively cheaper and earns us high returns, than other investment schemes.
All investments have their risks. There is a risk involved in keeping money at home even. So there is a risk of not investing also. With SIP, our amount gets invested in Mutual Funds. These are subject to risks of market volatility. Therefore, the experts advise keeping invested for medium or longer durations. 3-5 years, at least, to gain high returns on your investments.
An investor can start investing in the SIP plan with an amount as low as Rs.500 per month. There is no upper limit to the amount one can invest.
It depends on how fluctuating your income is. If the fluctuation is high, for example, in one month you make Rs. 1 lakh and in the next three months there is nil income – you should invest in a Debt, Liquid or an Ultra-Short-Duration Fund. Along with an instruction to transfer that money, either over a period of time or when it exceeds a certain limit, into equity funds.
If you do make a minimum income monthly, it is advised that you invest a lump-sum as and when you receive one. That is, whenever you have a surplus, invest it.
Remember the STP model.
Not every Mutual Fund Scheme has this feature, for now.
The whole idea of SIPs is that you can be disciplined with your investments. When you want to step up your SIPs for a limited period, this is not being disciplined. You may end up investing when the market is at a high. If you have some extra money, it is advised to spread it over a period of time, with STP.
We can choose the online or offline method to start SIP.
For offline method:
- We will have to personally visit the AMC office.
- Fill the Application and the SIP Biller form.
- Provide KYC documents like Address proof and ID proof.
- A duly signed cheque mentioning the selected plan.
For online method:
- Visit the AMC or the Distributor’s portal.
- Enter all the details as asked for.
- Provide soft copies of KYC documents.
- A scanned copy of the cheque.
- Bank Account details.
If we miss a SIP payment, our account wouldn’t be deactivated. Many AMCs and their schemes offer the “Pause” feature facility to suspend the payment. Some plans have this condition that if 2 installments are missed consecutively, then the scheme gets terminated automatically. Do check with your distributor before investing.
The whole idea of SIPs is that you can be disciplined with your investments. When you want to step up your SIPs for a limited period, this is not being disciplined. You may end up investing when the market is at a high. If you have some extra money, it is advised to spread it over a period of time, with STP.
Only SIP investment made in Equity-Linked Savings Schemes (ELSS Funds) offers tax benefits of up to the maximum limit of Rs. 1.5 lakh under Section 80C of the Income Tax Act.
No. Once you have submitted SIP Biller, WealthBucket will place the request on your behalf. You do not need to login to your account to purchase the units.
Yes. You may get registered and pay at any time during the day and even post-market hours. The units that will be bought by this amount will be at NAV of the next working day.
When you invest in mutual funds with e-KYC. You can invest up to Rs 50,000 per annum per fund house. For investing over this limit, you must personally visit a KARVY or CAMS office nearby.
Many AMCs are offering investors to invest SIP amount daily. There are also daily STPs available which allow to invest a lump sum amount in a liquid fund and later into an equity fund. Daily SIPs helps in capturing daily movements of the market, unlike regular SIPs with monthly installments. However, past average data suggests that the difference in returns between these two options has been quite negligible. No studies have yet proved which one is better. Hence, you should choose the model which suits you best.
Investing in SIP is considered as the most promising investment. Instead of keeping your money idle in a savings bank account, you can invest in a SIP and take benefit of regular savings along with earned interest. However, the perks of investing in a systematic investment plan do not stop right there. We can customize a SIP to better suit our requirements. Let’s say we want to change our fund options or make some other desired changes. The best SIP plans for this by following some simple steps:
Stop the existing SIP by providing a simple written request.
- In approx 15 days, the current fund will stop.
- Apply for the newly selected SIP, by filling up the Application Form, SIP Registration Form, and OTM or the SIP Biller form.
- Start investing.
Before the next SIP installment gets deducted, you can either send a written application to the fund manager or raise a request online. However, it is advised that you should complete the minimum period of investment which is normally 6 months.
At the end of the fixed tenure of SIP, you can opt to renew the investment. You need to fill the renewal form and can choose the required duration of SIP investment.
To make sure that the investment goes on uninterruptedly, we can set “Auto-renewal” for the ongoing Active SIP. This feature can be availed at the time of Registration of SIP. If someone has not opted for it at the time of registration then it can be done later on, on the account at the web-site. The renewal of SIP, in this case, will be perpetual i.e.the SIP will get Auto-Renewed on the date of expiry
One can get the Auto-Renewal Feature canceled by logging onto the mutual fund account for that particular plan.
You can stop investing in your SIP anytime. Moreover, if the SIP installments of 2 consecutive months are missed, your SIP account will automatically get terminated without any additional charges.
You can invest online directly through the website of the mutual fund house. You need to complete KYC (Know Your Customer) documentation online. As long as you have an Aadhaar card and online banking facility.
Though, as a new investor, it is advised to take the help of a mutual fund agent or distributor and invest in the Regular plans. Taking the guidance of an intermediary is recommended to easily complete the process and get advice about the best ones.
To set up an auto-debit facility, visit the portal of the AMC, choose the fund. Provide the required details such as the amount and period of SIP. You will receive a URN number from the fund house. Now log into your bank account and enter the URN there.
Some AMCs may have another method to set up this instruction.
Whenever you wish to discontinue your SIP, just log in to the fund house’s portal and utilize the option. You can also use this option through your bank, online or offline.
One-Time-Mandate is a one-time authorization process. Once you register the OTM with your bank, you can conveniently undertake SIP investments. To register, you need to tick the OTM box, whether you are applying online or offline.
Now the bank is authorized to debit a certain amount regularly, as per your choice, towards SIP investment. You can mention the amount or set an upper limit. You can either fix a period (Say, 5 years) or let it remain valid till you cancel it.
An OTM transaction doesn’t fail due to technical reasons, unlike a regular online transaction which may fail due to payment gateway related issues.
It saves you the trouble of affixing a cheque or setting payment through a payment gateway, remembering your Debit card or net banking details, etc.
SIPs should be stopped in 3 circumstances.
- When you realize that a wrong asset class or a wrong fund got selected. For example, SIP was started into a large-cap fund whereas you wanted the growth of a mid-cap fund.
- The fund has become a perpetual underperformer. As compared to its benchmark or category.
- You are getting closer to your financial goal.
Small-cap funds are the most volatile equity funds, so you must never put a lump sum here. Always invest through SIPs in small-cap funds. Moreover, you are advised to not stopping your SIPs during market lows and wait for correction. It is very difficult to know when the market is at its bottom or peak. Even if you get lucky with the market correction, it will be extremely difficult for you to return again. So, continue with your SIPs. SIPS will help you average out your buying and will improve your returns over time.
Though it is always the right time to start a SIP investment in equity funds. Buying when the market is low and selling when the market goes high may sound like a great idea, but it is almost impossible to keep on doing this on a regular basis. That is why investors are advised to not concern themselves with market movements beyond a point.
Still, if you feel you can time the market, starting SIP when the market is rising is not preferable. And the market going down is a much better time for investing in SIP.
When you sell mutual fund investments, you are liable to pay Capital Gains Tax for that financial year. Capital gains on SIPs are applicable on a First-In-First-Out (FIFO) basis. That is, the gains are calculated against each SIP installment. Starting from the first one.
If a monthly SIP of Rs. 5,000 is being invested in an equity fund, started from 10th March 2017. You redeem Rs. 25,000 on 20th June 2018. Investments from the earlier months will be redeemed until the amount specified is reached.
For equity funds, a redemption made after 12 months of purchase attracts Long Term Capital Gains (LTCG) tax. While redemption withing 12 months attract Short Term Capital Gains (STCG) tax. So, in the above assumption, the LTCG tax will be applicable on gains from the first three months and STCG tax on gains of the fourth month of your SIP.
| Date | NAV | Units Bought (Rs. 5,000/NAV) | Units Sold on 20/06/2018 at NAV 27.50 | Gains | Tax |
|---|---|---|---|---|---|
| 10/03/2017 | 21.25 | 235.29 | 6,470 | 2,941 | LTCG |
| 10/04/2017 | 21.68 | 230.62 | 6342 | 2,685 | LTCG |
| 10/05/2017 | 22.41 | 223.11 | 6135 | 2,271 | LTCG |
| 10/06/2017 | 22.72 | 220.07 | 5968 | 2,104 | STCG |
| 10/07/2017 | 23.04 | 217.01 | 5863 | — | — |