Systematic Investment Plan (SIP) A Comprehensive Guide to Follow

Introduction

Do you know about the latest sensation in financial markets? It is the humble systematic investment plan (SIP). SIP contributions to mutual funds have continued with their growth momentum over the past 12 months and there has been a rising inflow of ₹18,838 crore as of January 2024 to an all-time high inflow of ₹21,262 in June 2024 within a span of six months.

The growth is even more astonishing when compared to the corresponding data from a year ago. Inflows through SIP investment plans have increased 44% from ₹14,734 crore in June 2023 to ₹21,262 crore in June 2024. The statistics reflect the increasing acceptance of SIP investments and how they have helped accomplish multiple goals in life via systematic wealth creation.

Via SIPs, you can invest a small amount in your chosen mutual fund at regular intervals, and not only will it help you create corpus for life but also bring in the much-needed discipline in your investments. Not just this, it also aids your rupee cost averaging in the down-market periods.

Being able to invest little money through SIP on a regular basis itself is quite doable and helps save without fussing over it on a daily basis. How to invest in sip This detailed SIP investment guide covers the various aspects of SIP investments and how you can make use of them.

What is an SIP?

SIP stands for systematic investment plan. It is a mode of investment in financial instruments, such as mutual funds. Through SIPs, you can invest any amount of money, starting from as little as ₹500, in your chosen mutual fund at a particular interval.

This could be weekly, fortnightly, monthly, or quarterly instalments. Think of it as a recurring bank deposit. A recurring deposit is a savings plan that involves making regular deposits over a period of time. Offered by banks and post offices, a recurring deposit involves a particular amount of money being deducted from your primary account on a particular date and deposited into the recurring account.

SIP investment plans are the same. The difference is that in SIPs, the money is deducted per the given mandate and invested in a mutual fund. While a recurring deposit offers a fixed rate of return, SIPs in mutual funds don’t have fixed returns.

The small upfront amount required to kick-start your SIP investments means you don’t need a large investible surplus to get started. This makes SIP investment the go-to investment mode for everybody who wishes to invest - young earners, students, housewives and almost anyone.

However, you must factor in your goals and risk tolerance to choose the best SIPs to invest in. Equally essential is to consider the fund’s long-term returns and, specifically, its performance during market downturns before zeroing in on a fund to kick-start your SIP investment plans.

How Does SIP Work?

SIPs work quite simply. Here’s an example for how it works. For instance, if you hope to invest per month ₹1000 through SIP. All you need to do is:

Complete KYC

If you are a first-time investor, ensure that your KYC or know your customer is in place. It’s a statutory provision under the Prevent of Money Laundering Act of 2002. KYC is to be done if you follow the guidelines, you will only have to submit some basic documents with respect to your address and identity. E-KYC also gets completed in just a few clicks.

Establish your account

The next step is to establish your account on any fintech platform or directly on the fund house's website. You can register an account, provide your name, email, and phone number, and set up an account to start an SIP.

Select and configure your SIP

Choose your fund to configure your SIP. Select an amount you’d like to Auto invest through SIP (eg: ₹1000), frequency can be set as monthly to start with and the date when you want these auto debits to start.

Link Your Bank Account

Then link to your bank account and schedule payments on the date you’ve selected. Investment hassle-free with SIPs that are automated investment payments. You don’t have to do all the remembering and paying yourself. You only need to make the payment available in your account on date of SIP.

Review and Validate

In the end you can review and validate your details like SIP amount, frequency as well as bank account details. Please give a confirmation about your SIP plan to proceed further. After you have set it up, the asks are debited from your bank account and gets invested on a particular date.

You can find recommendations on the best SIP plans on fintech platforms and websites. Although you can look at past performance, keep in mind that the top SIP plans are those suitable for your goals and risk profile. Consider your investment goals, and keep in mind how much risk you are willing to tolerate.

Features of SIP Investment Plan

Here are the main points of SIP:

• Disciplined Savings When you invest using SIP, you develop a consistent habit of savings at a fixed interval. This disciplined method will deter you from spending unexpectedly and it also ensures that a portion of your income is always allocated to investment.

-Rupee Cost Averaging Under an SIP, you gain advantage of rupee cost averaging. Because you are investing a set amount consistently, when the price is low, you buy more units; when the price is high, you buy fewer. This decreases the final unit cost over time. This is a mechanism to help you deal with market volatility without having to time the market.

• Compounding Power

• The great power of SIP lies in compounding. As you invest consistently, those investments begin to throw off other returns. And as the years go on, this compound interest cycle adds up to exponential wealth for you. Even small monthly contributions can grow into a significant corpus if you stay invested for a long period.

• Risk Mitigation Market vagaries are a constant, but SIP ensures investment is less risky as it is spread over time. Unlike putting in a one-time investment that might be horribly timed, SIP spreads your purchase over various markets situations. This is to reduce the risk of entering at bad timing.

• Hedge Against Inflation SIP investments especially in Equity Mutual funds have provided higher returns that are higher than the inflation level in the past. While inflation erodes the value of money over time, SIP creates wealth that grows faster than rising prices.

Types of SIPs

The flowchart below helps you understand the SIP investment cycle:

Benefits of starting an SIP

The benefits of an SIP investment plan are multi-fold. Some of them are as follows:

• Disciplined investing

Want to invest but keep pushing for one reason or another? SIPs help you imbibe disciplined savings habits over time. As your money gets automatically invested, it results in a kind of forced savings and investment, which is highly needed to build a corpus for different long and short-term goals.

• Benefit from rupee cost averaging

SIPs can help you take advantage of the rupee cost averaging. This is a way to ride out market volatility and end up with a cost average over time. Let us take an example to understand this Suppose: If you invest Rs1000 in any mutual fund and its NAV is 100. You receive 10 units of the fund (1000/100).

Because of market turbulence, the NAV plunges to 50. At that point, you will receive 20 units of the find (1000/50). Over time, the average cost per unit of the investment may decline as a result.

• Puts Compounding to Work

Compounding is the process of earning interest on interest. That is to say, compounding occurs in the fact that the SIP returns on your 1st investment is reinvested. This can bloat your corpus, over a period of time.

• Flexibility on Offer

SIP investments allow you to adjust your contributions to changing financial situations. For instance, when you start earning, you can start small, add more with time say on marriage and kids born later. In the same vein, if you ever experience a cash crunch, you are free to reduce or stop your SIPs for a number of months.

• Helps Achieve Long-Term Goals

SIP investments can guide and help you plan to reach for your long-term goals like retirement or down payment for house or children's higher education. For instance, you want to collect ₹1 crore for your retirement 30 years from now and invest in a fund giving annualised return of 10%, you need to start an SIP of ₹4423.

Power of Investing Early

Timing is crucial to SIP returns. The early bird really does get the worm, and the earlier you start, the better. Getting started early also allows you to take even more advantage of the power of compounding. In other words, the earlier you start, the greater the time you give your money to grow. Let’s understand it with an example.

Suppose you are 25 and wish to invest ₹5000 per month through SIPs in a mutual fund offering 10% annualised returns till 60. The table shows how much you can potentially accumulate if you start at 25, and also the effect of a delayed start.

As you can see, the final corpus decreases as you lower the investment duration. When you start at 25 and keep investing for 35 years (until you turn 60), the end corpus is ₹1.9 crore. A delay of five years brings it down to ₹1.13 crore, and a delay of 10 years lowers it to ₹66.89 lakhs. Therefore, it pays to start investing early to allow compounding to weave its magic.

Things to Consider While Starting a SIP

Just like initiating everything good has certain prerequisites; there are a few things you should keep in mind while starting your SIP investments. These include:

• Financial goals

Determine your investment objective while investing through SIPs. Are you looking to build emergency reserve, buy a home or save up for retirement? You should ensure that your investments towards SIP are aligned with your goals in order to:

➔ Remain focussed and committed
➔ Choose the right funds for investment (Debt funds for short-term goals and equity funds for long-term goals)
➔ Check your SIP investments, track their status, and update them if needed

• SIP Investment Time

Think about the time for which you want to invest in your SIPs.

For short-term goals, the investment timeframe can range from a few months to a few years. On the other hand, for long-term goals, you need to remain invested for a long period.

• Risk tolerance

This is another vital consideration before starting SIPs. Risk tolerance reflects your ability to stomach risks. There are only a few high-risk takers amongst individuals while many have some or low risk appetite. If you have a high-risk appetite, you can consider going in for SIPs in equity funds, which are more volatile.

On the flip side, you have a low risk tolerance and opt for debt SIPs as they are generally less volatile than equity funds.

• Amount to Invest

SIP investments enable you to start small – as low as ₹500 per month. That being the case, you’ll of course want to select an amount that you can contribute on a regular basis. This is because only when you invest consistently can you take advantage of SIPs and compounding. You can allocate a high investment amount if you have a regular income. On the other hand, you can reduce the amount if your income isn’t consistent and is irregular.

When to Invest in SIP?

Here are some ideal scenarios for SIP investment:

• Early Career Once you start earning in your career, SIP investment helps in accumulating wealth over a longer period of time. You may not have much to earn as income as of now, but you can start with small in SIP.

• Salary Increment Whenever you get a salary hike, there is nothing better than increasing your contribution towards SIP. When your standard of living does not increase at the same rate as your salary, putting that rise to an SIP will enforce better financial discipline.

• Goal PlanningIf you have fixed goals like education of your child, house purchase, or retirement then by starting a SIP you can do planning in systematic manger. While with lump sum investment you may be forced to delay your goals by years, a SIP allows you to spread large targets into manageable monthly payments.

• Tax Saving If you wish to save taxes under Section 80C tax break, then investing in an SIP through Equity Linked Savings Scheme (ELSS) funds is good option. ELSS comes with a lock-in period of 3 years, which is lowest among the tax-saving instruments

• Lifestyle Upgrade As and when you improve your lifestyle (change to a better location, lower rent or clear off a loan), you add disposable income. Rather than adding to your discretionary spending, applying this surplus to SIP creates wealth over time.

How to Start a SIP in a Mutual Fund?

To start SIP, follow the steps below:

• Step 1 Preparation – Define your goal before starting an SIP The first step you need to take before investing in any financial product is defining the purpose which can be retirement, buying a house, funding child’s education or wealth creation.

• Step 2 You will need to do a Know Your Customer (KYC) verification in order to invest in any mutual fund. Submit identity and address proof, PAN card, Aadhaar and passport size photo. Several platforms are offering e-KYC via Aadhaar-based OTP as well.

• Step 3 Start your analysis and compare between mutual funds, based on their track record, experience of fund manager, expense ratio, and risk level. Select a fund that matches your level of risk.

• Step 4 Determine how much you want to invest, and for how long each month.

• Step 5 Visit the fund house website, distributor platform or mobile app. Choose the scheme, fill in the SIP amount of investment and frequency (either monthly or quarterly), and select a start date. Kindly provide your bank details for auto debit.

• Step 6 After the SIP begins, ensure that you keep a tab on how it is performing at certain intervals. Increase the SIP amount as and when required through a SIP top-up facility or shift funds depending on changing financial requirements.

Myths About SIP Investments Explained

Here are some common myths associated with SIP:

Guaranteed Returns: SIPs give guaranteed returns is a common misconception. It does not work like that. Unlike a fixed deposit, where interest is predetermined, SIP returns can vary.

Fixed Tenure: It is a belief that SIPs have a fixed lock-in period, but they don’t. Regular SIP investments in mutual funds can be started or stopped at any time without penalties. Tax-saving funds (like ELSS), which come with a lock-in period of three years, unlike most mutual funds under SIP which do not have withdrawal constraints.

Short-Term Gains: Do not keep high expectations with your SIP investment in the short run as you will be disappointed. SIPs are for wealth creation and not to generate returns in the short-term. Equity markets move in cycles, and short periods may bring volatility.

Only Equity: Many investors believe SIPs are limited to equity funds, but you can use SIPs across different mutual fund categories. You can invest in debt funds, hybrid funds, and even gold funds through SIPs. This flexibility enables you to align investments with your level of risk tolerance.

Market Timing: This is another myth that you should time the market, when investing in SIPs. SIP itself is meant to remove timing issues by making regular investments regardless of the market behaviour. By regularly investing, you purchase more units when the price is lower and fewer when it’s high.

SIP vs Lump Sum

Although there are many advantages of SIP, there is another investment strategy - a lump sum. While SIPs are an investment where you invest a small amount at regular intervals, the lump sum investment is one large amount invested once. Each investment has its benefits and drawbacks. The table will help you understand them better.

SIP vs Lump Sum

Although there are many advantages of SIP, there is another investment strategy - a lump sum. While SIPs are an investment where you invest a small amount at regular intervals, the lump sum investment is one large amount invested once. Each investment has its benefits and drawbacks. The table will help you understand them better.

Pros and Cons of an SIP

Now, as you know how a SIP works, like anything, they have their pros and cons. The pros of SIP investments include:

• Disciplined investing: SIPs do their bit to inculcate a disciplined savings and investing habit by way of regular investing. Investment discipline is needed if you wish to build a corpus for different short and long-term goals.

• Low initial investment: You don’t need much to start SIP investments. In case you are over 18 years, you can use your pocket money to start an SIP.

• Different types of SIP plans: SIPs give you plenty of options. You can select a plan which fits your requirements and budget.

• Compounding benefits: In the long run, SIPs make it possible for you to benefit the power of compounding. Compounding has a huge multiplier, and your corpus increases exponentially over the years.

• Hassle-free investment: The main advantage of SIPs is that it’s automated thus hassle-free. They’re basically a form of forced savings that can help you on your way to financial freedom.

• Helps ride market volatility: SIPs aid you to ride on market volatility and stay invested over market cycles. They help in capturing the benefits of rupee cost averaging, which can average out the volatility over longer periods.

There are, however, some disadvantages of SIPs too. These include: :

• No Lump Sum Gains in a Bull Market: In a bull market you have the potential to make better returns with lump sum investments. Since SIPs are spread over a time period, you can lose out on higher gains.

• Need Long-Term Commitment: SIPs truly shine when you hold your investment for several years. SIPs may not give you returns if you have short term investment perspective.

• Returns May Suffer If the Fund Performs Poorly: It is pertinent to note that SIPs do not deliver returns, the funds in which we invest so through it does. If the fund performs poorly, your SIP returns may suffer. Such losses are more magnified when markets tumble.

Final Thoughts

SIPs, because of their flexibility, ease and stress-free investing can become the beginning for you to accumulate funds for specific life goals. They foster a habit of disciplined savings and are available to everyone. The surge in SIP accounting inflows indicates its increase in preference. Well, the advantages of SIP investments are numerous, but it is also important to not forget that they are not a magic wand.

Before initiating SIP investment plans in mutual funds or any such instruments, you need to review your goals, risk tolerance and take into account the past performance for at least 5 years and make sure that the fund’s objectives are aligned with your goal. Also, evaluate the track record and experience of the fund manager along with the fund’s expense ratio. A higher expense ratio can eat into your returns.

It’s equally vital to not panic, make impulsive decisions following short-term volatility, and stop your SIPs. In fact, SIPs are more suited when markets are down because they help you buy more units. Redeeming your SIPs during market downturns converts notional losses into actual ones. Investing via SIP investment plans is akin to test cricket, where you require discipline, patience, and commitment in the long haul. Once you do so, you can benefit from SIPs.

Whether you are new to markets or a seasoned investor, it’s never too late to start investing via SIPs. Irrespective of whether you want to accumulate funds for your dream vacation, build an emergency corpus, save tax, or save for your child’s higher education or retirement, SIPs can help you in your endeavour.

Start your SIP journey today and use this SIP calculator to calculate the future value of your SIP investments. Happy investing!