Systematic Investment Plans: All You Need to Know About Them!

Do you feel investing in mutual funds is risky? You are not alone as gold, fixed deposits and real estate are the preferred investment. Mutual fund penetration at 12% of the GDP, is among the lowest in the World. Put this down to poor knowledge on the investment. AMFI had launched an aggressive campaign ‘Mutual Funds Sahi Hai’ to increase awareness on mutual funds. The buzzword is the Systematic Investment Plan or SIP is the ideal way of investing in mutual funds. 

What is SIP?

The SIP is a tool to invest a fixed amount of money in a mutual fund scheme. It allows you to stagger investments mostly in equity mutual funds over some time. The SIP can be on a daily, weekly or monthly basis. It enables buying mutual fund units of the selected scheme, on the date of your choice. A fixed amount of money is auto-debited from the bank account and invested in the mutual fund scheme.

Types of SIP

You may be familiar with the basic functioning of SIP. Let’s take a look at the four popular SIP variations.  

1. Flexible SIP 

The flexible SIP allows you to increase or decrease the SIP amount based on your cash flow. You can increase the SIP amount on getting a bonus or reduce if you face a cash crunch. 

2. Trigger SIP

The trigger SIP allows you to set a trigger on the SIP investment. You may choose an index level, NAV or an event as the trigger. Suppose the NAV is the trigger. The SIP amount would be withdrawn from your bank account and used to buy mutual fund units if the NAV falls to a particular level. 

3. Perpetual SIP

The SIP mandate requires you to give the start date and end date for the systematic investment plan. Not mentioning the end date makes it a perpetual SIP and it runs until the year 2099. You can stop the SIP by submitting a written application at the fund house. Do mention the end date for a SIP of fixed tenure. 

4. Step-Up SIP

You can increase the SIP amount with a Step-Up SIP. Suppose you start investing with a SIP of Rs 5,000 in a mutual fund scheme. You could instruct the fund house to increase the SIP amount by Rs 500, every six months. This automated facility helps you to increase the SIP contribution by a predetermined fixed amount at periodic time intervals. You can achieve financial goals as your income increases. 

How to start a SIP investment?

You can start a SIP investment in three easy steps.

Step 1: 

You need a few documents like the PAN card, address proof and a passport size photograph. Keep a cheque book ready to provide your banking details. 

Step 2:

You must complete the KYC formalities before investing in mutual funds. Visit the mutual fund house website and access the eKYC facility. Fill the personal details like name, address, date of birth and mobile number in an online form. Upload the soft copies of your PAN and address proof along with the photograph to support your details. You will have to complete the in-person verification or IPV. Schedule a video call to confirm your identity through a webcam. Display the original PAN card and address proof during the video call. 

The process is simple to complete with an Aadhaar. You will have to enter the Aadhaar and authenticate it. The UIDAI sends an OTP for the verification. The UIDAI database has your biometric information and pre-populates the form. You won’t need to go through the in-person verification process. 

You must submit the PAN details to invest more than Rs 50,000 in a financial year. Being KYC-Complaint helps you invest in any scheme of any mutual fund house. 

Also Read: 7 Tips to Earn Better Returns From Mutual Funds Investments

Step 3:

You must visit the website of the mutual fund house. Find the registration link which will direct you to a form. Create an online transaction account with the fund house. You will need the cheque book and mobile to verify the account through an OTP. 

After creating the account, select the mutual fund scheme. Choose the SIP date and specify the amount and the payment intervals. The SIP starts a month after you complete the process. 

What are the benefits of SIPs?

Systematic Investment Plans help you to average your purchase costs and maximise returns. It is not always possible to time the market when you invest in mutual funds. Investing in mutual funds through SIP, helps you overcome the limitation. 

These are the four benefits of investing in SIPs:

1. Rupee cost averaging 

You must buy the mutual fund units when markets are low and redeem when markets are up. It is the easiest way to earn returns. How can you catch the market at its lowest and sell at the peak? Rupee cost averaging helps you to maximise profit without timing the market. 

If you invest a fixed amount at regular intervals, you put money at different price levels. When the markets are down, you are buying more units. When the prices are up, you get lesser units. It averages the purchase cost in the long-run. 

Let’s understand rupee cost averaging with an example. You put Rs 10,000 every month through a SIP in an equity scheme. You cannot invest at the same NAV every month as markets are volatile. If you started investing Rs 10,000 in January the SIP investment looks like:

Take a look at the table. You have purchased 614 units at an average purchase price of Rs 98 (588/6) over six months. If you had invested a lump sum of Rs 60,000 in January, you would have bought 600 units. The purchase price of Rs 100 would be higher. 

Rupee cost averaging won’t guarantee profits. It is a long-term approach, reducing the risks of investing in a volatile market. 

2. Power of compounding

The SIP investment helps you get a higher corpus with the power of compounding. Reinvesting the returns from the mutual fund scheme accumulates more units. Let’s understand the power of compounding with an example. 

You start a monthly SIP of Rs 10,000, assuming the rate of return at 12%. You get Rs 8,093 at the end of the year. Add the amount to the initial principal of Rs 1,20,000, making your new investment Rs 1,28,093. The process continues generating a future value of Rs 8.25 lakh at the end of five years. You get one crore after 20 years. 

Use a SIP calculator and calculate the expected return on your monthly SIP investments. Start investing at an early age and reap the benefits of compounding. 

3. Financial Discipline 

Investing through SIP ensures you meet long-term financial goals. It brings discipline to your investment approach. Earning a big salary can’t make you wealthy. You will have to control your spending habits and invest regularly. 

Ploughing money into a systematic investment plan automatically debits fixed amounts from your bank account. Investment doesn’t stop even when markets crash. You can achieve financial goals with ease.

4. Pocket-friendly

You can start a systematic investment plan with just Rs 500 per instalment. Pick the daily, weekly, monthly or quarterly option depending on your financial situation.  Disciplined saving combined with regular investing ensures you don’t face financial difficulty. 

How to stop SIPs?

You can discontinue the SIP if you can’t afford the instalments. Simply log in to the mutual fund website with the folio details or the login credentials. You select the SIP instruction and click on ‘Stop’ SIP. The request takes 15-20 days for execution. You must cancel the SIP early, or the next instalment gets debited. 

Can SIPs save tax?

Start a SIP in an ELSS fund and save tax. It is an equity-diversified mutual fund with most of the investment in equity. You can claim a tax deduction up to Rs 1.5 lakh a year, under Section 80C of the Income Tax Act. ELSS is an excellent way to save tax if you fall in the highest tax bracket. Invest through SIP and save a maximum of Rs 46,500 a year. 

Can you start a SIP in debt funds?

Systematic Investment Plans are a popular way of investing in equity funds. However, you can also invest in the SIP of debt funds. The debt mutual fund pools assets and invests in fixed income securities like treasury bills, government securities or bonds. The investment gets affected by the interest rate movements. Investing through SIP reduces volatility due to interest rate fluctuations. 

SIP is an excellent method of investing in mutual funds. You can put money into mutual funds in a flexible manner. It helps you achieve financial goals without putting a strain on your finances. In a nutshell, SIP saves time and money as you invest in the mutual fund scheme. 

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in