What is SIP? Benefits, Plans, How it works, Calculator, etc.
Created on 18 Oct 2022
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Updated on 13 May 2023
The Systematic Investment Plan (SIP) is an investment process provided by mutual funds where an investor can invest a fixed amount of money at regular intervals instead of putting in the entire amount at once.
The instalment amount can be as low as ₹500 per month or more. SIPs provide an option where the investor can automate deductions of the systematic monthly payments from the bank account.
There has been a lot of talk about the benefits of SIP among investors because it helps in investing money in a planned manner without worrying about fluctuations in the market. If an investor is new to the market, there is nothing like a Systematic Investment Plan to start their investment.
The most important thing to understand while investing in SIP is that it is not an asset but a way of investing money in mutual funds. According to a survey by AMFI, the net monthly inflow through SIP has increased from ₹3,122 crore in April 2016 to ₹1,24,566 crore in April 2022. 🤯
So, what is this popular investment vehicle? How much better is it than the other options available? Should you invest in SIPs? Continue reading to learn more.
Different Types of SIP
SIP investors should understand the five different types of SIP. Let's look at them in detail:
1. Regular SIP
The regular SIP is the simplest form, where the investors must regularly contribute per the condition. The interval can be monthly, quarterly, bi-monthly, half-yearly or annually. When the investor opens the online SIP, they are given the option to choose their time interval at their convenience. But once the time interval is selected, it cannot be reconsidered.
2. Flexible SIP
The flexible Systematic Investment Plan is similar to regular SIP, the only difference being the investment amount. In flexible SIP, the investor can change the amount at any point in time. This helps the investors to have larger control over their investments.
3. Top-up SIP
The Top-up SIP or Step-up SIP is a form of Systematic Investment Plan where the investors can increase the amount at predetermined intervals. For example, the investor can start with an amount, say ₹1000. They can put an instruction to deduct ₹1000 for one year and, post that, start deducting ₹2000 till the end of the tenure. The change can only be done once.
The trigger SIP comes to play when some events occur. The events can be changed in index levels, NAV levels, and favourable market movements. This gives more strength to the investment in the mutual fund, but the investor needs to understand the market better to implement it properly.
5. Perpetual SIP
The perpetual SIP has no end tenure. The investment goes on till the investor ceases to invest in it. This is the only difference between a regular and perpetual SIP. The SIP continues till the investor puts money in it. This does not put pressure on the investor, and they can close it anytime they want.
Importance of SIP
The Systematic Investment Plan plays a crucial role in financial planning for an investor:
- SIP provides the flexibility to choose the amount and the time interval for investment as per convenience. For instance, the investor can choose from five different SIP plans and invest their funds
- The funds invested in SIP compound themselves and increase the income exponentially
- The SIP does not burn the investor's pocket. The investor can plan to invest long-term or short-term, depending on their needs
- The SIP absorbs the market shocks during wealth creation on account of rupee cost averaging
- The SIP provides a better return on investment than traditional fixed deposits
- With the turmoil in the market, the SIP provides steady growth on the investment with flexibility in opening and closing the SIP
How Does SIP Work?
Before starting to invest in SIP, the investor should be aware of how SIP works. Let's look at it in detail:
- Select the mutual fund - The first step in SIP is to select the right mutual fund investment. Investors can choose from regular, flexible, top-up, trigger or perpetual SIP to start their investment journey. The different plans give a wide range for investors to choose and invest wisely.
- Selecting the timeline - After understanding the plans, it is important to choose the investment frequency. The frequency should be convenient to the investor. For salaried investors, the common frequency is monthly. But there are different options like quarterly, bi-monthly or yearly.
- Setting up the SIP with mutual funds - After understanding the mutual fund scheme, the investor should do the KYC, provide the bank details, and choose the frequency and contribution. This would set the SIP for the investor.
- Provide standing instructions for the contribution - There is an option where the investor can provide a standing instruction to the bank for automatic deduction when the time for contribution comes. This automated process would take away a load of remembering to pay the contributions at regular intervals.
How to Choose SIP?
There are many Systematic Investment Plans in the market. It is very important to choose the right SIP to reap the maximum benefits of the investment.
Let's look at how to choose the right SIP:
1. The performance of the SIP
The consistency of the SIP should be compared by the investor. The performance of the funds with different schemes within the given category in different market phases should be checked before choosing the SIP. The CRISIL's category-level indices can be used to understand the performance of different SIP.
2. Hire a fund manager
The investor should hire a fund manager who has vast experience in risk management and robust investment schemes that would help a better return on the investment. The fund manager's track record would help an investor find the right fund for their portfolio.
3. Calculating the risks
The benefits of the investment comes with a certain amount of risk. So, it is always advisable to assess the risks before investing in a SIP. Always consult a fund manager about the risks involved in the SIP before investing. Always go for the minimum risk portfolio so that one would get a maximum return at the end of the tenure.
4. Parameters of a portfolio
The portfolios include company diversification, sector diversification, liquidity of the underlying stocks, and the quality of the stocks should be assessed before the investment. SEBI has capped sectoral and company holdings within the portfolio. It is important to check these portfolios before going for the SIP.
Do's and Don't for First-time SIP Investors
For investors debuting in SIP, apart from following the tips on choosing SIP, they should know about the industry-standard dos and don'ts of it.
Let's start with what should not be done while investing in SIP:
- Never invest in a SIP without going through the performance in the market and the offer document. All the SIP would perform well when there is a market boom, but not all would perform consistently over a long period of time. So, always check their performance in the market and the documents involved in it.
- Never choose a SIP based on the current performance and returns it provides. It is always important to check its past performance before investing in a particular fund. Do not run after a SIP only because it provides a better return in the current market.
- Do not put all the money in a single SIP. This may risk the investment in buying units at a costlier price and lead to a bad investment. It is always advisable to invest in small amounts and in several funds.
- Do not ignore the extra expenses included with the mutual fund. There are different expenses like transaction charges, withdrawal fees, and management expenses. Although these amounts are low, always look for a SIP that takes the lowest expenses.
After understanding what not to do while investing in a SIP, let's look at what one should do while investing in a Systematic Investment Plan:
- Choose a fund with a proven track record and a better offer document. Always check their performance over a period of time. This would give a better understanding of the SIP and their returns. Not all SIPs perform consistently over a long period of time.
- Always be patient while investing in SIP. Check the performance once a year and withdraw it only if the performance is weak compared to other funds or if there are changes like changes in the fund manager and portfolio composition.
- Always take benefit of rupee cost averaging by investing in regular intervals. This reduces the risk of loss as large amounts of money are not invested at a time. If an investor has a large sum of money to invest, then instead of investing it in a single fund, invest in multiple SIPs for a better return on investment.
- Always invest according to the risk appetite of the investor. The fund manager should provide a SIP with a short-term plan and good returns if the investor is looking for short-term benefits.
- Always check the index funds before investing in SIP. Always choose a SIP with lower index funds because if an investor is looking for a long-term investment, this expense takes away a large portion of the return on investment.
Ultimate SIP Calculator
The SIP calculator calculates the amount of return an investor would get based on their investment, rate of interest and tenure. Let's look at how the SIP return calculator works:
This is the SIP calculator that investors can use to check their SIP returns. Click here to visit the page. This SIP return calculator would provide the details of the return, the invested amount, and the future value of the investment made by the investor.
The investor needs to select from two frequency of investment: monthly and yearly. The investor has to contribute monthly if they select the monthly option, and they have to invest once a year if they select the yearly option. The investor can select an option at their convenience.
Once the investor has chosen the amount of contribution towards the SIP, they need to select the 'Expected rate of return'. The investor needs to check the interest rate before putting the value.
Here, the rate of interest has been given as 14%. The rate of return is different for different SIPs, and the investor needs to check carefully before investing in it. The return on the investment is mainly dependent on the rate of return. The higher the rate of return, the more the return on investment.
Now the investor has to select the tenure. The SIP gives the freedom to select the tenure at the convenience of the investor. There are options where an investor can choose to select a shorter timeline or a longer timeline based on their requirements.
The SIP provides the flexibility to choose the tenure. So, for a better understanding, let's take the tenure to be 20 years.
Once all the details have been provided, click on the 'Plan My Wealth' button. If the investor wants to make some changes, they can go to the tabs and make the changes, or if they want to reenter all the details again, they can click on the 'Reset' button.
Once the 'Plan My Wealth' is clicked, the investor can see the details below. In the example taken for a better understanding, if the investor invests ₹1000 monthly for 20 years at a rate of interest of 14%, they would get around the total earnings to be ₹10,76,346.28.
The table shows the future value of the investment to be ₹13,16,346.28. The total amount deposited over the tenure is ₹2,40,000.
So, using the SIP Return Calculator, an investor can easily calculate the return on their investment in mutual funds. The investor needs to check the details before entering the value.
Who Should Invest in SIP?
When it comes to investment, there are many options in the market for different types of investors. So, who should invest in SIP? Let's look at some potential investors in SIP:
- For investors starting to invest, SIP is the least risky investment portfolio
- If an investor is looking to invest in stocks systematically, SIP is the right investment for them
- For investors who are looking to actively manage their investments
- For investors who are looking at balanced and diversified portfolios
- For investors who have an idea of when to make changes in their SIP, like exiting or starting a new one
- For investors who are looking to build a portfolio over the long term by making regular investments in the SIP
- For investors looking for a good return on investment and do not want to invest a large sum of money at a time
Advantages of Investing in SIP
There are several advantages of a systematic investment plan. Let's look at some of the SIP benefits:
- The SIP has simple investment plans, where an investor can invest a minimum of ₹500 in regular intervals and watch the money grow over a period. The investor can control the amount and tenure at their convenience.
- SIPs have a healthy rate of return percentage. So, if an investor plans for a long-term investment in SIP, they would reap more benefits on their return. But the good rate of return also benefits the investors looking for short-term investments as the investment tends to compound according to the rate of return.
- When an investor starts investing in SIP, they get a higher return on their investment. The returns guaranteed on SIP are way more than traditional fixed deposits. SIP is not affected by inflation which is on the rise regularly.
- The synonym for SIP is emergency funding. A systematic Investment Plan is an open-ended investment plan where one can withdraw it and use it during any emergency.
- Options like flexible investment, choosing the desired timeline and selecting any SIP from the five plans, make it an easy choice for investors to choose SIP.
In this competitive market, SIP is the most rewarding investment plan, where an investor can gain a good amount of return on their investment. The five different SIP plans reflect the SIP benefits. With the SIP calculator, the investor can easily check their return on investment.
With flexible plans, investments, and tenure, SIP attracts many investors to invest in mutual funds with the least risk in the market. An investor can consult a fund manager before starting a SIP, as they would provide the right advice to invest in the right SIP.
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