Systematic Investment Plan (SIP)

What is SIP?

SIP investment or systematic Investment Plan is a facility to invest in mutual funds where you can invest relatively small amounts at regular intervals. Through SIP investment you can invest a fixed amount in any open ended mutual fund scheme of your choice at intervals chosen by you (e.g. daily, weekly, fortnightly, monthly etc.). SIP plans are preferred by investors because they can start investing in mutual funds with relatively small amounts. Since the amounts invested are relatively smaller than lumpsum investments, the risk in SIP mutual fund is also relatively lower.

Mutual fund SIP plans were first introduced in India in the late 1990s. Over the last two decades SIP mutual fund have grown tremendously in popularity among retail investors. As per AMFI data, there are 5.17 crores SIP accounts (as on 28th February 2022). More than Rs 10,000 crores is invested through mutual fund SIP plans. In FY 2021-22, more than Rs 1.1 lakh crores has already been invested through systematic investment plan (as on 28th February 2022).

Assets under Management in mutual fund SIPs are relatively stickier assets, since investors usually do not redeem their SIP investmentin volatile markets. SIP mutual fund is also a great way of building long term wealth because one invest over long horizons and benefit from the power of compounding. The chart below shows the growth of Rs 10,000 investments in Nifty 50 TRI through SIP investment over the last 20 years (ending 28th February 2022). With a cumulative investment of Rs 24 lakhs over the last 20 years, you could have accumulated a corpus of Rs 1.3 crores by investing through systematic investment plans.

How does SIP work?

• On the SIP investment date, the SIP amount (specified by you) gets auto-debited from your savings bank account and gets invested in the mutual fund scheme of your choice.
• The AMC allots units of the mutual fund scheme to you based on the SIP amount and the prevailing Net Asset Value (NAVs).
• You should have sufficient balance in your bank account on the SIP date. If your available savings bank balance, subject to minimum balance rules, is less than the SIP amount, then your SIP transaction will fail.
• While there is no penalty for insufficient funds, your Systematic Investment Plan will get cancelled, if the transaction fails for three consecutive months due to insufficient funds. You will then have to restart the SIP mutual fund.
• You can redeem units of your SIP investment (except in schemes with lock-in periods e.g. ELSS funds) at any time. Redemptions made within the exit load period will attract charges depending on the exit load structure.
• Through SIP plans you buy units of your mutual funds scheme at different NAVs. By investing in SIPs you can take advantage of Rupee Cost Averaging (RCA) of the acquisition cost of your mutual fund units. We will explain how Rupee Cost Averaging works in the next section.
  

^{Source: National Stock Exchange. Period: 01.03.2002 to 28.02.2022. Disclaimer: Past performance may or may not be sustained in the future.}

How does Rupee Cost Averaging work in SIP plans?

In Rupee Cost Averaging you invest fixed amounts at regular intervals (e.g. weekly, monthly, quarterly etc). The simplest mantra of stock market investing is “buy low, sell high”. But it is easier said than done, because timing the market is extremely difficult. Warren Buffet said that greed and fear influences investor behaviour when you try to time the market; often you may end up buying high, selling low.

Through SIP investment you invest fixed amounts of money at regular intervals, you buy less number of units when the NAV (price) is higher and more number of units of your mutual fund scheme when the NAV (price) is lower. The table below illustrates how Rupee Cost Averaging works in mutual fund Systematic Investment Plan (monthly SIP plan of Rs 10,000) in Nifty 50 TRI in 2020. Over sufficiently long investment tenures, investors can profit from volatility through Rupee Cost Averaging.

How to invest in SIP?

• Investors should note that, they should be Know Your Client (KYC) compliant to invest in mutual funds. If you are an existing mutual fund investor, you can check your KYC status online by entering your Permanent Account Number (PAN) on the depositary portals (e.g. CDSL) or the portals of the Registrar and Transfer Agents (RTAs).
• If you are a new investor or not KYC compliant, you need to submit your KYC documents (e.g. PAN card, Aadhaar Card etc) to the Asset Management Company (AMC) or the Registrar and Transfer Agents (RTA) of the AMC. You can complete your KYC process online or take the help of a financial advisor if required. Once you are KYC compliant you can start investing in SIP investment plans.
• Investors should also know that they need to have a bank account where they are the primary or joint account holder to invest in SIP mutual fund. SIP investment can also be started with the joint bank account holder on anyone or survivor basis or joint holder basis.
• To invest in mutual fund SIP, you first need to select a mutual fund scheme where you want to invest. You can invest in any open ended mutual fund scheme e.g. equity funds, hybrid funds, debt funds etc. You should select a mutual fund scheme and option (e.g. growth, IDCW) according to your risk appetite and investment goals. You should take the help of a mutual fund distributor or financial advisor if you want to understand your risk appetite and the risk profile of the scheme.
• To invest through SIP plans, you need to register for Systematic Investment Plan by submitting a bank Electronic Clearing Services (ECS) mandate where you have to specify the SIP amount, the interval and the SIP date. Through the ECS mandate, you instruct the bank to debit a certain amount at the specified date(s) of a month and credit to the mutual fund. The ECS mandate can be submitted online or through a paper form to the AMC or RTA.

Benefits of investing in SIP

• You can make SIP investments with relatively small amounts (Rs 500 or Rs 1,000) from your regular savings. In case of ELSS funds, it is only Rs 500.
• You can start SIP investment early in your working careers and invest for long tenures to get benefits of compounding.
• SIP mutual fund helps you remain disciplined in your financial plan. It makes market timing irrelevant since you are investing at different price (NAV) levels.
• Since you are investing relatively small amounts through SIP mutual fund, the risk is lower compared to lump sum investments where you commit relatively larger sums of money.
• By investing your savings on a regular basis, you are putting your savings to work to earn higher returns over the investment tenure, instead of keeping them idle in your savings bank or spending it on some discretionary item.
• The longer you remain invested, higher is the potential return and wealth creation. In SIP plans, over long investment tenures you can leverage the power of compounding. In mutual funds (growth option), the profits made by the scheme are re-invested in the scheme, just like how interest accrued is added to the principal in compound interest. Essentially, you earn profit on profits by re-investing the profits – this is the power of compounding. Longer the investment tenure, higher is the power of compounding (refer to the wealth creation example of investing in Nifty through SIP).
• By investing at a regular frequency, SIP investment can take advantage of market volatility by averaging the cost of the investment. Rupee Cost Averaging can lower the cost of acquisition of units in volatile or bear markets.
• SIP investments are ideal for meeting your long term financial goals e.g. children’s higher education, children’s marriage, retirement planning, wealth creation etc, since you can start early, have long investment horizons and benefit from the power of compounding.

Benefits of SIP:

Systematic Investment Plan (SIP) is a smart financial planning tool that helps you build wealth, step by step, over a period of time. Key benefits of SIP are:

Lower cost through Rupee cost averaging

SIP saves you from timing the market because by investing fixed sums at regular intervals, you have the advantage of picking up more units when the prices are low and less units when the prices are high. Therefore, SIP can bring down the average cost of your units. Click here to view details.