A systematic investment plan is a disciplined approach to investing in mutual funds. SIPs offer a disciplined and convenient way for investors to build wealth gradually, benefit from rupee cost averaging, and harness the potential of compounding over the long term.
What is a SIP?
SIP stands for “Systematic Investment Plan“, a method of investing in mutual fund schemes where an investor invests a fixed amount of money at regular intervals (typically monthly or quarterly).
This approach is well-suited for investors looking to achieve various financial goals, such as wealth creation, retirement planning, or funding education while providing flexibility to adapt to changing financial circ*mstances.
How SIP Works?
Before you set up your SIP, there are a few essentials you need to know about how SIP works.
There are four stages to investing in SIP from the beginning to the point where your funds are invested in a mutual fund scheme:
Select a mutual fund scheme
As your first step in the SIP investment journey, you need to select a mutual fund scheme you want to invest in. If you need some help with choosing a mutual scheme, take a read through our primer on how to choose a mutual fund.
Select the investment frequency
The next step in your SIP investment journey is to choose an investment frequency you feel comfortable with. The most common choice, especially among salaried investors, is a monthly frequency since they receive their salary monthly. However, if you have reasons to select a different frequency, you may choose to invest weekly, quarterly, semi-annually, or annually.
Set up SIP with a mutual fund scheme
Setting up your SIP is a simple process once you’ve picked a mutual fund. On ET Money, go to your chosen mutual fund, and click on invest. If you’re a first-time investor, complete your KYC and enter the bank details along with your SIP contributions and frequency, and you’re done. The process has been illustrated in detail in a later section.
Automatic debits and unit allotment based on NAV
Once everything is set up, money will be debited from your registered bank account. It will be debited each month based on the date you selected while setting up the SIP. This is an automated process. The funds will keep debiting from your bank account based on the frequency you entered while setting up the SIP.
After the money is debited, you’ll soon receive acknowledgment about your funds being invested. The acknowledgment also includes the number of units you’ve been allotted based on the NAV (net asset value). The number of units allotted for each contribution may differ because the NAV changes every day.
Benefits of SIPs
Rupee-cost averaging, through regular fixed investments, helps reduce the impact of market volatility on your portfolio by buying more units when markets are low and fewer when they are high.
SIP benefits from professional fund management, potentially leading to better results than individual stock picking.
SIP promotes financial discipline by encouraging consistent, fixed investments over time.
SIP leverages the power of compounding, and reinvesting returns to boost your portfolio’s value over time.
Power of Investing Early
In investing, the “Power of Starting Early” refers to the belief that if you start investing in an early stage of your life, then you can accumulate more wealth in the long term.
The earlier you start saving, the more time your money has to compound, and even if you start with a small amount, you can add up to large sums over time. This is possible through the power of compounding.
Compounding is the process through which you earn interest on the principal amount as well as on the interest part. This process continues throughout the investment period and generates a snowball effect, which helps you to generate a higher corpus in the future.
Starting early allows time and compounding to work in your favor, allowing you to reach greater financial security and freedom in the future. So, start early, be consistent with your investments, and diversify your investments per your risk tolerance to achieve your financial goals.
Types of SIP
Now that a lot of ground has been covered on what SIP is, how SIP works, and the benefits of SIP, let’s talk about the types of SIPs you can opt for.
Fixed SIP
Fixed SIPs are the plain-vanilla version of SIPs. You choose an amount, and a date till which you wish to contribute, and the rest of the process is automated.
Top-up SIP
Top-up SIPs are great for investors who want to increase their SIP contributions periodically. An example of where top-up SIPs make a lot of sense is when your income continues to increase every year.
Perpetual SIP
Perpetual SIPs are just fixed SIPs sans tenure. Once registered, your bank account will be debited with the amount of the SIP contribution unless you instruct the fund house to stop withdrawals.
Flexible SIP
It offers you the flexibility to change the amount per contribution or skip a few contributions if you so choose. There are two possible reasons an investor may want to change the contribution amount or skip a contribution. First, your contributions through SIP are adjusted based on the market’s overall outlook. If the market is valued higher, your monthly contributions through SIP would be reduced and increased again once markets are correct and valuations look attractive. Fund houses do this based on a predecided valuation matrix.
Things to Consider While Starting SIP
Before you start your first SIP, there are a few things you should consider the following things:
Investment goals
It’s best not to begin investing by calling “growing wealth” your goal. Tie your investments to important milestones of your life that may require a large amount of money — for instance, a bigger home, your child’s college, or your retirement. This will help you keep tabs on your objectives, and performance of how each of your investments is performing, and make it easier to take corrective action when required.
Time horizon
Once you have a goal in mind, you know how many years you’d want to achieve it. If you have a long time horizon, you could take on more risk than if you had a short time horizon. If you’re closer to retirement and don’t want to take on many risks, you could stick to short-term mutual fund investments.
Risk appetite
Another aspect to consider is how much risk you are willing to take. Assess the risk linked with the mutual fund by examining the volatility of its returns. It’s important to verify that the fund’s risk profile matches your personal risk tolerance. By considering your risk tolerance, you can select SIP options that match your financial goals
Mutual fund category
Selecting a mutual fund category requires careful consideration of your time horizon and risk tolerance. For those with a long-term outlook and higher risk tolerance, categories like focused funds or small-cap funds offer the potential for greater returns. Conversely, debt funds are suitable if you lean towards lower risk or have a shorter time horizon. Hybrid funds might be ideal for those seeking a balanced approach.
Trial run your strategy
Once you’ve figured all the elements out, try to do a trial run for your investment over your time horizon via an online calculator to see how much you’ll generate as returns and how much your maturity value will be. This will help you understand if your investment strategy will actually help you achieve the goal you’re investing for.
For simulating your returns, you could use a SIP calculator to see how much you’ll generate given a certain amount of monthly contribution made over a certain time and the expected rate of return
Which Are the Best SIP Funds?
The best SIP funds for an investor depend on several factors the investor’s risk profile and the fund’s return consistency, among others. As of this writing, the following are the best SIP mutual funds to invest in:
| Fund Name | 1-Year Return (%) | 3-Year Return (%) | 5-Year Return (%) | |
| Quant Active Fund Direct-Growth | 49.85% | 28.73% | 28.70% | Invest Invest on App |
| Quant Large and Mid Cap Fund Direct-Growth | 59.63% | 30.47% | 25.56% | Invest Invest on App |
| Quant Focused Fund Direct-Growth | 55.72% | 25.43% | 23.64% | Invest Invest on App |
| Parag Parikh Flexi Cap Fund Direct-Growth | 39.92% | 22.50% | 23.56% | Invest Invest on App |
| PGIM India Flexi Cap Fund Direct-Growth | 27.37% | 16.90% | 20.35% | Invest Invest on App |
*Last updated as on 15th Mar 2024
View All Best SIP Funds
Final Thoughts
Starting SIP could be one of the most rewarding parts of the investment journey. It gives you ample flexibility and minimizes the time and effort you’d otherwise need to put into managing your investments. If you’re young, now is a good time to start your SIP. Remember, time is on your side; make the most of it.
Frequently Asked Questions
Does SIP have maturity?
No, SIPs do not have a fixed maturity period like other investment options such as fixed deposits, PPF, etc. They are ongoing investments in which you regularly invest and continue for as long as you want.
But, as per the recent update by the National Automated Clearing House (NACH), effective from October 1, 2023, you can set SIP for a maximum duration of 30 years only.
What happens to SIP after maturity?
SIPs do not mature like traditional investment options, but you can redeem them anytime, except ELSS funds. So, when you redeem your SIP investment, you receive the corpus as per the fund’s applicable NAV (Net asset value). However, there may be an exit load, which asset management companies charge. And, if you want to continue your SIP, then you have to renew your SIP.
Is SIP safe to invest in?
SIP is just a method to invest in a mutual fund scheme. SIP in itself is not an investment product like FD, gold, or mutual fund. So, whether a SIP is safe or not will depend on the scheme in which you are investing.
How to calculate SIP returns?
When you invest in SIP, every installment is a new investment. So, the ideal way to measure SIP returns is to calculate XIRR, which is essentially the average annual return of each of your installments. If you want to calculate how much money you can make via SIPs over a certain period, you can download the SIP Calculator App.
Is SIP tax-free?
No, Mutual fund SIPs are not tax-free. If you sell your mutual fund units at a profit, you will need to pay tax on your gains (not the principal amount). How much tax you need to pay depends on the scheme in which you have invested and the period for which you held the mutual fund units before selling them.
Which SIP plan is best for 5 years?
Given the volatility in equities, you should look to invest in Equity Fund SIPs only for 7+ years. For 5 years, you can do SIP in Balanced Advantage Funds. As these funds invest in a mix of equity and debt, they dynamically move from one asset class to the other. They try to fall less during market corrections while capturing the market upside during rallies. You can look at some of the best BAFs on ET Money with their ranking.
How to stop SIP?
You can stop your SIP whenever you want. All you need to do is go to the investment platform through which you are investing and follow the instructions to cancel the SIP.
Can I withdraw SIP anytime?
The short answer is yes. In most schemes, you can withdraw your invested SIP amount whenever you want. The only exceptions are ELSS, Retirement Savings Fund, and Children Savings Fund. ELSS has a lock-in period of 3 years, while the remaining two have a lock-in period of 5 years. As every SIP installment is considered a fresh investment, you can only withdraw after the due lock-in period. Besides, you cannot withdraw anytime from close-ended funds.
Is SIP risk-free?
The short answer is no. Through SIPs, you are essentially investing in mutual fund schemes. So your investments can fluctuate with market volatility. In fact, if the market sees a steep fall, you may see negative returns on your SIPs. But the good thing is that historically SIPs in diversified equity funds have never given negative returns if someone has invested for more than 10 years.
Can I Start a SIP With a Small Amount of Money?
Yes, you can start a SIP with a small amount of money. One of the major advantages of the SIP is its flexibility, which allows you to start your investment with a very small amount. You can start your SIP with as low as Rs 100.
What Are the Charges Associated with SIP Investments?
When you invest in mutual funds via SIP, there are some charges that you will have to bear. Some of these charges are:
Expense Ratio: It represents the asset management expense charged by the fund houses for managing the mutual funds. It is charged as a percentage of AUM (assets under management).
Exit Load: It is the fee charged by the fund houses when you redeem your investments.
