A Systematic Investment Plan (SIP) is an alternative to the traditional lump sum mode of investment. Under a SIP, a certain amount is deposited in a mutual fund scheme at periodic intervals. A SIP helps an investor to benefit from the power of compounding while keeping the periodic investment requirement light on the pocket as a SIP can be started with an amount as low as Rs. 500.
Best SIP Plans in 2019-20:
|Fund Name||1 Year Returns||3 Year Returns||5 Year Returns|
|ICICI Prudential Bluechip Fund||11.20%||12.38%||10.15|
|DSP Tax Saver||20.34%||11.87%||12.37%|
|Franklin India Equity Fund||5.65%||7.52%||8.93%|
|ICICI Prudential Value Discovery Fund||0.67%||6.10%||7.70%|
|Axis Long Term Equity Fund||21.56%||15.84%||13.66%|
|Nippon India Tax Saver (ELSS) Fund||3.67%||4.01%||5.16%|
|DSP Equity Opportunities Fund||15.76%||10.92%||11.94%|
|Motilal Oswal Long Term Equity Fund||16.31%||13.35%||–|
|Aditya Birla Sun Life Pure Value Fund||-7.06%||1.83%||6.98%|
|HDFC Equity Fund||9.81%||11.38%||8.27%|
*3 year/5 year returns are annualised. Data based on the NAV of direct-growth variant of schemes as on November 08, 2019.
Also Read: Best Mutual Fund investments for 2019 here.
Benefits of Using SIP
Small amount: SIPs allow investors to invest with amounts as low as Rs. 500 at regular intervals. This helps them to invest without any financial burden as well as reduces the financial risk associated with lump sum investments.
- Less Risk: Mutual funds invest in market-linked instruments (equities and debt) and thus they carry a degree of risk with them. However, under the SIP mode of investment this market risk gets reduced as units of a mutual fund scheme are bought periodically. At periodic intervals when markets are up the invested SIP amount buys fewer units of a fund and vice versa. Thus, a SIP enables you to lower the average cost of your investment and reduce the risk of your investment by spreading the purchase price over time. This is known as rupee cost averaging.
- Power of compounding: A SIP enables you to regularly increase your investment amount by a fixed amount and get the benefit of compounding as you earn returns on the returns generated by your investment. This is known as power of compounding.
Automated Process: One of the best features of a SIP is that it can be made automatic. For this, an investor needs to give a one-time mandate to his/her bank after which the SIP contributions will be automatically deducted from his/her bank account and invested in the mutual fund scheme automatically at the selected periodic intervals. This saves one from the trouble of filling forms and cheques or logging on digital platforms for every SIP contribution.
Types of SIPs
- Top-up SIP: This SIP allows you to increase the SIP amount at regular intervals and take advantage of a well-performing mutual fund scheme by increasing your investment amount. For example, if your SIP is Rs 10,000 per month in June 2019, you can increase it to any amount, say Rs 11,000 per month in July 2019 or any other succeeding month under Top-up SIP.
- Flexible SIP: This SIP allows you to increase or decrease the SIP amount as per your disposable income. Thus, with this SIP, you can decrease or skip the payment of a few installments when there is a cash crunch. Similarly, this SIP also allows you to increase the SIP amount during an increase in cash inflows.
- Perpetual SIP: While making a SIP investment, investors have a choice to provide the end date of the SIP. If the investor chooses to not given an end date then it is a perpetual SIP. This allows you to end your SIP at the time of your choice or when your financial goal is achieved since there is no fixed tenure attached to the SIP.
- Trigger SIP: This SIP is suitable for investors who have knowledge and awareness of financial markets. It allows you to set either an index level, NAV or a particular date as the start date of the SIP. However, it is not advisable to invest via a trigger SIP as it is essentially an attempt to time the market which is nearly impossible to do with 100% accuracy.
3 SIP Investment Mistakes You Should Avoid
Be mindful of the following mistakes while making a SIP mutual fund investment so that you can create and appreciate your wealth to maximum levels:
- Investing too small or too big amount: It is often observed that many investors invest a very small amount via a SIP. It is fine to begin with a small amount in the beginning, however, the investment amount should be gradually increased to reap in substantial gains. Similarly, many investors begin a SIP investment with considerably huge amounts. This approach must be avoided and huge sums must be invested once the investor has enough confidence about the performance of the fund. An investor should always try to invest an amount optimal according to their financial position and investment objectives.
- Not investing for long term: Investors often withdraw their investment as soon as it starts giving a decent return, failing to realise that the value of a SIP investment also depends on the SIP time period. A SIP investment is capable of giving its maximum returns over a long tenure. Thus, it is advisable to remain invested for at least 3-5 years in order to earn some real good returns.
- Not increasing SIP amount with time: Another mistake which investors often end up committing is they fail to increase the SIP amount with time. With an increase in disposable income, an investor should increase the SIP contribution in order to continue receiving inflation-beating returns. This must be done when an investor is confident about the fund’s performance.
SIP Investment Taxation
The tax on SIPs depends on the nature of the mutual fund scheme – equity or non-equity. You can read about the tax treatment of equity and non-equity mutual funds here.
However, what is distinct about SIP mutual fund investment is that the SIP investment is spread out into daily/monthly/quarterly/semi-annually installments. Thus, each installment has a different start date and completes 1 year /3 year (equity/debt) to become long term at a different date.
For example, a monthly equity fund SIP that was started on June 01, 2018 will complete 1 year for the first installment only on June 01, 2019. The second installment will get completed a year after on July 01, 2019 and so on. Hence, if you sell your entire mutual fund holding on June 15, 2019, only part of your investment will be long term (taxed at 10%) and the remaining investment will be short term (taxed at 15%).
In order to be a successful investor, it is paramount that investments are made in a systematic manner and this is where the SIP calculator provided by Paisabazaar.com can play a key role. A prospective investor can use a SIP calculator to figure out how much his/her investment will grow at the end of a specific tenure for a specific amount. Alternately, if the investor has a fixed goal in mind such as a corpus for retirement or buying a house, a SIP calculator can help him/her find out how much monthly investment is required in order to achieve that corpus timely.
|Tax Saver Mutual Funds||Mutual Funds||Sip Calculator|
Q. What is Systematic Investment Plan (SIP)?
A. SIP or Systematic Investment Plan invests a fixed amount each month in a mutual fund. It averages out your purchase price and protects you from the risk of investing a lump sum during a market high. If the market falls after your SIP installment, you can accumulate more mutual fund units in the next installment and so on. As a result, when the market recovers you will get a higher return than a lump sum investment.
Q. How Does SIP Work?
A. A systematic investment plan is typically a monthly investment but it can also be weekly, monthly or quarterly in nature. Investments can be made at various intervals according to your preference.
Q. How To Set Up SIP?
A. In order to set up a SIP, you fill up a SIP form and a bank mandate. With online platforms like Paisabazaar, you can complete both these steps online in a matter of minutes by filling in your KYC details such as Aadhar and your bank details for debits.
The amount deducted is then invested in the mutual fund scheme of your choice according to the applicable NAV.
Q. How is NAV Calculated?
A. For example, let’s say you set up a Rs. 1,000 monthly SIP plan for 12 months starting from the 7th of the month. Every month around the same date, your bank account will show a Rs. 1,000 deduction towards investment in the mutual fund of your choice.
The case of applicable NAV is based on whether the 7th is a day when the markets are open or closed. If the 7th is a working day for the stock market, the applicable NAV for your SIP installment would be the chosen mutual fund’s NAV at the close of markets on the 7th. If 7th is a holiday such as a Saturday, Sunday or Public Holiday, then the applicable NAV would be the one obtained at the end of the next working day.