A systematic investment plan (SIP) is a method of investing in mutual funds which allows investors to invest a fixed sum in a mutual fund scheme at fixed intervals. Under the SIP mode of investing, a fixed amount is deducted from the investor’s savings account on a daily/monthly/quarterly/semi-annually basis and is directed towards the chosen mutual fund scheme.
10 Best SIP Investments in 2018-19*:
|Fund Name||1 Year Returns||3 Year Returns||5 Year Returns|
|ICICI Prudential Bluechip Fund||-1.22%||12.02%||15.36%|
|DSP Tax Saver||-7.71%||11.40%||17.83%|
|Franklin India Equity Fund||-4.27%||8.75%||17.44%|
|ICICI Prudential Value Discovery Fund||0.62%||9.00%||20.88%|
|Axis Long Term Equity Fund||1.61%||10.40%||21.47%|
|Reliance Tax Saver (ELSS) Fund||-19.53%||6.74%||19.09%|
|DSP Equity Opportunities Fund||-8.44%||12.21%||17.10%|
|Motilal Oswal Long Term Equity Fund||-5.86%||14.44%||_|
|Aditya Birla Sun Life Pure Value Fund||-19.81%||10.94%||24.90%|
|HDFC Equity Fund||-3.01%||11.71%||17.13%|
*3 year/5 year returns are annualised. Data based on NAV of direct growth variant of schemes as on November 1, 2018.
You can read more the best SIP investments here.
Benefits of using SIP
- Small amount: SIPs allow investors to invest with amounts as low as Rs. 500 at regular intervals. This in turn reduces the financial risk associated with a lump sum investment.
- Less Risk: Mutual funds invest in equities and debt, the prices of which fluctuate on a day-to-day basis. Thus, with the same amount of money invested at regular intervals, your money would buy fewer units of the mutual fund when markets are up and more when they are down. Thus, an SIP enables you to lower the average cost of your investment and reduce the risk of your investment by spreading your purchase price over time. This is known as rupee cost averaging.
- Power of compounding: An 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.
- Automated Process: You can opt to make your SIP fully automatic. For this, you need to give a one-time mandate to your bank for making your SIP contributions and and your money will get invested in the scheme automatically at the periodic interval selected by you. This saves you from the trouble of filling forms and cheques or logging on digital platforms every time you make your SIP contribution.
Types of SIPs
- Top-up SIP: This SIP allows you to increase the SIP amount at regular intervals and take the 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 2018, you increase it to Rs 11,000 per month in 2019.
- 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 when your cash flows increase.
- Perpetual SIP: While making an 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 essentially an attempt to time the market.
3 SIP Investment Mistakes You Should Avoid
- Investing too small or too big amount: It is often observed that many investors invest a very small amount via an 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, may investors begin an SIP investment with considerably huge amounts. This approach must be avoided and huge sums must be invested once the investors has confidence about the performance of the fund.
- 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 an SIP investment also depends on the SIP time period. An SIP investment is capable of giving its maximum returns over a long tenure.
- Not increasing SIP amount with time: Investor often fail to increase the SIP amount with time. This must be done when you are confident about the fund’s performance.
SIP Investment Taxation
The tax on SIPs depends on whether the SIP is in an equity fund or a non-equity fund. You can read about the tax treatment of equity and non-equity mutual funds here. However what is distinct about SIPs in either equity or debt is that SIP investment is spread out into daily/monthly/quarterly/semi-annually installments.
As a result each installment has a different start date and completes one year to become long term (for equity funds) at a different date. For example an equity fund SIP that was started on 1st June 2018 and invested on the 1st of every month will complete one year for only the first installment on 1st June 2019. The second installment will complete one year on 1st July 2019 and so on. Hence if you sell your entire fund holding on 15th June 2019, only part of your investment will be long term (taxed at 10%) and most will be short term (taxed at 15%). The tax treatment is similar for SIPs in debt funds.
In order to be a successful investor, it is of paramount importance that investments be made in a systematic manner and this is where the SIP calculator provided by Paisabazaar.com can play a key role. Using a SIP calculator a prospective investor figure out how much his 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, using a SIP calculator helps the investor find out how much monthly investment is required.