Systematic Investment Plan (SIP) allows you to invest small amounts periodically in the mutual funds of your choice.
What is the meaning of SIP?
The full form of SIP is Systematic Investment Plan. It is a type of investment made in mutual funds. In SIP, the investment of fixed amounts is made at regular intervals of time. The period can vary from months, quarters, to semi-annually and so on.
Hence large amounts of savings can be broken down into smaller chunks and invested periodically. Here you don’t need to time the market to start investing. Marketing timing can be risky if you don’t choose the right phase to invest in. This is why SIP eliminates the Unpredictability aspect of the market.
The Power of Compounding
The Compounding in SIP refers to the profits earned from the investments in the form of ‘Interest’. The longer you invest in SIP, the better it is. SIP calculates the Interest in the compounding formula. Hence the compounded interests form the SIP earnings.
- 5 Years = 30,000 ₹
- 10 Years = 60,000 ₹
- 15 Years = 90,000 ₹
What are the types of SIP?
SIP lets you have a disciplined approach to investing. To get good returns, you must choose the type of SIP plan that is right for you. So let’s take a look at the various types of SIP plans available in India.
In case your invested mutual fund is doing well and you want to increase the amount you are paying, then many fund houses provide an option to top up your initial amount invested. Meaning Top-up SIPs allow you to have greater flexibility to increase your recurring investments whenever your income permits you to do so.
Investors with good investing experience & knowledge go for a trigger SIP because of the market volatility. A Trigger SIP allows you to set the start date for SIP and switch plans once the selected event occurs. This may be linked to a favorable market event or capital appreciation or depreciation. New investors who are still learning should try to refrain from such SIP plans.
At the time of starting a SIP, you choose its tenor. But if you don’t specify a maturity date, then it automatically becomes a perpetual SIP until you mention it to the mutual fund house. Meaning Perpetual SIP generally targets the long-term goals of the investor.
In Flexible SIP, you can alter the amount you want to invest every month. In case of an irregular cash flow, you can ask your fund house to pause your payments. Such SIPs allow the investors to increase or decrease their installment amount depending on their financial situation.
How much to invest in SIP?
If you wish to get robust SIP returns, you should consider investing at least 40% to 50% of your income. But you need to be patient as it will take up a considerable amount of time. Also, the risks associated and volatility of the market should be taken into account.
This is why long-term SIP plans are more preferable since they will eliminate the market irregularities and their impact. Moreover, to get the benefit of compounding interest, you should keep your investments going for a longer period. And in case you are a beginner and want to test the waters before making any big commitments, you can start with a SIP as low as ₹500.
What are the Eligibility Requirements for SIP?
The eligibility requirements for SIP is as follows:-
- The person should be 18 years of age or above
- He/she can be an Indian Resident, Person of Indian Origin, or Non-Resident Indian
- A Bank Account
- KYC Compliance
- Essential Documents like PAN Card & Address Proof
What are the Advantages of SIP?
SIP comes with a lot of benefits for its investors. Some of them are:-
- The investments are very convenient and easy to track
- SIP helps to set your Investment Goals
- You can start investing with Small Amounts
- Compounding Interest offers a higher ROI
- Rupee Cost Averaging
- Systematic Investment at Regular Intervals
- SIP can be started at a young age
How to Start Investing in SIP Online?
Since SIP follows a planned approach, a predetermined amount of money will be auto-debited from your bank account and will be invested in the mutual fund selected by you. The Steps to starting a SIP online are:-
- Keep the required documents ready: PAN Card, Address Proof, Passport size Photograph & a Cheque Book.
- Complete the process of KYC with the Mutual Fund House of your choice.
- Register with the selected Mutual Fund House Website.
- Start your Online Transactions after creating your Username and Password.
FAQs on SIP (Frequently Asked Questions)
A systematic Investment Plan (SIP) is a type of mutual fund investment in which a fixed amount of money is invested every month.
SIP is a simple and cost-effective method of investing in mutual funds. You can invest small amounts at regular intervals with low risks.
SIP is only a method of investment and not the investment itself. Hence the risk factor will depend on the type of funds you choose to invest in.
Yes, SIP investments can be made for a short period. But if you wish to earn robust interests, you should consider long-term SIP plans.
There is no correct answer to this. You can invest as low as ₹ 500 or as high as you wish to.
Yes, it is possible to miss your payment. Fund Houses give you an option to pause your payments without deactivating your account.
The best thing about SIP is that you don’t have to wait for the market to be perfect. You can simply choose a date and start investing regularly. Automate the process to make the investments easier.
Yes, after the term is completed you will have the option to renew your SIP.
Yes, SIP investments made in ELSS (Equity Linked Saving Schemes) can enable you to get tax deductions of ₹ 1.5L under Section 80C of the Income Tax Act.