What is SIP in Mutual Fund

What is SIP in Mutual funds?

SIP or Systematic Investment Plan is a way to invest a set amount of money in mutual funds at regular intervals, typically monthly. With even a modest sum, investors can take advantage of compound interest, spread out their costs, and reduce their exposure to market timing risks.

This article covers: 

What is SIP Investment?

The full form of SIP is Systematic Investment Plan is an affordable way to invest in mutual funds as it allows investors to start with a small amount of money, typically as low as Rs. 500 per month.

According to the data from the Association of Mutual Funds in India (AMFI), SIP investments have witnessed steady growth over the years. The total SIP inflows in mutual funds in January 2024 stood at over Rs. 11,000 crores, indicating the popularity of this investment method.

SIP Advantages and Disadvantages

Systematic Investment Plans (SIPs) offer investors a mix of advantages and disadvantages. A key benefit of SIPs is that they foster financial discipline by encouraging consistent allocations of funds towards long-term goals. However, a notable drawback is their potential incompatibility with short-term investment objectives, as the returns may necessitate a more extended timeframe to fully materialize.

Advantages of SIP Investment

  • One of the major advantages of SIP investment is that it helps investors to cultivate a disciplined approach to investment. As the investments are made at regular intervals, investors tend to stay invested for a longer period of time, helping them to accumulate wealth over time.
  • SIP investment helps investors to average out the cost of investment, reducing the impact of market volatility on their investments. This helps investors to earn better returns on their investments in the long run.
  • SIP investment offers flexibility to investors, allowing them to change or stop their investments at any time, depending on their financial needs and investment goals.
  • SIP investment allows investors to start with a small amount of money, making it an affordable way to invest in mutual funds. This also helps inculcate a savings habit among investors who may not have a large amount of money to invest initially.

Disadvantages of SIP Investment

  • One of the major disadvantages of SIP investment is that it may not be suitable for investors with short-term investment goals, as the returns may take time to materialize. Investors should have a long-term investment horizon to benefit from SIP investment.
  • SIP investment may not be suitable for investors who are looking for high returns in a short period of time. While SIP investment can help investors to build wealth over time, it may not provide high returns in the short term.
  • SIP investment does not guarantee returns, as the performance of mutual fund schemes is subject to market risks. Investors should be aware of the risks associated with mutual fund investments before investing in them.

How Does SIP Work?

With a Systematic Investment Plan (SIP), investors can easily and conveniently invest a fixed amount of money into a mutual fund on a periodic basis. As an investor, you won’t have to wait for the right time to make an investment because the process is straightforward and simple.  Here’s how it works:

  1. Choose a mutual fund: Investors first need to select a mutual fund that aligns with their financial goals and risk appetite. They can choose from a wide range of mutual funds offered by various asset management companies.
  1. Determine investment amount: Investors then need to decide on the amount they want to invest in the mutual fund through the SIP route. This amount can be as low as Rs. 500 per month.
  1. Set up the SIP: Once the mutual fund and investment amount have been decided, investors can set up the SIP through their online investment account or by submitting a physical application form.
  1. Frequency and duration: Investors need to select the frequency of their SIP investments, which can be monthly, quarterly, or bi-annually. The duration of the SIP can also be chosen as per the investor’s preference and can range from a few months to several years.
  1. Automatic deductions: The SIP investment amount is automatically deducted from the investor’s bank account at the chosen frequency and invested in the selected mutual fund.
  1. Tracking investments: Investors can track the performance of their SIP investments and make changes as per their financial goals and market conditions.

Example: Suppose an investor wants to invest Rs. 5,000 monthly in a mutual fund through the SIP route. They can select a mutual fund that aligns with their investment goals and risk appetite and set up a monthly SIP for a duration of 5 years. 

The SIP amount of Rs. 5,000 will be automatically deducted from their bank account every month and invested in the mutual fund. Over time, the investor can track the performance of their SIP investments and make changes as needed to achieve their financial goals.

Types of SIP 

Let’s take a look at the 5 types of SIP plans:

  1. Regular SIP
  2. Flexible SIP
  3. Top-Up SIP
  4. Trigger SIP
  5. Perpetual SIP

Regular SIP

Regular SIP is the most common type of SIP plan where investors can invest a fixed amount at regular intervals, usually monthly. The investment amount remains constant throughout the investment tenure, making it easier for investors to plan their investments. Regular SIP is an ideal investment option for investors who wish to invest a fixed amount every month toward their financial goals.

For instance, an investor can choose to invest Rs. 5,000 every month in a mutual fund scheme of their choice. This can be useful for those who want to start investing but cannot afford a lump sum investment.

Flexible SIP

Flexible SIP is an investment plan that allows investors to invest varying amounts at regular intervals. With flexible SIP, investors can change the investment amount based on their financial situation and investment goals. This type of SIP is suitable for investors who have fluctuating incomes or who want to increase or decrease their investment amount as per their financial situation.

For example, an investor can invest Rs. 5,000 one month and Rs. 7,000 the next, depending on their financial situation. This type of SIP can be useful for those with irregular incomes or who want more control over their investments.

Top-up SIP

Top-up SIP is a type of SIP plan where investors have the option to increase their investment amount periodically, usually on a yearly basis. This type of SIP plan helps investors to increase their investment amount over time, enabling them to reach their financial goals faster. Top-up SIP is an ideal investment option for investors who want to increase their investments based on their financial growth and changing investment goals.

For example, an investor can choose to increase their monthly investment amount by Rs. 1,000 every six months. This can help investors to increase their investment amounts gradually over time and make the most of compounding.

Trigger SIP

Trigger SIP is good for investors who can analyze the market situation and understand when to buy and sell a particular mutual fund. The trigger levels for taking a buy or sell decision can be taken in specific market conditions, such as a drop in the market index, or a change in the NAV of a scheme. Investors can switch their SIP or redeem once the selected event occurs. For example, an investor can choose to invest in a mutual fund scheme when the market index drops by a certain percentage or sell their holdings if the NAV decreases by a set trigger level. 

Perpetual SIP

Perpetual SIP is a type of SIP plan where investors can continue investing in mutual funds without any fixed investment tenure. The investor can continue investing in the mutual fund scheme until he/she decides to stop. This type of SIP plan is ideal for investors who want to invest in mutual funds for the long term without worrying about investment tenure.

In perpetual SIP, investors can continue their investments for an indefinite period of time, without having to set a specific end date. This can be useful for long-term investment goals, such as retirement planning or saving for a child’s education. For instance, an investor can choose to invest a fixed amount every month until they reach their retirement age.

Table Summary

Type of SIPInvestment AmountInvestment TenureIdeal for
Regular SIPFixedThroughoutInvestors with a fixed monthly budget
Flexible SIPVaryingThroughoutInvestors with fluctuating income
Top-up SIPIncrease periodicallyThroughoutInvestors who want to increase investment over time
Trigger SIPPredetermined target amountShort-term goals or lump sum investmentInvestors who wish to capitalize on market trends
Perpetual SIPFlexibleLong-term investmentInvestors who want to invest without worrying about tenure

Best SIPs to Invest 

When it comes to investing in SIPs, choosing the right fund can be crucial for maximizing your returns. Here are some of the best SIPs to invest in:

  • Mirae Asset Large Cap Fund: This fund has been one of the top performers in the large-cap category, with a return of 22.4% in the last year. Its top holdings include HDFC Bank, Reliance Industries, and ICICI Bank.
  • Axis Bluechip Fund: This fund has consistently outperformed the benchmark index in the large-cap category, with a return of 21.1% in the last year. Its top holdings include HDFC Bank, Bajaj Finance, and Reliance Industries.
  • SBI Small Cap Fund: This fund has performed exceptionally well in the small-cap category, with a return of 72.3% in the last year. Its top holdings include Dixon Technologies, Amber Enterprises, and Deepak Nitrite.
  • HDFC Hybrid Equity Fund: This fund is a good option for investors looking for a mix of equity and debt investments. It has given a return of 25.7% in the last year. Its top holdings include ICICI Bank, HDFC Bank, and Infosys.
  • Aditya Birla Sun Life Tax Relief 96: This fund is a tax-saving mutual fund and has given a return of 33.4% in the last year. Its top holdings include HDFC Bank, ICICI Bank, and Infosys.

How to Invest in SIP

Investing in a Systematic Investment Plan (SIP) is a simple and hassle-free process that can help you achieve your financial goals. Here’s a step-by-step guide on how to invest in SIP:

  • Choose a Fund: Before investing in SIP, you need to choose a fund that aligns with your investment goals, risk appetite, and investment horizon. You can research mutual funds and select the one that fits your criteria.
  • KYC: Before you can start investing in SIP, you need to complete your KYC (Know Your Customer) formalities. This includes providing your identity and address proof and other necessary documents required by the AMC.
  • Choose Investment Amount and Frequency: After completing the KYC formalities, you need to decide the investment amount and frequency. You can start investing in SIP for as low as Rs. 500 per month. You can also choose the frequency of investment, such as monthly, quarterly, or annually.
  • Set up a Bank Mandate: To invest in SIP, you must set up a bank mandate with the AMC. This will allow AMC to automatically debit your bank account on the chosen date and frequency.
  • Monitor Your Investment: Once you have invested in SIP, it’s essential to monitor your investment regularly. You can track the performance of your fund and make changes to your investment strategy based on the market conditions.

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What is SIP in Mutual funds- Quick Summary

  • Types of SIPs include regular, flexible, top-up, trigger, and perpetual SIPs, and each of them have its own unique sets of characteristics.
  • SIP in mutual funds is a way of investing small amounts systematically in a periodic manner. 
  • SIP investment allows you to invest regularly in mutual funds without having to worry about the time period or the investment amount. You can start investing with just Rs. 500. 
  • SIP offers benefits such as rupee-cost averaging, disciplined investing, and flexibility. However, it also has limitations such as lower returns and longer investment duration.
  • SIP works by investing a fixed amount at regular intervals in a selected mutual fund and your money will get compounded during the entire investment period offering you a handsome return on investment.
  • Regular SIP involves investing a fixed amount at regular intervals, flexible SIP allows you to change the investment amount or frequency, top-up SIP lets you increase the SIP amount at regular intervals and trigger SIP allows you to invest based on market conditions, while perpetual SIP allows you to invest indefinitely.
  • The best SIP to invest depends on your investment objectives and risk appetite.
  • You can invest in SIPs online or offline through various channels such as mutual fund websites, brokers, and mobile applications.

What is SIP in Mutual funds- Frequently Asked Questions

1. What is SIP in mutual fund?

SIP (Systematic Investment Plan) is a method of investing in mutual funds where investors can invest a fixed amount regularly at predetermined intervals, providing a disciplined approach to investing.

2. Which is better: SIP or FD?

SIP can be a better option than FD if we consider tax benefits, diversification, return on investment, etc. However, comparing SIP and FD as investment options is subjective and depend on individual financial goals, risk appetite, and investment horizon.

3. Can I withdraw SIP anytime?

Yes, you can withdraw from your SIP investment at any time, but it is recommended to stay invested for a longer duration to reap the benefits of compounding.

4. Is SIP good for beginners?

Yes, SIP is a good option for beginners as it offers a disciplined approach to investing, helps create a habit of saving and investing, and reduces the impact of market volatility on investments.

5. Is SIP tax-free?

SIPs are not tax-free, but the returns earned from SIP investments are tax-efficient. However, investments of up to Rs. 1.5 lakh in equity-based SIPs are eligible for tax benefits under Section 80C of the Income Tax Act.

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