What is Systematic Investment Plan (SIP) - Types of SIP, Features, Benefits

A Systematic Investment Plan, or an SIP, is a great way to safely invest in mutual funds. This type of investment method allows investors to be flexible and invest small amounts at fixed intervals.

In this article, we will share all about an SIP investment and how you can invest into one. 

What is SIP Investment?

SIP full form is Systematic Investment Plan. It is a concept and one of the methods of investing in mutual funds. It can be termed as an investment in a sip plan periodically with a certain amount of money in a disciplined manner. This offers an investor the flexibility to invest according to one’s financial goals and create long-term wealth by investing a small sum through a long tenure. Investors having regular cash flows or fixed income can go forward with doing SIP plans that meet their financial goals. Also, SIP is the best alternative to get into the habit of saving & investing regularly. Moreover, the benefits of compounding can do wonders in the long run. It also helps to avoid timing the market and is least affected by the market volatility on long-term investments due to its benefit of rupee cost averaging. 

Types OF Systematic Investment Plan

Systematic Investment Plans (SIPs) come in various types, each catering to different investment goals and preferences. Here’s a detailed look at the different types of SIPs:

1. Regular SIP

• Description: Involves investing a fixed amount at regular intervals, such as monthly or quarterly, into a mutual fund.
• Purpose: Suitable for investors who prefer a disciplined and consistent approach to building wealth over time.

2. Step-Up SIP

• Description: Allows investors to increase their SIP contributions at regular intervals, such as annually.
• Purpose: Ideal for those expecting their income to rise over time and who want to gradually increase their investment amount to potentially achieve higher returns.

3. Flexible SIP

• Description: Provides the flexibility to adjust the SIP amount as per the investor’s financial situation or market conditions.
• Purpose: Beneficial for investors who want the ability to change their investment amount based on their financial goals and market performance.

4. Perpetual SIP

• Description: This type of SIP continues indefinitely until the investor chooses to stop it.
• Purpose: Suitable for long-term investors who wish to keep their investments ongoing without setting a specific end date.

5. Trigger-Based SIP

• Description: Investments are made based on specific triggers, such as market conditions or changes in a particular index.
• Purpose: Ideal for investors who want their SIP investments to be automatically adjusted based on predefined market triggers.

6. Top-Up SIP

• Description: Allows investors to increase their SIP amount periodically or at predefined intervals.
• Purpose: Useful for investors who wish to contribute more as their financial situation improves or when they receive a bonus or extra income.

7. Dynamic SIP

• Description: Investment amounts vary based on market conditions or specific rules set by the investor, like investing more when markets are down and less when markets are up.
• Purpose: Aimed at optimizing investments by adjusting contributions according to market performance.

8. Daily SIP

• Description: Instead of monthly or quarterly investments, investors contribute daily amounts into a mutual fund.
• Purpose: Suitable for those who prefer frequent, smaller investments, allowing them to benefit from rupee cost averaging more frequently.

9. Weekly SIP

• Description: Investments are made on a weekly basis rather than monthly.
• Purpose: Ideal for investors who want to invest more frequently and benefit from market fluctuations on a shorter time frame.

10. Quarterly SIP

• Description: Contributions are made every three months instead of monthly.
• Purpose: Useful for investors who prefer to invest less frequently but still wish to maintain a disciplined approach.

Each type of SIP has its own advantages and suits different investment strategies and financial goals. Choosing the right type depends on individual preferences, financial goals, and market outlook.

How Does SIP Work?

Once you have applied for an SIP plan, a predetermined amount will be automatically debited from your bank account and invested in the mutual funds you've purchased at regular intervals. 

By the end of the day, you will be allocated the units of mutual funds depending on the NAV of your chosen mutual fund. 

New units will be added to your account, depending on the market rate, at every investment. So, the amount gets larger with every investment, and so do the returns. An investor can choose whether they want to receive the returns at SIP's maturity or at a periodic interval. 

Let's understand further with an example. 

Suppose that you want to invest a sum of ₹10 lakh in a mutual fund. Now, there are two different ways for you to make the investment. 

The first way is to make a one time payment of ₹10 lakh, also called a lump sum investment. Another way is to invest via a Systematic Investment Plan or SIP. 

To start an SIP, you need to decide an amount to invest regularly. Let's say you decide to invest ₹5000. In that case, ₹5000 will be deducted from your account and auto credited to the mutual fund at a fixed date of every month. This process will continue till the maturity of the SIP. 

Features of an SIP Investment

An SIP has numerous features that may attract a lot of new investors. Here are some of them listed below:

• Start Small: With an SIP plan, you can start your investment with as little as ₹500 per month and expect the small sum to grow into a large corpus over time. 
• Regular Investments: You can choose to invest regularly on either a weekly, monthly, or quarterly basis. 
• Top-Up Option: If you want to increase your SIP investment amount, there's a “top-up SIP” option that allows you to increase the SIP amount without canceling it. 
• Pause the SIP: If you are going through any financial hardships, you can always consider temporarily suspending your SIP for one to three months. 
• Flexible Investments: If you want to change your investment intervals, all you'll need to do is send an online request. 
• No Upper Limit: Investors can invest any amount they wish to, without having to worry about an upper limit. 
• Convenient Cancellation: In case you want to cancel your SIP plan, it can be easily done online or by contacting your Mutual Fund provider. 

Benefits of Investing in SIP

Here are all the benefits that you can avail by investing in an SIP:

• Become a Disciplined Investor

An SIP plan can be the best investment option for you if you do not know much about how the financial market works. With this investment method, you do not have to spend your time analyzing market movements. 

Additionally, since the money gets auto-deducted in an SIP, you can sit back and relax without worrying about making manual investments. Thus, become more regular and disciplined with your investments. 

• Rupee Cost Averaging Factor

With SIP, you can benefit from the rupee cost averaging factor. This way, since your money goes constantly for a longer period of time, rupee cost averaging can help you take advantage of market volatility. 

In simple words, the fixed amount you invest every month averages out the value of each unit. So, you can buy more units when the market is low and fewer units when the market is high, which lowers down your average cost per unit. 

• Leverage the Power of Compounding

SIP is a disciplined investment method where you constantly make new investments. The small amount that you invest every month grows to become a large corpus accumulated with the returns compounded over time. 

When to Invest in SIPs ?

SIP investment can be initiated anytime during the year with the ideal plan for the investor. An ideal SIP investment is the one that suits the goal of the investor in an apt way. Long-term objectives can be achieved by investing in equity-based funds for a longer horizon and short-term objectives can also be achieved by making a wise choice of funds across the categories of debt & hybrid funds as per requirements. Therefore, there must be a suitable time horizon within which an investor should initiate a SIP, and as it is said, the sooner the better.

How to Invest in SIP?

Investing in an SIP is a very simple and free process in many banks. Numerous banks offer convenient plans to their customers for automatic deposits into mutual fund schemes. 

Here is a detailed guided how you can invest in an SIP plan:

1. Get the Documents Ready

Ensure that you have the following documents handy:

• ID Proof (Aadhar Card) 
• PAN Card
• Address Proof
• Valid bank account details
• Passport or driver's license copy

Lastly, make sure that all your documents are compliant with the latest KYC norms set by the government. 

2. Complete Your KYC

Completing the KYC requirements are essential for any financial investment. You can easily get it completed at an authorized bank, post office issuing prepaid cards, or online. The application form will ask for your personal details and a clear declaration of your investment objectives. 

3. Register for an SIP

To register for an SIP, find a reputed Indian broker or financial advisor who can help you go through various investment plans considering your needs and risk tolerance. 

4. Choose an SIP Plan

Choosing the right SIP plan is important for good returns. Consider various factors such as your risk tolerance, desired units, and your investor profile. Before settling with an SIP plan, evaluate different plans and their features and benefits. 

5. Determine the Investment Amount

Decide the amount that you want to invest every month or week, depending on your financial goals and liquidity needs. This step will make sure that you stay disciplined with your investment approach. 

6. Select the SIP Date

Then, pick a date on which you want to make your monthly SIP investments. You can be flexible with picking your SIP date as well. 

7. Submit the Form

Lastly, start the SIP by submitting a form. You can do it through your online Demat account, or offline through your bank. 

Things to Consider Before Investing in SIP Mutual Fund

Before you make a commitment to an SIP investment plan, it’s important to consider a few factors, such as:

• Investment Tenure: Consider for how long you want to stay invested in an SIP plan while ensuring a balance with short-term liquidity needs and long-term financial objectives. 
• Fees & Taxes: Evaluate the total cost that comes with an SIP, such as management fees and taxes. Make sure that all these extra fees align with your finances. 
• Fund Selection: While you research to select an SIP mutual fund, consider the fund's historical performance, expense ratio, and the manager's expertise. 
• Investment Amount: Select the monthly investment amount as per your financial capacity, income, and expenses. 
• Regular Monitoring: Remember that even with an SIP, you are required to monitor the fund's performance periodically and adjust your investments to stay aligned. 
• Financial Goals: Assess the financial goals that you've set for yourself and question whether they align with your SIP plan. 
• Risk Tolerance: Lastly, know how much risk you can comfortably take and then plan how much to allocate among equity, debt, and hybrid SIPs accordingly. 

How to Choose a good sip to invest in ?

Fund House:

Before opting for a sip plan, having a glance at the reputation of the fund house is really important. The performance of the fund house will give an estimation to investors about how well the sip investment plans and returns are and how they has been in handling the adverse market scenarios without letting the investors lose money. 

Personal goals:

Investors’ personal vision and goals play a very important role in choosing the best mutual fund plan for a SIP. An investor can opt between equity funds, debt funds, and hybrid funds as per his financial position and feasibility. Also, factors like the amount to invest, tenure, etc also hold equal importance.

Duration of SIP:

This factor is important to consider from the view angle of risk, tax, and return. While making an investment, the investor should vouch for how the fund performed across different tenures in different conditions.

Asset Under Management (AUM):

AUM is considered to be an apt benchmark while opting for a fund. Nevertheless, it doesn’t indicate that the funds below a specific AUM are not good as the ideal AUM varies from category to category. 

Which SIP is best for beginners?

For beginners, SIPs in well-established, diversified mutual funds are often recommended. These funds typically offer a good balance of risk and return, making them suitable for those new to investing. Some of the best options include:

• Index Funds: These track major indices like the Nifty 50 or Sensex, providing broad market exposure with lower fees and less risk compared to actively managed funds.
• Large-Cap Equity Funds: Invest in large, well-established companies with stable performance, offering lower volatility compared to mid- or small-cap stocks.
• Balanced or Hybrid Funds: Combine equity and debt investments to provide a balanced risk-return profile, making them suitable for conservative investors.
• Mutual Fund Schemes from Reputed Fund Houses: Funds from established fund houses like HDFC, ICICI Prudential, or SBI often come with a track record of stable performance and good management.

Starting with these options can provide beginners with a solid foundation for building their investment portfolio, while also offering the potential for long-term growth.

Which platform is best for SIP?

When choosing a platform for SIP investments, consider factors like ease of use, variety of mutual funds, customer service, and additional features. Here are some of the best platforms for SIPs:

Direct Mutual Fund Platforms:

• Zfunds: India's fastest-growing mutual fund platform where you can talk with a Financial Expert to invest money without hassle. It provide you with free portfolio review in every 3 months and also 24*7 helpline support.
• Groww: Offers a wide range of mutual funds, a user-friendly interface, and transparent fee structures.
• Zerodha Coin: Provides access to a broad selection of mutual funds with low expense ratios and no commission charges.

Bank Platforms:

• HDFC Bank: Known for its wide range of mutual funds and a robust online platform for SIP investments.
• ICICI Bank: Offers a comprehensive selection of mutual funds and a seamless investment experience.

Investment Apps:

• ET Money: Provides a simple and intuitive interface with various mutual fund options and personalized recommendations.
• Paytm Money: Features a wide range of mutual funds, easy SIP setup, and competitive fees.

Mutual Fund Distributors:

• CAMS (Computer Age Management Services): Facilitates investments in a variety of mutual funds and offers comprehensive services.
• KFintech: Provides a broad array of mutual funds and efficient SIP management tools.

Each platform has its strengths, so choose one based on your specific needs, such as ease of use, customer support, and fund options.

Taxation of Mutual Funds

In SIPs, the taxation is different for debt mutual funds and equity-based mutual funds.

Here are the taxation rules:

On Debt-Oriented 

• The STCG(Short Term Capital Gains) are included in the income and taxed as per the applicable income tax slab to the investor.
• LTCGs on debt-oriented hybrid funds are taxed at the rate of 20% after indexation benefits.

For debt, LTCG is applicable when you hold the securities for more than 3 years and STCG is applicable when it is held for less than 3 years.

On Equity-Oriented

• STCG is taxed at 15%.
• LTCG of more than Rs. 1,00,000 are taxed at 10% (without indexation).

For equity, LTCG is applicable when you hold the securities for more than 1 year and STCG is applicable when it is held for less than 1 year.

Tax benefit on SIPs plan is only eligible for the investments made in ELSS (Equity Linked Savings Schemes). If the investors invest in government-approved tax saving schemes like ELSS, they can claim tax deductions of up to Rs.1.5 lakhs under Section 80C of the Income Tax Act.  

More Information:

RD vs SIP
What is Rupee Cost Averaging
SIP vs STP vs SWP
SIP vs Mutual Funds
Difference Between SIP and Lump Sum
Right Time to Start SIP in India

FAQs

Q. What is the SIP full form?

SIP full form is Systematic Investment Plan. It is a method of investing in mutual funds, allowing investors to contribute a fixed sum regularly, such as monthly or quarterly, rather than making a lump sum investment. 

Q. What is a SIP for? 

The primary purposes of Systematic Investment Plan (SIPs) are to:

• Promote Regular Savings: Encourages consistent saving habits by making small, manageable contributions over time.
• Reduce Market Risk: Mitigates the impact of market volatility through cost averaging, as investments are spread out over various market conditions.
• Build Long-Term Wealth: Facilitates gradual accumulation of wealth, leveraging the power of compounding over the long term.
• Accessibility: Makes investing in mutual funds accessible to individuals with different financial capabilities, starting with relatively small amounts.
• Convenience: Automates the investment process, making it hassle-free and easy to manage.

Q. Is SIP 100% safe? 

SIP (Systematic Investment Plan) is generally considered a safe and disciplined way to invest in mutual funds, as it helps average out the cost of investment over time and reduces the impact of market volatility. However, it is important to note that while SIPs mitigate some risks, they are not 100% risk-free. The safety of your investment depends on the underlying mutual fund's performance and market conditions. SIPs are a prudent strategy for long-term wealth creation, but investors should still carefully choose the funds they invest in and be aware of the inherent market risks.

Q. Is SIP a good investment?

Yes, SIP (Systematic Investment Plan) is considered a good investment strategy for several reasons:

• Disciplined Investment: SIPs encourage regular, disciplined investing, which helps build a substantial corpus over time.
• Rupee Cost Averaging: By investing a fixed amount at regular intervals, SIPs help average out the purchase cost of mutual fund units, reducing the impact of market volatility.
• Compounding Benefits: Regular investments benefit from the power of compounding, where the returns earned on investments also generate returns.
• Flexibility: SIPs offer flexibility in terms of investment amounts and durations, making them suitable for investors with varying financial capabilities and goals.
• Accessibility: SIPs allow investors to start with relatively small amounts, making mutual fund investments accessible to a broader range of people.

Overall, SIPs are a prudent approach for long-term wealth creation, especially for those seeking to invest systematically and reduce market timing risks.

Q. How does sip work? 

A Systematic Investment Plan (SIP) work in the way that a fixed amount gets debited from your bank account at regular intervals and credited to your mutual fund SIP. You can start a SIP once you've determined the best mutual fund, investment amount, and investment period. 

Q. Can I withdraw SIP anytime?

Yes, you can withdraw from a Systematic Investment Plan (SIP) at any time. SIP investments are flexible, allowing you to redeem your mutual fund units either partially or fully as needed. However, it's important to be aware of potential exit loads or penalties for early withdrawals, depending on the fund's specific terms and the duration of your investment. Additionally, redeeming your investments might impact your overall returns, especially if done during a market downturn. Always review the fund’s redemption policies and consult with a financial advisor if needed before making a withdrawal.

Q. What exactly is an SIP account?

An SIP account is a fund house arrangement that allows investors to invest a small amount of money in a mutual fund plan at regular intervals. Because you have to invest a defined amount at regular periods, it instills a constant feeling of financial discipline. 

Q. What is a systematic investment plan?

Systematic investment plan is the most comfortable way to invest in a mutual fund scheme. This type of investment allows you to accumulate your small investments at fixed regular investments over a long run. Depending on how often you want to invest, you can set your SIP on a weekly, monthly, quarterly, or half yearly basis. 

SIPs are open-ended investments and thus, you can end them whenever you wish to do so. You can also choose to pause your SIP in case of financial constraints. 

Q. What exactly is NAV in SIP?

NAV, or net asset value, is the price at which an investor can buy or sell mutual fund units. 

The NAV of most mutual funds is updated on a daily basis after business hours. All mutual fund trades happen only at the current NAV, meaning that the current NAV will be the cost of purchase each time you invest through an SIP installment. 

Q. What is the minimum amount to invest in an SIP?

The minimum amount that you need to invest in an SIP may depend on the type of Mutual Fund. Typically, the amount you are required to invest ranges between ₹100 to ₹500 per month. 

Q. What is a top-up SIP?

A Top-up SIP is an option offered by Mutual Fund companies for individuals who want to increase their monthly SIP investment amount within their existing SIP. This way, investors can increase their original investment amount by a percentage. 

Q. Why should you invest in SIP mutual funds?

By investing in an SIP mutual fund, investors can avail many benefits such as disciplined investing, rupee cost averaging, power of compounding, flexibility, and diversification. 

Additionally, with SIPs, you invest a small amount which reduces the impact of market volatility and beats inflation. It can also generate higher returns in the long run. 

Q. Which bank SIP is best?

Here are some of the best SIP plans in India:

Q. What is SIP investment?

An SIP investment is an open-ended investment plan that allows you to invest a small amount at regular investments over a course of time. You can cancel an SIP plan whenever you wish to do so. Thus, it’s a safer way to invest in mutual funds. 

Q. Is SIP better than FD?

Whether SIP is better than an FD depends on your risk tolerance, investment goals, and tenure. For instance, SIPs offer higher potential returns than an FD, but at a higher risk. On the other hand, an FD offers stability but lower returns.