SIP or Systematic Investment Plan – Concept, Safety, Benefits, Investment Process & more

With the aid of the internet, all have acquired information about SIP and investing in mutual funds. This is likely to make complicated things a piece of cake.

This article provides answers to questions such as, when to start mutual funds, how one can invest, what are the ways, and many more.

For starting your investment you do not really need to grasp every little knowledge about the market, because the fund managers monitor and invest in mutual funds after researching the market.

All you need is, a fixed amount of money to invest and time to check your returns timely.

To all your mutual fund queries, a Systematic Investment Plan, commonly called SIP is the answer.

About SIP or Systematic Investment Plan

A Systematic Investment Plan can become your true best friend in the phase of saving. SIP works on the principle of investing a little amount regularly and attaining more than invested money.

Under this, you need to invest an amount regularly. SIP offers numerous advantages to an investor.

With SIP, you are free to invest any amount on a regular interval. You can invest your money weekly, monthly, or annually.

This depends on you, but consistency in investing is a must. In the long term, you can build a huge amount of wealth.

The money which you invested is used to buy units of your desired mutual fund.

The main benefit of regular SIP is that the fund manager monitors the investment and helps you to achieve good returns.

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How to Start SIP Online?

With the advent of technology in online platforms, we can work on SIP easily online. You will require following a few steps to open your account.

1st Step – Fill up the Form provided below with details like Name, Mobile No. & City

2nd Step – You will receive a Call from a Mutual Fund Distributor or an AMC

3rd Step – Open a Demat Account or Mutual Fund Account Online with a Mutual Fund Distributor or AMC

4th Step – Upload all the required Documents Online such as a PAN card, address proof, passport size photograph, cheque, etc.

5th Step – You will receive your ID & Password

6th Step – Download the App or Login via Website

7th Step – Decide on the plan and money to invest beforehand after doing research

8th Step – You have to choose a payment mode and date so that you can invest without any hassles

Here is the Step by Step process to Invest in Online SIP.

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Why Invest in SIP?

Here are the various benefits of Systematic Investment Plan –

Financial Discipline

One of the biggest benefits of SIP investment is financial discipline. This is because as an investor a fixed amount of money will be deducted from one’s bank account after fixed intervals.

This deduction happens regardless of the market conditions or change in the mind of the investor. This helps in maintaining regular investments in the long term.

Low market conditions often tempt investors to pull out their money. However, in SIP the investor must follow financial discipline.

SIP ensures that the investment from the investor doesn’t stop and this is exactly what helps in earning adequate financial returns in the long term to meet the goals of the investor.

SIP investment makes investors committed and disciplined towards financial goals and investments.

Affordability

Another huge benefit of SIP investment is affordability. One does not require a lot of money to start a SIP Investment. The instalment can be as low as INR 500.

If the investor’s financial capability increases overtime then the investor can choose to increase the amount of money that he invests periodically.

Moreover, the fact that one can choose daily, weekly, monthly, quarterly, or partial annual instalments is also beneficial.

This enables the investor to choose the right intervals and the right amount of money according to the capability and willingness.

Moreover, because the investor has to give away a sum in regular intervals, the investor also develops a habit of saving which is great in the long run.

Compounding Effect

SIP investments involve something that we know as the compounding effect. This means that the returns we gain from the investment are something we can reinvest into the scheme.

This helps in earning a higher corpus over time. We can have the full benefits of compounding by early investment. Early investment helps in ensuring a good number of years to grow the capital.

Even if the principal amount is less, the returns from the same also earn returns and therefore, the total returns keep increasing over time.

More the time given to the compounding effect greater will be the returns. It is important to be patient with investment to not lose on potential financial gains.

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Rupee Cost Averaging

Rupee Cost averaging is another huge benefit of investment. This means that when the net asset value is high then investors’ instalment amount can acquire fewer units.

Similarly when the net asset value is low, then the instalment amount can acquire more units. This is the reason why the average cost of the total holdings reduces as the number of instalments increase.

This helps in earning higher profits on the principal amount after giving the investor an increased SIP rate of return.

From investor’s, perspective SIP is of a huge benefit as they facilitate rupee cost averaging to buy securities.

It happens when the market is low or down and sell the same when the market is high and therefore earn profits.

Long-Term Gains

Because of rupee cost averaging and compounding provide long term gains. With the right scheme, one can earn adequate financial returns through investment.

Even though an investor has the option to discontinue the scheme at any given point of time it is best to leave it untouched until maturity, because a lot of potential returns can be lost if the scheme is discontinued.

It is important to be patient to reap the full benefits of SIP in the long run.

Flexibility

Investments are for long term gains. It is best to let schemes complete their maturity.

However, the investor also has the opportunity to discontinue the SIP investment as and when required.

The fact that the investor can increase or decrease the amount of money that is regularly deducted in it makes it even more flexible and convenient for the investor.

Convenience

SIP investment is an extremely convenient way to invest. One can invest in SIP through both online and offline modes through banking and financial service providers.

The affordability of SIP makes it a great choice for beginners. The flexibility that SIP offers makes it even more convenient for investors who do not have a balanced financial stability throughout.

Even for investors who do not have the time to keep a check on market ups and downs, investment is a great choice.

It helps in a regular investment from the investor’s side even when the market is too low and this helps in earning profits in the long run conveniently.

Tax Benefits on SIP

SIP and mutual funds are connected to one another. If you want to invest in mutual funds then there are two ways of doing so, SIP and lump sum.

SIP is when you invest a little amount of money in mutual funds and regularly whereas lump sum investment is one where you invest all the money at once.

Therefore, it means that SIP is a way that is used to invest in mutual funds.

Are all SIP Tax-Free

In recent years, SIP has gained huge popularity among investors of all age groups. SIP is seen as wealth creation for every kind of investor. But the question here is – are all SIP tax free?

Well, for this you need to understand the viewpoint of the purchase and sale side of the transaction of equity and debt mutual fund SIP.

Tax on SIP on equity Funds

For the Equity Linked Savings Scheme (ELSS) there is a unique thing. This fund is a tax saving fund which is compulsory locked for 3 years. It is a very worthwhile tax saving scheme.

The tax process here is similar to other equity funds where the gains are STCG if the funds are held for less than 1 year. These are captive to gain tax of 15%.

LTCG, if the funds are held for more than 1 year. These are captive to gain tax of 10% over Rs.1 lakh.

The tax period is valid from the date of the SIP. SIPs from the financial period of April to March are eligible for a deduction of up to Rs.1,50,000 from the entire revenue.

This tax solution of equity funds will also be applied to arbitrage funds as well as balanced funds, since these are dealt with equity funds for tax treatment due to 65% extra equity component.

Tax on SIP on debt and non-equity funds

In the case of non-equity funds of SIP, it will pursue the FIFO (First In First Out) method in the sale of units of SIP. Here, 3 years is a short term capital gain, and also the tax is at its peak.

If the holding is for more than 3 years then we consider it as long-term capital gains and it will also be taxed at a rate of 10% or 20% with the benefit of indexation.

Indexation attracts investors. Indexation helps in lessening the cost. This applies only to long term gains.

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How Safe is SIP?

We should plan a Systematic Investment Plan for the long term because it will generate good returns by default in long term.

The safety of investing in mutual funds via SIP depends on several parameters. You must start investing early if you want to get returns at an early age.

Moreover, you should not make payouts because it will reduce the compounding effect. We can say that “SIP” will work out well in the long run. It can be so if you manage the risks properly.

Can I discontinue an SIP?

An investor can stop the SIP anytime. You just need to fill a form of SIP stoppage.

If your bank account doesn’t have sufficient money to invest in SPI, the fund house can automatically stop your SIP after 3-5 months.

How to Increase or Decrease SIP Amount?

SIP involves investing a fixed amount of money monthly or even weekly according to their present financial state.

The financial condition of an investor tends to change every year and thus, one would desire to increase their monthly investment amount in SIP. It is important to increase the amount to get more returns.

Previously, only a few fund houses offered an increase or decrease facility in SIP. But now, most of the fund houses provide this capability.

Increasing the amount is possible but reducing the investment money is not. SIP top up or SIP plus is one way of increasing investment money.

This is a method which many mutual funds provide. If you want to decrease your investment money, you will need to cancel the prevailing SIP and then apply to a new SIP with a reduced amount.

Why Choose SIP over RD?

There’s a lot of confusion among investors on choosing SIP or RD for their investment. Based on returns, it can seem that SIP always gives higher returns than RD.

The mutual fund you are investing in is the main parameter of getting returns in SIP. In RD, the rate of returns is permanent but in SIP there is always a risk.

SIP in equity mutual funds are of high risk and debt mutual funds are comparatively of low risk. The debt funds will give better returns than RD. Thus, choosing SIP over RD is always a yes.

How to Choose SIP Investment?

Investing in mutual funds via SIP is a great start. Before investing you must acquire every inch of knowledge about the available SIP mutual funds.

The choice of or choosing a SIP to invest totally depends upon your financial condition and your needs.

If you want to take a low or moderate risk on your investments then you can choose large cap mutual funds.

On the other hand, if you are ready to take high risk, then small and mid cap mutual funds are good.

SIP or Systematic Investment Plan – Conclusion

SIP has become the most popular way of investing in mutual funds in recent times.

With SIP, you can accomplish all your financial intents, without actually disturbing your present financial condition.

The technique of investing in SIP is simple. Just have an effective tool, select the fund in which you want to invest, and start investing money every month.

You can start an investment in SIP with amount as low as Rs.500. If you have just started then the best way to invest in mutual funds is through SIP.

It not only lessens the pressure of investing but also gives stunning returns after a certain period.

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