What Is SIP in Mutual Funds?
A Systematic Investment Plan (SIP) is a method of investing in mutual funds where an investor opts for a mutual fund scheme and invests in it at fixed intervals. A SIP investment plan works by investing a small amount of money over time rather than investing a one-time huge amount that could result in higher returns.How Does a SIP Work?
Once you opt into a systematic investment plan, the amount will be automatically debited from your bank account and reinvested in a mutual fund you purchase at some predetermined time interval. By the end of the day, you will be allocated units of your mutual fund that depend on its net asset value. With every investment into an SIP plan in India, any additional units will be added to your account as per the market rate. With every investment that is made, the amount that you reinvest will be larger in addition to any of the returns that you see on those investments. The investor decides whether or not to receive the returns at the end of the SIP’s tenure or any periodic intervals.
Understand SIP Through an Illustrative Example Below
Assume that you want to invest in a mutual fund of your choice. Accordingly, you set aside a sum of ₹1 lakh to invest in the same. There are two ways in which you can choose to make this investment. You can either make a one-time payment of ₹1 lakh in the mutual fund of your choice, which is known as a lump sum investment. Alternatively, you can choose to invest using an SIP. The steps will be as follows: Begin by setting the amount you wish to invest via your SIP each month. Let’s assume you choose ₹500 and the current Net Asset value (NAV) is ₹100, so you will be allotted 5 units of the fund.| Month | Investment amount (₹) | NAV | Units allotted | Total units |
| 0 | 500 | 100 | 5 | 5 |
| 1 | 500 | 125 | 4 | 5 + 4 = 9 |
| 2 | 500 | 100 | 5 | 9 + 5 = 14 |
| 3 | 500 | 200 | 2.5 | 14 + 2.5 = 16.5 |
Types of Systematic Investment Plans
Below are the different kinds of systematic investment plans you can consider investing in:- Top-up SIP: This kind of systematic investment plan enables you to increase your investment amount periodically while also giving you the flexibility to invest more when you have a higher income that can be invested. This type of SIP also helps one make the most out of their investments by investing in the best as well as the most high-performing funds at regular intervals.
- Flexible SIP: As suggested by its name, this type of systematic investment plan carries the flexibility of the amount you want to invest in. The amount to be invested as per an investor’s cash flow and needs or preferences can be increased or decreased.
- Perpetual SIP: This type of SIP Plan enables you to carry out your investments without any end to the mandate date. Generally, a systematic investment plan carries an end date after one year, three years, or five years of investing. Hence, the investor has the freedom to withdraw the amount that is invested whether or not he wishes to invest in accordance with his financial goals.
Benefits of SIP Investing
Here are some of the several benefits of investing in an SIP over a lump sum investment.- Makes you a more disciplined investor: In case you do not possess superior financial knowledge about the way in which the way market moves, an SIP can make the ideal investment option. You need not spend your time analysing market movements to find the right time to invest in something. With an SIP, your money is automatically deducted from your linked bank account, and it goes towards your mutual funds.
- Rupee cost averaging: One of the main advantages of SIPs is rupee cost averaging. Since the amount you invest remains constant for a longer time period, with rupee cost averaging, you can make the most of market volatility. The fixed amount that you choose to invest implies that your SIP will average out the value of each unit. Hence, you can choose to buy more units once the market is low and opt for lesser units when the market is high. Ultimately, this will lower your average cost per unit.
- Power of Compounding: SIPs allow the small amount you invest on a daily basis to grow into a large corpus as a sum of your contribution with returns that have compounded over the years. The power of compounding without the hassle of having to invest a lump sum amount gives SIPs a unique advantage over standard investment options.
When To Invest in SIP?
Investing in SIPs can be a strategic decision that aligns with your financial goals and risk tolerance. It's essential to consider your investment horizon and the purpose of the investment. SIPs are well-suited for individuals with a long-term investment horizon who want to benefit from the power of compounding. If you have specific financial goals like buying a house, funding your child's education, or planning for retirement, starting a SIP early allows you to accumulate wealth gradually over time. Additionally, market conditions should not be the sole determinant for starting an SIP. Since SIPs involve regular and disciplined investing, they help smooth out the impact of market volatility through rupee-cost averaging. By consistently investing a fixed amount, you buy more units when prices are low and fewer units when prices are high. This systematic approach reduces the impact of short-term market fluctuations on your overall investment and can potentially lead to better returns over the long run.How To Choose a Good Mutual Fund for SIP?
The answer to this question lies in identifying why you are investing and what the goal is. Say you have a long-term goal; you can choose a mutual fund SIP that allows you to invest over the long term. A SIP to fulfil goals such as getting a home renovation done or going on a vacation would be one that offers a short-term investment horizon. You could also look at the fund’s expense ratio before you opt for a SIP. The expense ratio is the annual charges in percentage that are needed to manage or operate your investment portfolio. This can vary from fund to fund, with ceilings mandated by SEBI for equity and debt schemes and on the basis of net assets. It is important to look at the fund philosophy, investment horizon and your own goals while choosing a good mutual fund for SIP investment. Also, rather than focusing on a nice mutual fund for SIP, focus on what fund aligns with your investment principles and timeframe. No best fund suits everyone; there is only what is best for you.Best Performing Mutual Funds
| Name | AUM (₹ in crore) | Expense Ratio | CAGR 3Y (%) | CAGR 5Y (%) |
| ICICI Pru Overnight Fund | 10,098.72 | 0.1 | 125.88 | 65.97 |
| Quant Small Cap Fund | 11,206.76 | 0.77 | 46.61 | 33.74 |
| Bank of India Small Cap Fund | 819.51 | 0.87 | 35.54 | 32.60 |
| Quant Infrastructure Fund | 1,130.39 | 0.77 | 41.92 | 32.04 |
| Quant ELSS Tax Saver Fund | 4,956.53 | 0.76 | 35.01 | 30.89 |
| Nippon India Small Cap Fund | 37,319.33 | 0.69 | 41.96 | 29.65 |
| Quant Mid Cap Fund | 3,267.99 | 0.76 | 36.04 | 29.08 |
| Axis Small Cap Fund | 17,915.66 | 0.52 | 31.55 | 27.98 |
| Quant Flexi Cap Fund | 2,162.68 | 0.77 | 32.65 | 27.93 |
| Tata Small Cap Fund | 6,345.75 | 0.3 | 37.86 | 27.87 |
How To Invest in SIP With Angel One?
You can easily start a Mutual Fund SIP on the Angel One app by taking the following steps:- Go to the Home page and click on ‘Mutual Funds’.
- Choose the Fund that you want to invest in from the section titled ‘Discover Mutual Funds’. You can start your search by clicking on ‘EXPLORE ALL FUNDS’. You can also narrow down your search by clicking on the categories of funds given.
- Once you have gone through the details of a mutual fund and chosen it, click on ‘INVEST’.
- Choose the SIP option and enter the monthly amount and date, i.e. the day of the month when the SIP payments will be made from your account.
- Choose the mode of payment, for example, UPI.
- Click on ‘START SIP’ to start the SIP process.
- You can choose to make your first SIP payment right away as well by checking the box next to ‘Make first SIP payment now’.
Types of Frequencies for an SIP
There are different frequencies available for SIP investments, each offering its own advantages and disadvantages depending on your financial goals and risk tolerance. This diverse range of SIP frequencies ensures investors can comfortably participate in the market based on their financial planning and cash flow patterns.
The frequency of an SIP investment is weekly, monthly or quarterly. You can decide the right frequency based on your income, expenses, ongoing EMIs, financial goals, the scheme you are investing in, etc. Talking to a financial advisor can also help you choose the right frequency for your particular needs.
Points You Must Consider While Selecting Your SIP Frequency
- Effect of volatility: Depending on the volatility of the investment avenue, you should decide on the frequency of your SIP. Suppose the volatility of the mutual fund or stock SIP is higher. In that case, you can invest in a higher frequency SIP to benefit from the market volatility by averaging out your investment over a period of time and vice-versa.
- Frequency of your cash inflows: If you are a salaried professional and earn income on a monthly basis, it is advisable to invest in a monthly SIP. If you work on a contract basis where you receive income every few months (for example – construction business, interior designing, etc.), you can choose to invest in a SIP on a quarterly basis. You can plan to invest in weekly SIPs when you earn on a fortnight or a weekly basis (for example – internship, task-completion basis, etc.)
- Ease in tracking instalment payments: It is easier to track your income and expenses monthly, and thus, investments can be planned better on a monthly basis. You won’t have to track how much was debited throughout the month, as the instalment amount will be debited once every month. On the other hand, in the case of daily and weekly SIPs, the number of instalments is higher, leading to difficulty in keeping track of all the payments.
Common Myths About SIPs
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- Not for large investors: There is a common misconception that SIP plans are only for small investors. However, SIP has more to do with the frequency of payments than the total amount. Anybody can invest in a SIP plan, and up to ₹1 lakh can be invested, provided your KYC process has been completed.
- Don’t invest in SIP when the market is bullish: A bullish run occurs when the market shows an upward trend, and many myths suggest that you must not invest in SIP when the market is bullish. However, this is a baseless myth since an SIP relies on the rupee cost averaging to guarantee investors their returns. The rupee cost averaging works well over the long term, regardless of market conditions.
- SIPs are not flexible: Another common myth around the SIP investment plan is that this investment instrument is less flexible for investors as compared to other instruments. There are misconceptions that the tenure of the SIP plan or the amount invested in it cannot be changed. Another misconception is that once you invest in a SIP investment, you will not be allowed to discontinue it. None of these statements are true. A SIP is among the most flexible investment instruments available to people and one of the easiest to customise according to your specific requirements. With an SIP, you can easily alter the amount you have invested in it and the tenure for which you are investing. Unlike many instruments that charge you for making these changes to an existing investment, a SIP investment has no penalties for making these changes. However, some SIP plans do have restrictions regarding the minimum amount that you can invest and the minimal amount of time that you must invest in order to reap any rewards at all. Make sure to ask questions about this before you sign on for any particular SIP to ensure that you understand all the important terms and conditions of your investment.
- Returns are guaranteed: In line with the rising popularity of the instrument, several myths have come up surrounding SIPs, which are seeing a lot of acclaim from across different demographic sets of the population. One common misconception has been that investing in an SIP will guarantee you returns since your funds are invested periodically into the same nature of the investment. While no investment can ever guarantee you profitable returns, if you do invest in SIP, you stand a better chance of earning returns than through a more directly market-linked instrument. This is again owing to the rupee cost averaging principle, which enables you to offset the market volatility by remaining invested for a longer period of time.
- Only for equity markets: The dearth of knowledge about investment instruments in the common arena is evident when you realise that some of the myths are quite contradictory to each other. A common misconception about SIPs is that they invest only in equity stocks or in the market. This misconception deepens into mistrust since the equity markets are notorious for being volatile and affected by various issues, including political, economic, and social, both locally and globally. This makes several investors wary because it significantly reduces the chances of earning profitable returns. However, this is not true. The fact is that you can choose which kind of security you would like to invest in through your SIP investment plan. Based on your goal, requirement and risk profile, you can take the call on which kind of security you wish to invest in and, thus, have control over your funds.
Conclusion
SIPs are useful instruments, especially for investors who want to invest periodically in small amounts. However, before you invest in an SIP, make sure you have the minimum knowledge about both the stock market and the strategy of the fund managers. Open a Demat Account on Angel One today and learn about stocks, SIPs, mutual funds, etc.Mutual Funds Calculator
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FAQs
What is the meaning of SIP mutual fund?
The SIP full form in a mutual fund is a Systematic Investment Plan. It is a type of investment route offered by mutual funds where an investor can invest a fixed amount of money at regular intervals (usually monthly) in a mutual fund scheme.
How does SIP investment work?
When you invest in a SIP, your money is invested in the mutual fund scheme of your choice at regular intervals. Each investment is treated as a separate transaction, and you get units based on the prevailing net asset value (NAV) of the scheme. Over time, the cumulative value of your investments grows as the value of the units also grows.
What is the minimum investment for SIP?
The minimum investment for SIP varies depending on the mutual fund scheme you choose. It can range from as low as ₹100 to ₹500 or more.
How often can I invest in SIP?
Most mutual fund schemes allow you to invest in SIP every month. Some schemes also offer quarterly or bi-annual SIP options.
Can I stop or pause my SIP investment?
Yes, you can stop or pause your SIP investment at any time. Most mutual fund companies allow you to do this through their online portal or by contacting their customer care.
How do I choose the right mutual fund scheme for SIP investment?
When choosing a mutual fund scheme for SIP investment, you should consider factors such as the fund’s track record, the fund manager’s experience, the fund’s investment objective, and your investment goals and risk tolerance.
What is the benefit of SIP?
SIP offers rupee cost averaging, disciplined investing, and compounding benefits, reducing the impact of market volatility.
How can I make an online SIP investment?
You can invest in SIPs online through Angel One by following the simple steps below:
- Open the Angel One app and click on ‘Mutual Funds’ on the home page.
- Choose the Fund that you want to invest in from the section titled ‘Discover Mutual Funds’. You can start your search by clicking on ‘EXPLORE ALL FUNDS’. You can also narrow down your search by clicking on the categories of funds given.
- Once you have gone through the details of a mutual fund and chosen it, click on ‘INVEST’.
- Choose the SIP option and enter the monthly amount and date, i.e. the day of the month when the SIP payments will be made from your account.
- Choose the mode of payment, for example, UPI.
- Click on ‘START SIP’ to start the SIP process.
- You can choose to make your first SIP payment right away as well by checking the box next to ‘Make first SIP payment now’.
Is SIP a suitable option for beginners?
Yes, SIP is suitable for beginners as it allows gradual investment, doesn’t require a lump sum, and provides a disciplined approach to wealth creation.
Does SIP offer tax benefits?
Tax benefits on SIP depend on the type of fund. SIPs invested in Equity Linked Savings Scheme (ELSS) funds are eligible for tax deductions. As per Section 80C of the Income Tax Act, investors are eligible for a deduction of up to ₹1.5 lakh.
