SIP Meaning – Everything You Need to Know About SIP

Gaurav Chakraborty
Gaurav Chakraborty
gauravc@orowealth.com

What is SIP?

With the proliferation of the Indian economy, the reasons for its earning members to spend are drastically increasing as well. SIP is the latest trend of the mutual funds that come with yet another pack of promises. SIP is an acronym for Systematic Investment Plan. In SIP, you invest a pre-determined amount at the regular intervals. Usually, these intervals are monthly and have a pre-set date. SIP allows you to install the habit of investing regularly along with the habit of saving. As easy as it sounds, the monthly investment amounts for SIPs are equally easy and comfortable for every individual despite their economic positioning. So, it wouldn’t be wrong to assume that systematic investment plans have much more to offer than tax savings and wealth accumulation. This article covers everything you need to know about SIP including how it works, types of SIPs, how to start a SIP, and benefits of the same.

How does SIP work?

A typical systematic investment plan comes with many assurances and dynamic features like flexibility. For the investors who are particularly apprehensive about losing large amounts of money in mutual funds, SIPs offer open-ended fund schemes that can be altered, continued or stopped anytime during the pre-set tenure. Also, individual investors can choose to extend the tenor, partially or fully withdraw capital and increase or decrease the number of monthly investments depending upon their interests. However, despite their beneficial features, the investment horizon for SIPs must not be cut shorter if one intends to reap wealthier benefits.

Advantages of SIP Plans

Besides the obvious benefits of tax relaxation and safe, profitable capital investment for the future, there are many other advantages of systematic investment plans as well. They usually abound from the specific features of SIPs that allow for added comfort and profits to the investors. According to its facilities, the different benefits of a SIP are as follows:

1. Regularity in Investments Inculcates Discipline

Unlike other investment plans that are manually handled by investors on a monthly basis, SIPs are automatic and do not need any further interference from the investor once the installment value, tenor of plan and date of monthly deposit have been set.

So, apart from maintaining the balance of one’s bank account investors are not required to worry about anything else. This, in turn, inculcates discipline while adding comfort to mutual fund investments.

2. No Risk of Loss through Rupee Cost Averaging

Market cycles change color as fast as a chameleon. It is nearly impossible to predict the circumstance when the market reaches its high or low peak. Majority of investors are often stuck between choosing one market cycle from another, which is why they are sooner dissuaded from making an investment.

With SIPs the risks of market losses are reduced drastically. Systematic Investment Plans automatically accustom themselves to the market cycles, thereby averaging one’s final investment by the end of the tenor. In other words, as you pay more in a high cycle, you would be necessitated to pay as much lower in the consequent market cycle. Hence, the final investment becomes an average of all installments.

3. Ease of Achieving Personal Goals While Saving on Costs

The costs of living in cities are rising day by day owing to the widening of business markets. It clearly means that every day it becomes even more difficult for a common individual to procure the basic luxuries of life.

However, with small investments in SIPs, every person can ease the capital burden of personal goals. By investing in a mutual fund that gives yearly returns at a considerable profit, one can save up to more than half of the costs of amenities like houses and cars.

4. Added Versatility: From Smallest to Largest Installments

SIPs were specifically designed to attract more and more investors towards mutual funds. A direct consequence of the same concern is versatility of monthly deposition amounts. Today, Systematic Investment Plan (SIP) can be purchased for as low a monthly deposit as Rs.500 going up to as much amount as an investor can manage. Furthermore, the process of purchasing, continuing and redeeming has been made easier by the advancement of banking and corporate technologies.

Besides the above, SIPs also have a number of other benefits like freedom of individuals from market navigation and responsibility of saving from monthly income.

Popular Types of SIP

Keeping the benefits of SIPs in mind, it is imperative of investors to flock in the market and buy SIP mutual funds as soon as possible. However, in the case of SIPs, not one size fits all. So, it is important for investors to understand the specifics of every type of SIP, before making a contractual and capital investment. The following is a list of the types of SIPs that are functional in the mutual funds market today, can prove to be a helpful guide for amateur investors:

1. Top-Up SIP

These plans are one of a kind progressive investment that mandates increasing the installment amount with every passing month. They are usually adopted by investors interested in the business of a successful brand. Naturally, their yearly return is high as compared to other plan types.

2. Perpetual SIP

Under these plans, investors can periodically submit funds in any planning scheme of their choice up to a particular month or for a certain period in a year. They can extend or reduce the SIP end date as per their choice. As a result of the reserved right of the investor on the SIP end date, they can redeem the scheme amount during any time of the tenor.

3. Flexible SIP

As the typical and most comfortable form of SIP, these plans allow investors flexibility over the amount payable per month. One can increase or decrease the installment amount as per one’s own financial condition. The investors are only required to stipulate the installments per plan and they’re ready to begin with capital investments!

4. Trigger SIP

It is probably the most complex form of SIP that requires a high understanding of market features. The investors are provided with the choice of setting an index level, event, NAV or start date for SIP.

The different types of SIPs are designed after due consideration of the varied investors that participate in the mutual funds business. As expected, trigger SIPs are least opted by investors that look forward to making more profits over long periods of time. However, as a humble beginner, flexible SIP should be the first choice of investors who wish to add some discipline and stability to their capital savings. Regardless of the SIP type, investors are sure to profit in terms of money and personal well being by placing their trust in the SIP mechanisms.

What is the Difference between EMI and SIP?

The monthly cycle of Systematic Investment Plans often prompts the investors into mistaking it as a different form of Equated Monthly Investment i.e. EMI. SIPs and EMIs differ not only in their orientation towards the market but also in the kind of capital investment that they entail. EMIs come forth as an installment to cover expenditure costs, while SIPs are better understood as capital reserves for the future. So, here is an elaborate list of differences between EMI and SIPs:

1. Nature of Investment Plan

SIPs are systematic investments that act as stocks or liquid equity for investors. They can be redeemed anytime. EMIs are regular, non-modular investments paid to a certain investor who has secured one’s possession of luxury items.

2. Disciplinary Function of Investments

SIPs are the certain authority that can lead to the inculcation of investment discipline in investors for they promise to fulfill one’s financial needs on a later date. EMIs do not lead to the procurement of the desired asset. They add a burden to one’s monthly finances.

3. Response To Inflation or Taxation

SIP schemes do not take account of the inflation and taxation rates. So, their yearly returns cannot be depended upon for purchasing expensive goods during price surge.

EMIs stand as a better alternative in such exceptional cases since they consider the present-day scenario and freeze the rates of the installments on the day of purchase.

SIP vs Recurring Deposit. Which One is Better?

Even before SIPs could rule the market, investors held their trust in recurring deposits (RD). So, here are the few spheres where SIPs have taken over RDs’ popularity:

1. Tax Saving Investment

Recurring deposits fail miserably when it comes to saving tax, as compared to SIP. The latter brings capital gains that are entirely tax-free. With RDs the return of total income includes the capital gained from other sources and becomes liable for taxation.

2. Volatility to Economic Market

Since mutual fund investments (including SIPs) are subject to market cycles, they hold high volatility to market risks. Even though the rupee cost averaging feature of SIPS reduces its loss percentage, the volatility levels are still considerable. On the other hand, RDs are not volatile to any external agent and generate fixed returns.

3. Penal Charges

If the SIP investment is missed for three successive months, one’s SIP mandate is permanently canceled. However, missing RD investments usually leads to a penalty.

How to Choose Best SIP?

In terms of meeting financial goals, SIP demand year-long planning and hard work to bring valuable opportunities. Here are some tips to select the apt SIP:

1. Risk appetite

If you are risk-averse it makes sense to go with instruments like government bonds or debts securities. In case you don’t mind taking risks to grow your wealth significantly then choosing a bigger allocation of equity will work for you. Your risk appetite will define your goal and hence the portfolio in which SIPs need to be invested in

2. Fund house

Knowing the fund house is important. Points like its investment approach, past success stories, and a number of schemes on offer. You can also check how easy is it to withdraw or exit the fund. Knowing about this will help you decide the right fund house.

3. Fund performance

Your key objective is to generate returns from your investment. So the fund house needs to depict a proven track record in this aspect. You can examine fund performance across a span of months/years and then compare it with a benchmark index like NIFTY or SENSEX. If the scheme is performing consistently well compared to the benchmark then you are likely to have a winner on your hands.

4. Loads and administrative expenses

Though exit/entry loads are minuscule, they tend to have an impact in the long run. Ideally the bigger the size of the fund, the lower will be its expense ratio (the annual fee charged by mutual fund houses).

Documents needed for SIP Investment

The following documents are a must-have to open a SIP:

1. Proof of Identity

Indian national citizenship certification is necessary for investing in SIPs through its platforms. Investors can attest identity documents like copy of PAN Card, Aadhaar Card, Voter ID, and Driving License, along with the application.

2. Proof of Address

Much like the evidence of identity, address proof is required to affirm the Indian location of correspondence of investors. So, copy of passport, driving license, ration card, registered lease, sales agreement of residence, updated bank account statement or passbook can be attached with application.

3. Recent Photographs

Two latest passport sized photographs with all of the above documents and their self-attested copies are needed for registering oneself for a SIP.

Step by Step Guide to Start SIP Investment

Investing could never be as easy as it is with SIP. Today, a number of companies offer SIP mutual funds, though their procedure is strikingly similar. Once the documents are ready, the following steps need to be taken for procuring any desired SIP:

1. Comply with KYC Verification

Open the online portal of eKYC or visit the nearest KYC branch for procuring a KYC form. Fill up the form with correct details and submit self-attested copies of address proof, PAN card, identity proof, and two passport size photographs.

2. Research to Find Your Right Fund

This step usually takes a long time because one is needed to survey through the specifics of every SIP offered by different firms. Alternatively, one can consult Asset Management Companies or intermediary individuals to learn about the different available plans.

3. Set the Monthly Investment Amount

For initiating the SIP, one needs to submit a form with one’s personal details and expectations from the SIP. To meet a certain financial goal, one needs to calculate the amount of monthly investment and enter it in the form. Seeking help from Investment Service Companies can be very helpful here.

4. Choose Payment Date

After one has made up his/her mind about the monthly or Quarterly cycle of SIP, s/he can fix the date on which the specified monthly investment would be deducted from his/her bank account. It must be remembered that even if the investment amount is altered, the due date cannot be changed later.

5. Submit the Complete Form

Check the details entered in the form and submit it to the nearest Asset Management Company. In case one’s case is being handled by professional Investment Companies, then the form can be handed over to them directly. The AMC would send regular updates to one’s registered email id about the monthly payment, SIP specifics etc.

SIP Calculator

With the help of SIP calculator, you can easily find out the suitable amount you are ready to invest in SIP plans. The SIP calculator assists you to calculate the overall gain in wealth and expected returns for the tenure of your SIP investment. You get a general idea about the maturity amount of any monthly SIP investment, depending on the projected annual rate of returns.

Common FAQs

1. Can a SIP be initiated anytime?

The basic idea of SIP is to free the investors from the hassles of waiting for market cycle jumps. So, ‘now’ is always a good time to start with SIPs. Make sure to customize the SIP as per your net take home salary.

2. Is it okay to miss a SIP monthly submission?

It is one of the perks of SIP that investors do not have to worry about losing all their capital investments by missing a few payments. However, it is better not to miss any monthly submissions for garnering more profits.

3. What if I wish to change my SIP?

As easy as it is to procure a SIP, it is equally easy to shift from one mutual fund to another. One just needs to refill the application form with the details of the new mutual fund to relocate their investments.

In Conclusion

SIPs pay in the long run. With increasing investment tenor, the profits from SIP funds increase gradually. So, investors are required to exercise patience while purchasing SIPs. The compounding effect, a unique feature of SIPs, garners more and more yearly return amount after passing time. This is precisely why being consistent with SIP monthly payments is an utmost priority.

Gaurav Chakraborty
Gaurav Chakraborty
gauravc@orowealth.com

Gaurav is an engineer-turned-digital marketeer. Also a personal finance blogger with experience in financial planning and crowdfunding sector. He is a part of the Marketing team at Oro.

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