A complete guide to Systematic Investment Planning
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A complete guide to Systematic Investment Planning

  • Highlights

  • SIPs are seen as a way to reach your financial goals

  • Small periodic investments can fetch you high returns

  • SIPs are suited to conservative and aggressive investors

  • Some mutual funds can also help you claim tax benefits

While saving money is important, investing wisely is even more crucial, as it allows you to maximise your wealth over the course of time.

In fact, investing as early as you can is ideal so that you can save adequately for major expenses later on in life and post retirement. One smart way of investing is through Systematic Investment Planning, more often referred to as investing in SIPs or Systematic Investment Plans.

As per the Association of Mutual Funds of India, data indicates that SIPs are a sought-after option for most mutual fund investors. Over 9 lakh SIP accounts were created on average in each month in FY 2017-18.

What are SIPs?

As the name suggests, a SIP involves investing a fixed sum of money at regular intervals (usually monthly, though you could invest quarterly too). Then, a money market expert takes this money and buys units of a scheme, usually a mutual fund, at a pre-determined frequency.

SIPs allow you to invest in securities in a safe and secure way. You don’t have to worry about selecting the right securities as your financial advisor will do so on your behalf. Also, since you have the option to invest flexibly, this option is suited to all kinds of investors. It doesn’t matter if you’re an experienced investor or are investing for the first time.

How are SIPs calculated?

SIPs are calculated by taking into account two principles: power of compounding and rupee cost averaging. Take a look at how these mechanisms work.

Power of compounding

This simply means that the interest you earn is compound in nature as opposed to simple interest. For example, if you invest Rs.5,000 at 10% for 5 years, the interest will be Rs.2,500. So, your total gain will be Rs.7,500. On the other hand, when interest is compounded on Rs.5,000 your total interest earnings will be Rs.3,052.55. In turn, your total gain will be Rs.8,052.55. Here, in the first year you earn Rs.500 as interest. This is compounded, which means that it is added to your principal. As a result, the principal for the second year is Rs.5,500. This method allows the interest to earn returns too, thereby enriching your benefits.

The difference between the two may seem nominal, but when you invest in an SIP for a long period the benefit of compounding is staggering. For instance, when you invest for a period of 20 years or more, the total amount is more than double than what you would earn if you were to receive simple interest on it.

Rupee cost averaging

Rupee cost averaging is the outcome of the way in which your SIP operates. Your financial expert will buy more securities when prices are low, and buy lesser units when prices are high. Over a long period, this system evens out the impact of market fluctuations, giving you better returns. This is what makes an SIP a winning investment option.


How to use SIP calculator

Using a calculator is a quick and easy way to find the best SIP. Take a look at how you can use one.

Monthly investment amount: Here, feed in the amount that you can comfortably invest on a monthly basis. Don’t worry, you have the option to increase it in the future. Let’s assume that you put in Rs.2,000 as the investment amount.

Tenor: Enter the duration for which you want to stay invested. Remember, the longer you are invested in SIPs, the more your net benefit will be. Here, assume that you enter 15 years.

SIP interest rate: Here, enter the SIP interest rate that the scheme is offering, for example, 10%.

View results: Instantly, you will be able to see the total amount that you will invest over the years, the total interest that you will earn on it, as well as the total sum that you will receive on maturity. For this scenario, your total invested amount will be Rs.3.6 lakh, interest earned will be Rs.4.68 lakh and the total amount on maturity will be Rs.8.28 lakh.

4 benefits of using an SIP calculator

Using a SIP calculator is packed with benefits. Here’s a look at 4 key benefits that this financial tool offers.

Decide how much you want to invest: By showing the maturity sum for various investment amounts, tenors and rates of interest, a SIP calculator allows you to see exactly how much money you will make when it matures. This will tell you if it meets your financial targets adequately before you invest.

Select a top SIP: Selecting a sound SIP is of equal importance. You can do this with ease as the SIP calculator allows you to vary the interest rate. This way, with the investment amount and tenor being constant, you will be able to see which is the best SIP for you.

Get results quickly: Since a SIP calculator is available online, it takes a fraction of a second to see the results. Needless to say, it takes far lesser time to use this calculator than it takes to do the math yourself. Apart from the total interest and maturity amount, some calculators even give you a break-up of the interest earned each year so that you can understand how your money will multiply.

Get accurate results: Since the calculator is backed by a formula and is automated, you can expect error-free results, every time. The same can’t be said for when you calculate manually.

Bajaj Finance helps you with the best SIPs in India, and gives you access to several SIP calculators. You can make use of the basic one or use an advanced SIP calculator to see returns that have been adjusted for inflation. Similarly, a need-based SIP calculator allows you to work backwards. Based on the amount that you want to earn, it tells you how much you need to invest.

How to invest in an SIP

Making an investment in SIPs is extremely simple. Here’s how to go about it.

- Set a target: The first step that you ought to take is deciding how much you want to earn via SIPs. Once you know the desired amount, move on to step two.

- Decide the amount: This step involves judging your current income and expenditure and deciding how much you will contribute to SIPs on a monthly basis. The best part is that you can increase the amount later on if you wish to. To start with, you can invest as little as Rs.500.

- Decide the tenor: Based on the amount that you can invest, select an appropriate tenor. Remember that the benefits of rupee cost averaging and compounding interest are highest when you stay invested for a long duration. You can use an SIP calculator to decide this parameter accurately.

- Select an SIP: This is the most important consideration. Research your options thoroughly and discuss them with a financial advisor. This way you will be able to select the best SIP that caters to your financial goals.

What should be the ideal tenor of an SIP?

The most beneficial aspect of investing in an SIP is that you can choose how long you want to stay invested for. But here are two things that you should keep in mind.

- The longer you stay invested, the higher are the benefits of rupee cost averaging and compounding interest. In turn, your gains are higher.
- You have to stay invested for at least 3 years if you have chosen an Equity Linked Savings Scheme (ELSS). With a view of saving tax, it makes more sense to choose an ELSS as it has the shortest lock-in period as compared to other tax-saving investments.

What makes an SIP an ideal instrument for investment?

A SIP is a superior investment tool as it offers better benefits as compared to other investment options, be it recurring deposits, Unit Linked Insurance Plans (ULIPs), fixed deposits or Public Provident Fund (PPF). It gives you several advantages, without requiring you to stretch your budget.

SIP vs. ULIPs: Which one should you choose?

While you should base your ultimate decision as per your financial needs and goals, here’s a look at the various ways in which SIPs and Unit Linked Insurance Plans (ULIPs) differ.

Key benefit: When you invest in an SIP, the benefit is that you can maximise your wealth exponentially. However, ULIPs offer two benefits: it provides life insurance cover, as well as acts as an investment.

Lock-in period: ULIPs have a lock-in period of 5 years, whereas if you choose ELSS-backed mutual funds, the lock-in period is shorter, at 3 years. With other kinds of SIPs there is no lock-in period.

Returns: It is tricky to determine returns for ULIPs as it depends on whether you have chosen to invest in debt funds, equity funds or hybrid funds. When you invest in an SIP, you can expect an average SIP interest rate of 12%–15%.

Charges and transparency: When you choose a SIP, you usually have to pay a fund management charge and an exit load, and so the process is simple and transparent. However, a ULIP has several charges. You have to pay policy administration charges, mortality charges, premium allocation charges, fund management fees, etc. As a result, in an SIP it is easy to determine exactly how much is being invested, but in a ULIP it is more difficult. With so many charges, it makes for a complicated calculation.

Tax treatment: ULIPs allow a deduction of up to Rs.1.5 lakh under Section 80C. However, when you take an SIP, you can enjoy the EEE (Exempt, Exempt, Exempt) tax benefit under this section. This means that the amount you invest, amount on accumulation and withdrawal are all tax-free.

SIP vs. PPF: Which investment works better?

In the SIP vs. PPF debate, as always, your priorities matter most. To make an informed decision, understand what sets the two options apart.

Investment amount: In SIPs, you can invest any amount that is equal to or greater than Rs.500; there is no maximum limit. But, when you choose PPF, you can invest up to Rs.1.5 lakh per year, either in lump sum or on a monthly basis.

Rate of returns: SIP interest rates range from 9% to over 20%, with an average of 12%–15%. On the other hand, when you choose PPF, you get around 7.6% only.

Financial goals: If you are saving for retirement, creating an emergency reserve, or investing for the future of your child, a PPF is a safe option. On the other hand, if you want to take charge of your finances and grow them actively, SIPs are better for you. That being said, you can stay invested in SIPs for a long tenor and finance your retirement or child’s needs too.

Tenor: When you choose a SIP, you can invest for a minimum of 6 months and decide to end the investment whenever you deem fit. When you choose PPF, you have to stay invested for at least 15 years. So, while SIPs can be long- and short-term investments, PPF is strictly a long-term investment.

Liquidity: If you anticipate needing funds in between the tenor, considering liquidity is important. In this regard SIPs offer you funds within 1–2 days, giving you better access to your money. On the other hand, a PPF allows you to withdraw a portion of the amount only after the 7th year.

Should you choose a SIP over fixed deposits?

When choosing between a SIP and fixed deposits, don’t rely just on popular opinion. Take these facts into consideration before you make a decision.

Investment amount: Both options give you complete control on how much you invest. That being said, when you invest a small amount in a high-cap SIP, you will still be able to earn substantial returns. This isn’t the case with fixed deposits. Here, how much you invest is directly proportional to how much you earn.

Rate of interest: SIP interest rate is around 12%–15%, which is better than what most investment instruments offer, including fixed deposits. On the higher end, you can expect around 8.5% interest from a fixed deposit if you choose an NBFC instead of a bank.

Type of investor: Fixed deposits are better suited to you if you are a conservative investor as they aren’t linked to the market, unlike SIPs. That being said, if you are a conservative investor you can choose small-cap funds and still benefit, or pick large-cap funds if your risk appetite is high.

Associated risk: As SIPs deal in market-linked securities there is a degree of risk associated with them. However, since financial experts manage SIPs, and due to rupee cost averaging, this risk is mitigated. On the other hand, fixed deposits are risk-free and offer guaranteed returns.

Recurring deposits or SIPs: Which investment offers better returns?

If your sole priority is to select an investment option that offers high returns, in the SIP vs. RD battle, SIPs win. As mentioned, a SIP in mutual funds offers an interest rate of 12%–15% on average that can go up 20%–22%. As of 2016, small- and mid-cap mutual funds yielded a CAGR (Compound Annual Growth Rate) of around 15% in the past 5 years. More specifically, sectoral funds investing in banking, pharmaceutical and FMCG offered 18% returns. On the other hand, when you choose a recurring deposit, you can expect an average interest of just 6%–7.5%.

SIPs or lump sum investment: The better way to invest in mutual funds

You may wonder why you should invest in mutual funds via SIPs instead of making a lump sum investment. When faced with the conundrum of SIP vs. mutual funds keep these pointers in mind.

- SIPs offer more flexibility as you don’t have to save money to be able to invest. Even as a fresher at your first job you can start investing in SIPs. On the other hand, if you have to make a lump sum investment you have to save a substantial amount first.
- Mutual funds only offer higher returns when the market is performing really well. On the other hand, SIPs perform well even during market lows. Rupee cost averaging ensures that such fluctuations don’t affect your net outcome. This also protects you in case of a market crash.
- When you invest in a mutual fund, there is a psychological aspect that you must take into account too. With a lump sum investment, you have to constantly monitor it and decide when to invest and when not to, apart from choosing the fund itself. On the other hand, a long-term SIP means that you will be investing every month, regardless of the market’s performance. It is an on-going process. More importantly, a financial professional manages it. So, even if you don’t have any knowledge of how the market operates, you can invest worry-free.

What are the types of SIPs available in India?

The best SIPs in India belong to different categories. Take a look at the ones that you are most likely to come across.

Top-up SIP: This allows you to increase the monthly investment amount of an existing SIP in multiples of Rs.500. As your income increases, you can either open a new SIP or avail the top-up facility to increase the amount you invest each month.

Perpetual SIP: This is an SIP without a defined maturity date. At the time of starting an SIP, you can choose its tenor, be it 1 year or 20. However, if you don’t specify this date, it is considered to be a perpetual SIP and will be in effect until December 2099, or until you instruct the SIP provider to cancel it. You can also check the perpetual SIP box if it is present on the form. If you are convinced by the benefits of an SIP and are sure that you want to stay invested in the long run, you can opt for this SIP.

Flexible SIP: This variation allows you to invest more when the market is down and vice versa. It gives you this facility without the hassle of extra paperwork and processing. Most SIPs will have a defined level for this rise or decline. For instance, once the market falls below this mark, the fund manager will invest 3 times your usual monthly investment to make the most of it. When you opt for a flexible SIP you can indicate right at the start how much more or less you would like to invest when the market performance is high or low.

There exists another kind of flexible SIP. Here, you have to specify the amount that you want to invest each month. But, depending on your financial situation, you can increase or decrease the amount around a week before it is to be deducted. This allows you to invest flexibly without having to compromise. If you don’t change the amount, the default amount will go towards your SIP.

Which SIPs provide the highest returns?

If the best SIP in India is what you’re after, it is important to evaluate the best SIPs for each mutual fund cap size and decide accordingly. While you can arrive at the top SIP after considering your finances and using various methodologies, here’s a look at the ones that are widely-considered to be high-performing.

Large-cap mutual funds*
- Aditya Birla Sun Life India GenNext Fund (G)
- Tata Equity P/E Fund (G)
- Reliance Growth Fund (G)
- Quantum LT Fund (G): Direct Plan
- Templeton India Growth Fund (D)

Mid-cap mutual funds*
- Canara Robeco Emerging Equities Fund (G): Regular
- Franklin India Smaller Companies Fund (G)
- L&T Mid-Cap Fund (G): Regular
- Edelweiss Mid and Small Cap Fund (G): Regular
- Aditya Birla Sun Life Small and Mid-Cap Fund (G)

ELSS*
- Reliance Tax Saver (ELSS) Fund (G)
- Tata India Tax Savings Fund Regular (DP)
- DSP BlackRock Tax Saver Fund Regular (G)
- Invesco India Tax Plan (G)
- Aditya Birla Sun Life Tax Relief 96 (D)

*Source: Economic Times, April 2018

How does investing in a Systematic Investment Plan give you tax benefits?

Apart from high returns, investing in top SIPs makes you eligible for tax deductions too. As per Section 80C of the Income Tax Act, you can avail up to Rs.1.5 lakh of the amount that you invest as a deduction each financial year. Whether you have one or multiple SIP/s, the cumulative deduction is capped at this amount. Also, you can use the same SIP to claim a deduction the next year and don’t need to start a new one.

How to redeem your SIPs

When you invest in SIPs, you can choose to redeem/withdraw an amount. This is helpful if you have to meet urgent cash flow needs or want to switch from one fund to another.

Each round of investment in SIPs is treated as an individual entity. So, if you have been investing in a SIP for the past 5 years, the amount that you have held on to for the first 4 years will not attract an exit load. However, the units that you have held for a period of less than a year will attract the exit load, at a rate that is defined at the time of starting the SIP.

- If you started your SIP with an Asset Management Company (AMC), you can log on to the website and using your username and password, you can redeem the SIP fully or partially. Alternatively, you can visit the AMC’s office, submit a redemption form and make a withdrawal in person. The same process is applicable if you start an SIP through fund partner portals online.
- If you have used the assistance of an agent to start an SIP, submit the form to him/her and it will be passed on.
- If you have started an SIP via a trading or Demat account, you can redeem your SIP online through your account. An e-payout will be made to the bank account that is registered to this account.
- Lastly, you can use Computer Age Management Services to redeem SIPs from multiple AMCs. You can download the form, fill it and submit it at a CAMS office. If you want to redeem several SIPs, this system is easy as you only have to visit one office.

Do note that despite making a withdrawal, you SIP will continue to invest on a monthly basis. If you want to end the SIP, you have to cancel it.

What are the charges involved in an SIP?

Primarily, these are the charges that you have to factor in when you start an SIP.

Exit load: This charge is expressed as a percentage, varies from scheme to scheme, and is a one-time fee. You have to pay an exit load as per the holding period. If you retain the SIP units for longer than the holding period, you don’t have to pay any exit load. However, if you exit prematurely, you have to pay this amount.

Transaction charges: This is another one-time charge that is applicable if your total investment amount is going to exceed Rs.10,000. For SIPs, this charge is Rs.100, and is deducted in 4 instalments, starting from the 2nd one up to the 5th instalment.

Recurring charges/ On-going expenses: Recurring charges are levied on the Daily Net Assets of the fund. The regulator gives the rates for this and mutual funds can’t charge you anything above this amount. The expenses are subtracted from the net assets of the fund and then the NAV is posted after adjusting expenses.

With this wealth of information by your side, don’t hesitate to invest in SIPs. Regardless of your risk appetite or budget, there is a smart way to invest in this instrument and make your money grow.

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