What Is Systematic Investment Plan (SIP)

Explore the Systematic Investment Plan (SIP) - From its full form and meaning to the incredible benefits it offers. Learn how SIP works.
What is SIP
5 mins
23 January 2024

The stock market is a volatile investment option. While it fascinates many individuals due to the returns it offers, it comes with its share of risks. For those individuals, Systematic Investment Plan (SIP) is a great option. It helps you make profits from both bullish and bearish market patterns, eliminating the need to time the markets.

With SIP, one can seamlessly navigate both bullish and bearish market trends, making it an attractive option for those seeking to profit without the stress of market timing. The process involves investing a fixed sum on a regular basis.

Embraced by Indian Mutual Fund investors, SIP offers a disciplined investment approach, shielding investors from market volatility. Positioned as the optimal entry point for long-term investments, SIP advocates the mantra of starting early and investing regularly to maximise returns over time.

What is SIP?

SIP or Systematic Investment Plan is a smart investment strategy that allows you to invest a certain predetermined amount of money at regular intervals (weekly, monthly, quarterly etc.). Through SIP you can invest in market-linked funds offered by fund houses (mutual funds, insurance companies (ULIP), and financial institutions.

How does Systematic Investment Plan work?

Understanding the functioning of a Systematic Investment Plan (SIP) is crucial for maximising returns with minimal investment. Follow the steps below to comprehend the workings of an SIP investment plan:

  • Thoroughly research the best SIP plans you intend to invest in.
  • Select a fund which aligned with your financial goals and risk profile.
  • Determine the frequency and amount of your SIP investments.
  • Carefully complete your KYC authentication and provide bank account details with auto-debit activation for uninterrupted SIP investments.
  • Once activated, the SIP amount is allocated to the chosen mutual fund scheme.
  • The fund manager invests the accumulated amount in various assets based on the scheme's investment objective.
  • On the SIP date, the deducted amount from your bank account is used to purchase units at the prevailing Net Asset Value (NAV).
  • Enjoy the flexibility to adjust your SIP contributions as needed.
  • Utilize online tools like the Bajaj Finserv SIP calculator to estimate returns based on your SIP investment plan.
While SIP returns depend on fund performance, long-term SIP investments are proven to be an excellent avenue for wealth growth.

Understand SIP With an Example

Let us assume that you want to start an SIP for Rs. 5,000 every month to invest in a mutual fund ‘A”. The present value (NAV) of the mutual fund is Rs. 50 per unit, so you will get 100 units of the fund.

Month Investment amount Present value Units allocated Total units
0 Rs. 5,000 Rs. 50 100 100
1 Rs. 5,000 Rs. 40 125 125+100 = 225
2 Rs. 5,000 Rs. 52.6 90 225+90 = 315
3 Rs. 5,000 Rs. 100 50 315+50= 365


Similarly based on the NAV of the mutual fund, the units allocated will change each month, and get added to your portfolio. This change in NAV also impacts your investment amount. Thus, an SIP helps mitigate the risk of market volatility and achieve the investor's long-term financial goals.

Features of SIP

  • Rupee cost averaging: SIP uses the strategy of rupee cost averaging, helping investors benefit from market fluctuations. During market downturns, the fixed investment buys more units, and during upswings, it buys fewer units. This approach helps mitigate the impact of market volatility over time.
  • Disciplined and consistent investing: SIP promotes financial discipline by allowing investors to commit to regular contributions regardless of market conditions. This disciplined approach encourages consistency in investing, fostering a habit of regular savings and wealth creation.
  • Flexibility in investment amount: Investors have the flexibility to choose the amount they want to invest in SIP, making it accessible for a wide range of investors with varying budget sizes. This feature accommodates both small and large investors, enabling them to start with an amount that suits their financial capacity.
  • Professional fund management: SIP investments are managed by professional fund managers who make informed investment decisions based on market conditions and the fund's objectives. This professional management aims to optimise returns and effectively manage risks, providing investors with the expertise needed for successful mutual fund investments.
  • Long-term wealth creation: SIP is designed for long-term wealth creation. Through consistent and disciplined contributions, coupled with the power of compounding, investors can potentially achieve significant returns over an extended period. This long-term approach aligns well with financial goals such as retirement planning or building a corpus for major life events.

Benefits of investing in SIP

SIP (Systematic Investment Plan) is a popular investment method that allows investors to invest in mutual funds in a disciplined and regular manner. Here are some benefits of investing in SIP.

  1. Disciplined investment: SIP helps investors to invest in a disciplined manner as it involves investing a fixed amount at regular intervals. This helps investors to avoid the temptation of timing the market and investing a lump sum amount. Without analysing the market movements, it helps to create a habit of disciplined saving and investing, which is essential for long-term wealth creation.
  2. Cost-effective: SIP allows investors to invest in mutual funds with a small amount of money. As the investment amount is divided into small portions, the impact of market volatility on the investment is reduced. Moreover, the cost of investing in mutual funds through SIP is also low compared to other investment methods.
  3. Power of compounding: SIP investment allows investors to take advantage of the power of compounding. As the investment is made regularly over a long period, the returns generated on the investment also generate returns, resulting in a higher return on investment.
  4. Flexibility: SIP offers flexibility to investors as they can start, stop, or increase/ decrease their investments at any time based on their financial goals and circumstances.
  5. Diversification: SIP allows investors to invest in a diversified portfolio of assets as mutual funds invest in various securities like stocks, bonds, and other instruments. This helps to spread the investment risk and reduce the impact of market volatility on the investment.

Who should invest through SIP?

SIP or Systematic Investment Plan caters to those who prefer a disciplined and systematic approach to investing, making it suitable for both seasoned investors and beginners. For beginners, SIP offers a convenient entry point into the world of investments, allowing them to start with modest amounts and gradually increase their investment as they become more comfortable. Seasoned investors, on the other hand, appreciate SIP's ability to navigate market volatility effectively, enabling them to capitalise on both bullish and bearish market trends. Regardless of one's risk appetite or investment experience, SIP provides a flexible and accessible investment avenue that aligns with various financial goals and timelines.

Types of SIP

Systematic Investment Plan (SIP) is an investment tool that allows investors to invest a fixed amount of money at regular intervals. Here are some different types of SIP:

  1. Fixed SIP: In this type of SIP, the investor invests a fixed amount of money at regular intervals.
  2. Flexible SIP: Here the investor has the option to vary the amount invested in each instalment.
  3. Perpetual SIP: It is one where the investor does not specify an end date for the SIP.
  4. Trigger SIP: A type of SIP where the investor can set certain trigger points. When the market reaches those trigger points, the investment is automatically made.
  5. Top-up SIP: The investor has the option to increase the amount invested periodically.
  6. Step-up SIP: The amount of investment is increased at regular intervals.
  7. Value averaging SIP: The investor invests a variable amount of money based on the current value of the investment.
  8. Multiple SIP: In a multiple SIP, the investor can invest in more than one scheme at the same time using a single SIP mandate.

Things to consider while starting SIP

Before starting SIP mutual fund, an individual should consider the following things:

  1. Financial goals: You should have a clear understanding of your financial goals and the investment horizon.
  2. Risk appetite: You should assess your risk appetite and choose a SIP plan accordingly.
  3. Investment amount: An individual should choose an investment amount that is comfortable and affordable.
  4. Investment duration: An individual should choose an investment duration based on their financial goals and investment horizon.

Follow the below steps to invest in SIP through Bajaj Finance

Discover how to invest in SIP effortlessly by following the below steps.

Step 1: Determine the investment amount: You need to decide the amount that you want to invest periodically through the SIP. This amount can be as low as Rs. 100 per month for many mutual funds. The minimum investment amount varies for each scheme.

Step 2: Choose the investment product: Select the investment product or mutual fund in which you want to invest the money. The choice of mutual fund is based on your financial goals and risk appetite.

Step 3: Select the SIP tenure: Decide the tenure of the SIP, which can range from a few months to several years.

Step 4: Decide the SIP date: Choose the date on which the SIP investment amount will be debited from their bank account.

Step 5: Set up the SIP: Once you have determined the investment amount, chosen the investment product, decided the SIP tenure, and set the SIP date, set up the SIP with Bajaj Finance.

After setting up the SIP, the investment amount will be deducted from your bank account on the chosen date and invested in the chosen mutual fund. This process repeats at regular intervals as per the chosen tenure.

Conclusion

In conclusion, SIP or Systematic Investment Plan is a simple and disciplined approach to investing in mutual funds that helps individuals to build wealth over the long term. SIP mutual funds are a good investment option for individuals who want to create long-term wealth through disciplined and regular investing.

SIP has grown in popularity among Indian MF investors because it encourages disciplined investing without concern for market volatility or market timing. The ideal method to enter the world of investing for the long term is unquestionably through Systematic Investment Plan provided by mutual funds. It is crucial to invest for the long term, which means you should get started as soon as possible to optimise your results. To get the most out of your assets, your motto should be to start early, invest regularly.

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Frequently asked questions

What is systematic investment plan scheme?

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 safely and securely. You don’t have to worry about selecting the right securities as your financial advisor will do so on your behalf. Also, since you can 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.

What is the return of SIP 1 year?

The one year SIPs have been gaining popularity amongst young investors as these produce good and quick returns. Usually, with the help of one-year SIPs, you can expect ROIs ranging from 4.2% to 6.2% on your investment, depending upon your fund portfolio.

How much tax do I pay on SIP monthly?

If the SIP of a debt fund is held for less than 36 months there will be short-term capital gain taxable at the slab rate applicable to the taxpayer. But if a SIP of a debt fund is held for 36 or more months, then there will be long-term capital gain taxable at 20% after indexation of cost.

There are some hybrid funds also which are taxable based on the equity exposure of the fund. If the equity exposure of the fund exceeds 65%, then it is taxable like an equity fund otherwise the tax rates applicable to the debt fund apply

Is SIP good for beginners?

SIPs are a great investment tool for beginners who want to make systematic and disciplined mutual fund investments. They provide a number of advantages, including the power of compounding, cost effectiveness, diversification, and disciplined investing. Before selecting a mutual fund, investors should take into account a number of variables, including their investment objective, risk tolerance, fund performance, fee ratio, investment horizon, asset allocation, and fund manager history.

Is SIP tax free?

No, not all SIPs are tax free. Under section 80C, only investments made in ELSSs, or equity-linked savings systems, are eligible for a tax deduction. Under Section 80C of the Income Tax Act, investors may invest in ELSSs and receive tax deductions of up to Rs 1.5 lakh.

What is the full form of SIP?

SIP stands for "Systematic Investment Plan." It's a disciplined way to invest in mutual funds.

SIP Meaning or Definition?

SIP is a method of investing a fixed amount regularly in mutual funds, typically on a monthly basis. It allows investors to benefit from rupee cost averaging and the power of compounding.

Can I withdraw SIP anytime?

Yes, you can withdraw or stop your SIP investments at any time. However, it's essential to understand that it's a long-term investment strategy, and stopping prematurely may affect your ability to achieve your financial goals.

What is the minimum investment amount for SIP?

The minimum investment amount for SIP can vary depending on the mutual fund scheme and the asset management company. It's usually a small amount, such as Rs. 100 or Rs. 500.

How frequently can one invest in a SIP?

SIPs are typically set up for monthly investments, but some mutual funds also allow quarterly or semi-annual SIPs. The frequency depends on the specific mutual fund scheme.

Can the investment amount be changed during the SIP tenure?

Yes, you can modify the investment amount during the SIP tenure. It's a flexible investment option, and you can increase, decrease, or even temporarily stop your SIP contributions as per your financial situation.

Can one withdraw money from SIPs before the completion of the tenure?

Yes, you can make partial or complete withdrawals from your SIP investments before the intended tenure. However, some mutual funds may have exit load charges for early withdrawals, and it's advisable to check the fund's specific terms and conditions.

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