What Is Systematic Investment Plan (SIP)

A systematic investment plan (SIP) is an investment vehicle provided by mutual funds, enabling investors to make small investments in a disciplined manner rather than lumpsum investments.
What is SIP
5 mins
07-June-2024

A Systematic Investment Plan (SIP), commonly referred to as SIP, is a service provided by mutual funds to enable investors to invest systematically. With SIP, investors can allocate a predetermined amount at regular intervals in their chosen mutual fund scheme. The investment amount can start as low as Rs. 100, and SIP intervals can be set on a weekly, monthly, quarterly, semi-annual, or annual basis.

SIP allows investors to profit from market ups and downs without the stress of timing. This disciplined approach involves investing fixed sums at regular intervals, offering a shield from market volatility. Embraced by Indian Mutual Fund investors, SIP is positioned as the optimal entry point for long-term investments.

What is SIP?

Systematic Investment Plan (SIP) is a method of investing in Mutual Funds allowing investors to contribute a fixed sum regularly, like monthly or quarterly, rather than a lump sum. This, starting from as low as Rs. 100 per month, is same as a recurring deposit and is hassle-free with automated monthly deductions. Popular among Indian Mutual Fund investors, SIP ensures disciplined investing. It is an ideal long-term investment strategy, emphasising the importance of starting early and consistent contributions for optimal returns. In essence, the mantra is to "Start Early, Invest Regularly" for the best outcomes in long-term investments.

How do SIPs 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 Systematic Investment Plan (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 investment plans

Here are some features of SIP investment plans:

  • 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 mutual funds 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.
  • Option to temporarily halt investments: SIP provides the convenience of temporarily suspending investments, offering valuable flexibility, especially during financial challenges. The SIP automatically resumes at the end of the pause period. It is recommended to verify the availability of this pause feature with your Mutual Fund provider.
  • Unrestricted investment ceiling: With a minimum SIP investment of Rs. 100 and no strict upper limit, investors can contribute any amount of their choice through the SIP. Ensuring the ongoing consistency of SIP investments throughout the plan's duration is essential for optimal results.

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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. Read more about, Compounding in mutual funds.
  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. Lower Risk: The rupee cost averaging strategy employed by SIPs helps mitigate the impact of market volatility. During market downturns, fixed investments acquire more units, and during upswings, fewer units are bought. This strategy lowers the average cost of acquisition, reducing the overall risk and providing a more stable investment journey.

Who should invest in 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.

What are 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. Read more about, What is a step up SIP.
  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.

Explore SIP types in more detail.

How to choose right SIP to invest in India

Choosing the right SIP in India involves considering factors like duration, fund house performance, asset size, investment goals, plan selection, portfolio diversification, and periodic reviews for optimal outcomes.

  1. Duration of SIP: Invest with a reference point of at least 5 years to gauge fund performance across market conditions, aligning with long-term investment goals.
  2. Fund house performance: Evaluate the reputation and past performance of the fund house to gauge the ability of fund managers in handling market fluctuations.
  3. Asset under management: Consider the asset under management, especially for first-time investors, ensuring a substantial and well-managed fund portfolio.
  4. Set investment goal: Align your SIP plan with specific goals, choosing funds that match your financial objectives and risk tolerance.
  5. Select the right plan: Analyse the past performance of available SIP plans, ensuring alignment with your investment strategy and risk appetite.
  6. Diversify your portfolio: Mitigate market fluctuations by investing in multiple fund units, ensuring a diversified portfolio for maximum returns.
  7. Periodically review your investments: Regularly review your SIP strategy, making adjustments to align with changing financial goals and market conditions for sustained success.

How to calculate returns from mutual fund SIPs

Calculating returns on your Systematic Investment Plan (SIP) investments helps you understand how your money is growing over time. Here, we'll explore different methods to measure your SIP returns:

1. Point-to-Point or Absolute Return

This is the simplest method, reflecting the total profit or loss earned on your investment. It's calculated by subtracting the initial investment amount from the current value of your SIP units.

For example, if you began your SIP with a Rs. 1,000 investment and your current units are worth Rs. 1,500, your absolute return would be Rs. 500 (Rs. 1,500 - Rs. 1,000). This method is useful for understanding immediate gains but doesn't account for the time period involved.

2. Simple Annualised Return (SAR)

This method aims to express your absolute return as a yearly percentage. It's calculated by dividing the absolute return by the total investment period (in years) and multiplying by 100.

Let's say you invested Rs. 1,000 per month in an SIP for 2 years, and your total return is Rs. 12,000 (Rs. 500 x 24 months). Using the SAR formula:

SAR = (Total Return / Investment Period) * 100 SAR = (Rs. 12,000 / (2 years * 12 months/year)) * 100 SAR = 50%

While SAR is easy to understand, it doesn't consider the compounding effect, where your returns generate further returns over time.

3. Compounded Annual Growth Rate (CAGR)

This method provides a more accurate picture of your investment's growth considering the power of compounding. CAGR reflects the average annual return you would have received if your investment had grown at a steady rate over the entire period.

Calculating CAGR usually involves financial calculators or online tools. However, it provides a valuable insight into the actual growth rate of your SIP.

4. For calculating SIP returns, use XIRR

Since SIPs involve multiple investments at different points in time, a more sophisticated method is necessary. XIRR (Internal Rate of Return) is a financial function used to calculate the actual return on an investment with uneven cash flows (like your SIP contributions).

Most mutual fund websites or financial calculators offer XIRR functions. By providing your SIP investment details (amount, frequency, and current value), XIRR will calculate the true annualised return considering all your SIP contributions.

Remember, understanding these methods empowers you to effectively monitor your SIP performance and make informed investment decisions.

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.

SIP or a One-time Investment - Which is better?

Both Systematic Investment Plans (SIPs) and lump sum investments are popular ways to grow your wealth, but they cater to different preferences and financial goals. Here's a breakdown to help you decide:

  • SIP (Systematic investment plan):

    • Involves investing a fixed amount at regular intervals (monthly, quarterly, etc.).

    • Benefits from rupee-cost averaging, where you purchase units at various price points, potentially balancing out market volatility.

    • Inculcates financial discipline by automating investments and setting aside a regular amount.

    • Ideal for long-term investors who want to build wealth gradually and manage risk through market fluctuations.

  • Lump sum investment:

    • Involves investing a larger sum of money upfront into a chosen investment.

    • May potentially benefit from investing during market downturns when prices are lower.

    • Requires a larger initial investment amount, which might not be feasible for everyone.

    • Suitable for investors with a specific financial goal (like a down payment) or those comfortable with potentially higher market risks.

Ultimately, the best choice depends on your individual circumstances. Consider your investment horizon, risk tolerance, and financial goals when making your decision. You can even combine both strategies for a well-rounded approach.

Calculate SIP investment returns by using an online SIP calculator

Tired of guesswork when it comes to your mutual fund investments? Online SIP calculators, like the Bajaj Finserv SIP Calculator, take the complexity out of estimating your long-term returns.

Let's explore how to leverage this tool for both target amount and current investment scenarios:

Calculating your future wealth:

  1. Investment amount: Enter your desired monthly SIP contribution (typically Rs. 100 to Rs. 10,00,000).

  2. Investment tenure: Set your investment horizon, ranging from 1 to 30 years.

  3. Expected return rate: Choose a realistic estimated annual return percentage (typically 1% to 30%).

  4. Results revealed: The calculator displays your projected future investment value, including total growth and returns earned over the chosen period.

With this information, you can plan your investments strategically to achieve your financial goals.

What are the documents required for SIP investment?

Before starting your online SIP journey, ensure you have the following documents readily available:

  • Proof of Identity: Aadhaar Card or PAN Card

  • Proof of Address: Driving License, Utility Bill (electricity, water), or Bank Statement

  • Photograph: Passport-sized picture in JPEG or PNG format

How 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.

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.

Calculate your expected investment returns with the help of our investment calculators

 

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Frequently asked questions

What is meant by SIP investment?

Systematic Investment Plan (SIP) is a method of investing in mutual funds where you contribute a fixed amount regularly. It works by allowing you to invest smaller sums at regular intervals, harnessing the power of compounding and rupee cost averaging.

Is SIP better than FD?

SIP and Fixed Deposit (FD) serve different purposes. SIP offers market-linked returns with potential for higher growth, while FD provides fixed returns with lower risk. The choice depends on individual financial goals and risk tolerance.

Can I invest Rs. 1,000 per month in SIP?

Yes, many SIPs have a low entry point, allowing investors to start with amounts as low as Rs. 1,000 per month, making it accessible for a wide range of investors.

Is SIP 100% safe?

While SIPs are relatively safer than some investment options, they are not completely risk-free. The risk is associated with market fluctuations, and returns are subject to the performance of the underlying funds.

What is SIP Rs. 5,000 per month for 20 years?

If you invest Rs. 5,000 per month through SIP for 20 years, assuming 12% return. The estimate total returns will be Rs. 37,95,740 and the estimate future value of your investment will be Rs. 49,95,740.

Can I withdraw SIP anytime?

Yes, SIP investments offer flexibility, allowing you to withdraw your funds at any time. However, it's essential to check if there are any exit loads or charges associated with early withdrawals.

How much is Rs. 50,000 monthly SIP for 5 years?

If you invest Rs. 50,000 per month through SIP for 5 years, assuming 12% return. The estimate total returns will be Rs. 11,24,318 and the estimate future value of your investment will be Rs. 41,24,318.

Is SIP risk-free?

SIPs (Systematic Investment Plans) are subject to market risks, as they invest in mutual funds that fluctuate with market movements. However, investing regularly over time can help mitigate risk through rupee cost averaging.

Does SIP pay monthly?

SIPs offer flexibility in frequency, allowing investors to choose monthly, quarterly, or other intervals for investment contributions, depending on their preferences and financial goals.

How can I start SIP?

Starting a SIP is simple. Investors can approach a mutual fund provider or use online platforms to select a fund, specify the investment amount and frequency, and set up automatic deductions from their bank accounts.

Can SIP go in loss?

Yes, SIP investments can incur losses, especially during market downturns. However, investing regularly over the long term may help offset losses through rupee cost averaging and the potential for market recovery.

Is SIP good for beginners?

SIPs are often recommended for beginners due to their simplicity, affordability, and ability to instill disciplined investing habits. They offer a convenient way for novice investors to start building wealth gradually over time.

What is the 8:4:3 rule in SIP?

The 8:4:3 rule suggests allocating 80% of SIP investments to equity funds, 40% to mid-cap funds, and 30% to small-cap funds. This strategy aims to balance risk and return potential while diversifying across different market segments.

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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.