What is SIP in Mutual Fund? Systematic Investment Plan Complete Guide
“SIP kya hai” The SIP is a plan of investing money into the funds systematically and that is why it is abbreviated as a Systematic Investment Plan. It enables one to follow the investment discipline and grow their wealth slowly but largely over a long period of time.
How a few amounts of money can be turned into the large corpus, we will see that in this article. We will also cover the following points in this article.
1. SIP Definition + Introduction
2. How sip work with an example?
3. How is sip calculated?
4. What are sip and its benefits?
6. Are sip tax-free OR taxable?
7. Is SIP is a good investment option?
8. What is SIP calculator?
9. How to Calculate SIP Returns?
10. Why is sip better than FD?
11. How can I open a SIP account?
12. How can I invest in SIP?
13. Which Equity mutual fund is best for SIP?
14. SIP meaning in Stock Market
First, we will start with the basic concept of SIP.
What is SIP in Mutual Fund?
SIP means “Systematic Investment Plan”. SIP is considered the much better way to accumulate your wealth as per your suitable customized features. Through SIP, the investor has to invest a fixed amount of money in a regular way in Mutual Fund. The regularity for investing money can be done either every month or every quarter or even yearly basis also.
सिस्टेमैटिक इन्वेस्टमेंट प्लान(SIP)क्या है? हिंदी में
एसआईपी का मतलब व्यवस्थित निवेश योजना है। आपकी उपयुक्त अनुकूलित सुविधाओं के अनुसार एसआईपी को आपके धन को जमा करने का बेहतर तरीका माना जाता है। एसआईपी के माध्यम से, निवेशक को नियमित रूप से एक निश्चित राशि का निवेश करना पड़ता है। पैसा निवेश करने की नियमितता हर महीने या हर तिमाही या यहां तक कि वार्षिक आधार पर भी की जा सकती है।
How does SIP Plan work? – The amount of money to be invested is decided by the investor himself, after considering his capacity. The duration for which the SIP continues is also pre-decided. The investor chooses the duration plan himself, say for 1 year, or 3 years or anything. He has permission to even extend the period after reaching the prior duration.
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You can open multiple SIPs on various durations.
- Anyone from any financial class can open a SIP for him.
- SIP can be started with a minimum amount of Rs 500.
- SIP follows the First-in-First-Out (FIFO) rule, wherein the SIP plan which you had opened very first, will be terminated first or you can say, it arrived at its maturity period first. The successive plans will get terminated in successive durations.
- You can withdraw a part of earned income before the arrival of the lock-n period also, in case you have to face some emergency issue. You can be asked to bear a very less percentage of exit loads in exchange for it, but that’s OK because it will not harm your money in a drastic way.
- Not only this, you can skip investing your money in between for any month. But remember, you should not do this every time because of it volatiles the basic criteria of SIP investment.
- Another benefit you get of SIP is that you can re-invest the returns you get from the investments. The returns on the returns get compounded each time and you get a very fair interest simultaneously. This enables you to have a nice amount of capital appreciation.
- You can customize your SIP also. You can extend the whole duration of investment or you can customize from monthly duration to quarter duration to yearly durations. You can also change the SIP amount.
- A SIP allows you to invest at different levels of the market and benefit from rupee cost averaging. The equity markets go up and down and won’t be at the same level every month.
- It reduces the risk of investment. Suppose you have started a SIP in 2006 for 10 years, i.e. till 2016. During this period your money will be invested in every stage of the market phenomenon, during up of the market and during the down of the market. As a result of this, your investment experiences a steady appreciation of your capital in the long run.
- The average purchase price of units decreases.
- You can invest at any time in any market condition because SIP is invested in every stage of the market.
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Let’s take an example-
If you invest a fixed amount of 10K every month for 20 years. This MF provides you 20% returns.
So, after 20 years your amount will become R 1.51 Core due to the power of compounding.
How SIP works in Mutual fund?
SIP works on the basis of two factors-
• Rupee Cost Averaging Method
• Compounding of Interest method
Rupee Cost Averaging method-
In this method, the SIP investment of the investor provides him the benefit of rupee cost averaging in the long run, if he chooses to invest at regular intervals, rather than investing at a time.
Let us understand this with the help of an example-
How SIP Works with Example?
Suppose Mr. A invests Rs1000 every month for SIP of 6 months.
If the average value of NAV is calculated then we get the value as Rs44, which means total SIP amount/ total NAV= 44. Now, you know that at low NAV, more units will be purchased and at high NAV, low units will be purchased.
You can see from the above table that at NAV 45, Mr. A buy 22.22 shares, while at 40, he buys 25 shares. It comes by dividing the amount of month SIP by the NAV price.
If we divide the total SIP amount by the total number of units, i.e. 6000/137.50 we get the average rupee cost as 43.64. This is the total units that are earned by Mr. A in the whole 6-month tenure. This is less than NAV 44.
Suppose, MR. B invests Rs 6000 in a lump sum at the current NAV. He gets 130 number of units in exchange. In this way, the Average cost price will be Rs46.15 which is more than Mr. A’s cost.
As you see here that Mr. A enjoys more gain of Rs 2.5 per unit over Mr.B. Mr. A played up smart by investing consistently for a period of time. Also, he’ll be less affected by the ups and downs of the market in the long run, as the time period will lead to an averaging of the market fluctuations. This effect is called Rupee Cost Averaging.
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How does Compounding work in SIP?
Power of Compounding– In this method, the investor enjoys the benefit of compounding interests. It means that when you invest in SIP for 6 years, then you’re every year interest will be compounded in your previous year amount and this process keeps on continuing. This enables the investor to earn more and more in less time.
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How is SIP calculated?
When you invest in a SIP for a period of time, you accumulate the number of units at different NAVs. It becomes hard to determine how much you have earned as your returns for the whole invested amount.
For this, here we are providing you with some simple steps to calculate your Sip returns or the total returns. All you need is an Excel sheet. Now follow the following steps-
- Open Microsoft Excel on your computer.
- At one column type the dates at which you have submitted your SIP.
- In the second column enter the number of SIPs for the corresponding dates.
- Enter the market value of all your units. To know the market value of the units for a specific date, you can check it by logging in to your AMC account or through your latest statement.
- Use the XIRR function: Move your cursor to a blank cell and open the XIRR function. It will ask you to fill three parameters: Values, Dates, and Guess. For Values, select the cells with SIP amount and market value. And, for dates select the cells with SIP dates and the date at which you are calculating the returns. You can leave the Guess field blank and click on the OK button.
- Multiply the decimal number by 100.in this way you can get the returns you have earned on your SIP investments on the date of your choice.
Are sip investments Tax-free or taxable?
Yes, the returns on the SIP are taxable and this also depends upon the scheme you have selected and the tenure of your investment. Take a look at below points.
If you have made an investment in equities, then the long-term investment will be considered if you complete an equity investment duration of 1 year at least. If you hold your investments for 1 year, then no tax will be applied. If you failed to do so, then 15% tax is levied on your returns.
In case you have chosen a debt plan, then 3 years is considered as the long-term investment duration. In debt LT capital gains, you have to pay 20% tax with indexation benefit and 10% without indexation.
If you fail to hold your investment in debt for 3 years, then you have to pay the tax as per the income tax slab.
Is SIP comes under 80C?
Yes, some of Equity Linked Saving Schemes (ELSS) which is also known as tax saving mutual funds schemes with a lock-in period of 03 years came under 80C.
In case you have opted for the dividend option, such incomes don’t get taxed in the hands of the investors in equity funds. For debt funds, the taxation rate for dividends is 28.84
What is SIP Calculator?
SIP Investment calculator is a tool using which you can get the returns value which you get as a result of your regular investment during the whole tenure.
When you open the SIP calculator for mutual funds it asks you various fields. Like it asks the Mutual Fund AMC where you have invested
- The scheme name
- The invested amount
- The frequency of investing, that is, yearly, monthly, or quarterly.
- SIP start date and the end date.
Hope now you have a better idea of how does SIP calculator works?
Is SIP good investment?
It totally depends on your nature of investing money. If you prefer to invest on regular duration, say every month, or every quarter, or yearly, until the SIP tenure did not get terminated, then this is a very good option because you get the benefit of rupee cost averaging and you get the more generated capital appreciation.
On the other hand, if you choose to invest in a lump sum at a time, and want to hold that money for the long duration, say 1 year, then it will cost you more than the above and your returns will not be that handsome than what you could get via regular investments.
How is SIP better than FD?
This is really true that SIP is much better than the FD as,
• FD binds you to wait until its maturity period arrives.
• FD deducts taxes also from your returns.
• The rate of return is also very low, it is around 7% only.
The SIP did not bind anyone to wait for long. The amount can be withdrawn anytime with an exit load of very minimal percentage.
No tax is levied on returns.
The return rates are around 15-20%. It can be more also, depending upon the market performance.
How to open SIP account?
It is very simple to open an account of SIP with any Mutual Fund house.
How to Invest in SIP Online?
- You have to prepare yourself with the necessary documents like your PAN card, your address proof, and the identity proof.
- Go to the mutual fund house website of your choice and fill the eKYC form, i.e. Know Your Customer form there. You have to fill your name, address details, DOB, contact information and all. Also, attach the above documents there.
- You should also confirm your physical existence through an In-Person Verification or (IPV).
- Once you completed your KYC, visit the website again and search for “Register Now” or “New Investor Link”.
- Fill a simple form there and choose your ID and password for transacting online.
- Enter your bank details.
- Enter the scheme name you wish to invest in and also select the date for your monthly SIPs according to your convenience.
This way your account will get open in a gap of 30-40 days.
- How to Invest in Share Market Online?
This is an online method. If you cannot approach eKYC then, you can approach an offline KYC. Ask your distributor to bring KYC form. Fill it nicely and hand it over to your distributor. The agent then will help you to open the account for you. It is his responsibility afterward.
How to invest in SIP?
You can invest in SIP using your bank account. Your agent will automatically extract the concerning amount on a regular basis from your bank account.
Another method that you can use is that you can make post-dated cheques in the name of SIP submissions, which will be submitted by your agent from time to time, whenever the date of filling SIP will arrive.
Disadvantage of SIP
- It might be possible that your agent did not submit your post-dated cheques on time. Or the bank has dishonored your cheque or you do not have sufficient balance in your account for that duration.
- It may be also possible that the house fails to deposit the post-dated cheques.
- It is not always true that you will always gain profit due to averaging costs. Sometimes, the average cost method does not work, when the market is down at the time of the maturity period.
How much do you need to start an SIP?
You can start an SIP from a minimum of Rs. 500/- monthly.
Which mutual funds are best for SIP?
See, this cannot be answered with 100% accuracy because the performance of Mutual fund houses varies from time to time. The best MF house or fund is that which is performing well in terms of financial objectives and are targeting the potential markets.
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SBI bluechip funds of SBI MF and Franklin India, HDFC MF are some of the houses that are nowadays doing very well.
Top Five SIP Investment Funds and their Performances
|Fund Name||3 Year Returns (%)||5 Year Returns (%)|
|Birla SL Frontline Equity Fund(Growth)||23.15||18.16|
|SBI BlueChip Fund-Regular(Growth)||26.25||20.24|
|BNP Paribas Mid Cap Fund(Growth)||33.82||24.58|
|Mirae Asset India Opportunities Fund-Regular(Growth)||27.45||19.44|
|Franklin India Prima Plus Fund(Growth)||27.17||18.56|
While selecting the best MFs for SIP, you should see their past performances of 5 years and also see the AUM. These two are really crucial to consider.
Can I customize my SIP?
Yes, you can customize you SIP anytime.
So Get started with SIPs in the mutual fund for long term wealth creation. We have described the advantages and disadvantages of SIP here. Obviously, there are fewer disadvantages of SIP over its advantages because it is considered a very ideal method of investment, especially for the average class people.
You can invest any time and any amount and in any duration which suits you best to maintain regularity.
If you have any questions regarding “SIP” or Systematic Investment Plan details, duration, guidance etc. please ask us. Don’t forget to like and subscribe to us.
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