INVESTMENT
SIP ( Systematic Investment Plan)
Systematic Investment Plans (SIPs) in India
SIPs have become a popular method for building wealth in India, especially among the salaried middle class. This is especially true for mutual fund SIPs, as here, retail investors can access the benefits of professional management of their investments at a low cost.
What is SIP?
An SIP, or Systematic Investment Plan, is a method of investing money into mutual funds or stocks. It allows you to invest a fixed amount at regular intervals over time rather than making a large, one-time investment.
SIPs offer investors an easy, convenient way to invest without having to worry about timing the market. You can just set up an account and benefit from rupee-cost averaging over time. SIPs are also known for their flexibility, as you can start by investing a small amount and eventually increase your contribution as your financial situation improves.
To calculate the potential returns of your investment via this mode, you can use a SIP calculator online.
Types of SIPs
Read the following types of SIPs to know which one is the best for you:
- Regular SIPs
This is the standard SIP, where investors pay a fixed amount periodically. They enable regular transfer of funds from the bank to the SIP account. It helps average out the cost of the SIP units purchased.
- Flexible SIP
In this case, you can change the SIP amount as per your requirement. For instance, when the market is down and the assets are underpriced, you can buy more. Similarly, you can buy less when the assets are overpriced.
You can also alter the instalment amount according to your financial condition. You can lower the SIP amount when you are short of cash and increase it when you have a cash surplus. This is also called Flexi-SIP or Flex-SIP.
3.Step-up SIP
Also known as Top-up SIP, this plan allows you to increase or step up the SIP amount at regular intervals. For example, you can start a monthly SIP with ₹10,000 and arrange to increase it by ₹1,000 every year. This plan is suitable for salaried people who expect annual increments and bonuses.
4.Perpetual SIP
You can stay invested in most SIPs for a predetermined period of time. However, for perpetual SIPs, you have to only mention the start date and not the end date. This means that you are going to keep investing in the SIP until you request the fund house or the Asset Management Company (AMC) to stop the SIP.
5.Trigger SIP
In this type of SIP, you can set a trigger for an SIP. The trigger could be an event, like a sudden market dip or a favourable market condition, a specific index level, a level of NAV (Net Asset Value), etc. Your trigger can result in starting the SIP, redeeming the fund units, or switching to another scheme. This is highly useful for people who invest based on principles and want to automate their investments.
6.Multi SIP
This scheme allows you to invest in multiple funds of a fund house via a single SIP. For example, if you invest ₹30,000 monthly in a multi-SIP, you can split the amount into five schemes, buying units of ₹6,000 each. It makes investing in multiple SIPs a much smoother process and helps add to the diversity of your SIP portfolio.
SIPs can also be categorised as per the kind of instruments that they invest in, e.g. equity funds, debt funds, overnight funds, balanced funds, money market funds, etc.
Benefits of SIPs
1. The money invested in the SIP compounds over the years, generating a high return eventually.
2. Unlike investing in stocks yourself, you do not have to worry about investment strategies. The funds will be allotted by capable professionals who understand financial markets well.
3. You can garner high returns without having to make a huge investment in one go. It is perfect for salaried people who get a moderate but regular income.
4. It encourages financial discipline as your SIP commitment nudges you to be more attentive toward your spending.
5. Investing in certain SIPs like ELSS funds can help you save thousands of rupees in taxes.
How to Start SIP Investment?
You can easily start a Mutual Fund SIP on the Angel One app by taking the following steps:
1. Go to the Home page and click on Mutual Funds.
2. Choose the Fund that you want to invest in from the section titled ‘Discover Mutual Funds’. You can start your search by clicking on EXPLORE ALL FUNDS’. You can also narrow down your search by clicking on the categories of funds given.
3. Once you have gone through the details of a mutual fund and chosen it, click on ‘INVEST’.
4. Choose the SIP option and enter the monthly amount and date i.e. the day of the month when the SIP payments will be made from your account.
5. Choose the mode of payment e.g. UPI.
6. Click on ‘START SIP’ to start the SIP process.
7. You can choose to make your first SIP payment right away as well by checking the box next to ‘Make first SIP payment now’.
Tax Implications on SIP Investment
Taxation of SIPs in India is based on the following:
1. The holding period of the investment. For instance, gains from an equity fund held for more than 12 months are considered long-term capital gains and taxed accordingly. However, gains from equity funds held for less than 12 months are considered short-term capital gains and taxed accordingly.
2. Tax-saving mutual funds (ELSS) are eligible for a tax deduction of up to 1.5 lakh in a financial year.
Mistakes to Avoid in Systematic Investment Plan
The following are some of the mistakes that should be avoided in SIP investments:
- Procrastination – Delaying the start of SIP can reduce the potential benefits of compounding over time.
- Stopping SIP – You should not stop your SIP midway because SIPs give their highest returns towards the end of their holding period. Therefore, the short-term opportunity cost of leaving your SIP midway is quite high.
- Ill-informed selection of funds – Choosing a fund without adequate research may lead you to invest in an SIP that is not in line with your goals. It’s essential to research and choose SIPs based on investment goals, risk tolerance, and historical performance.
- Excessive investing – Investing beyond one’s means can lead to financial strain. Setting a realistic and affordable SIP amount ensures consistency in contributions.
SIP Calculator
The SIP returns are calculated by entering the variable numbers mentioned above into the Systematic Investment Plan calculator.
The SIP calculator formula used is,
A = P × ({([1 + r]^n) – 1} / r) × (1 + r)
Where,
A-> Estimated Returns from the SIP
P -> Amount you invest in SIP
r -> Rate of Return you are expecting to get
n -> Number of total SIPs made
Example of Using SIP Calculator
Suppose you are a salaried individual earning a monthly income. Assume that you have decided to put in ₹5,000 per month as SIP, and after due diligence, you have chosen an SIP that gives an average of 12% return per year. Now, if you want to know the final amount this SIP will give you in 5 years