Systematic Investment Plan

Systematic Investment Plan (SIP) is an investment mode through which investors can invest in mutual funds. SIPs make investing in mutual funds easy and convenient. In this article, we explain what this mode is, how it works, how it can benefit your financial journey, and what things you should know before investing in mutual funds through SIPs.

One of the most popular investment modes, Systematic Investment Plans are convenient and easily accessible. In this article, we are going to learn what this mode is, how it works, how it can benefit your financial journey, and what things you should know before investing in mutual funds through SIPs.

According to data from AMFI (Association of mutual funds in India), as of October 2022, the Indian mutual fund industry had 5.93 crore SIP accounts. Meanwhile, the total amount collected via SIP during that month was ₹13,041 crore. The amount accumulated through SIPs has been continually increasing for the past few months.

The above data shows how more and more people are investing in mutual funds through SIPs and how more and more money is being invested in SIPs by Indian investors. If you are someone who is considering investing in mutual funds via SIPs, you must read this blog to understand all about it.

Before we learn what SIP is, let’s learn a small definition of the investment modes available in mutual funds.

When you invest in mutual funds through the SIP mode, you invest a fixed amount in a scheme at regular intervals. For example, you can choose to invest 1,000 every month or 5,000 every quarter and so on. When the due date comes, the amount will be deducted automatically from your bank account. The investment amount will be used to purchase units of the mutual fund scheme.

Here's how SIPs work: Let's say that you start investing ₹10,000 every month through SIP and this investment would create units in the mutual fund based on the NAV (Net Asset Value). If the NAV is 25, then 400 units would be allotted (10,000/25=400).

The NAV is the reflection of the market movement on which the fund is based and it can go up or down based on how the market functions. If the stock market trades lower, you would be allocated more than 400 units and vice versa. However, the amount you pay (i.e. ₹10,000) will remain the same even if you are allocated over 400 units or less than 400 units per month.

When you examine the example closely, you can see that when the NAV is high (likely when the market is up), the number of units allotted for the same ₹10,000 SIP is lower compared to the month when the NAV is low (the market is down). Over time, as your SIP progresses, you will have invested across all market phases. So, your average cost will be reasonable. This is called rupee cost averaging.

There are two investment modes through which an investor can invest in mutual fund schemes. They are

Lumpsum - You choose lump sum if you wish to invest one time in a mutual fund scheme. Usually, people choose this method when they receive a bonus, so they can put the money in a scheme as a one-time investment.

If you wish to know how much and how long you need to invest to achieve your goals, please check the Lumpsum Calculator, created by Koshex.

Systematic Investment Plan (SIP) - You choose SIP when you want to invest a fixed amount in a scheme at regular intervals. You can choose to invest ₹5000 every month or ₹10,000 every quarter. When the due date comes, your amount will be deducted automatically from your bank account and it will be used to purchase units of the mutual fund scheme.

If you wish to know how much you need to invest every month via SIP to achieve your goals, please check the SIP Calculator, created by Koshex.

Now, let’s learn about Systematic Investment Plans (SIPs) in detail.

There are several types of systematic investment plans. Below are the types that you need to know before you start an SIP.

This is one of the popular SIP investment routes. In a regular SIP, you can fix your investment amount and investment interval. The fixed amount will be deducted automatically at the given time.

In this type, you can adjust your SIP amount based on income, expenses, and market conditions. You can even set this SIP to automatically invest more when the market declines and less when the market goes up.

Here, you can set up your investments to increase by a small amount periodically. Let's say, you set up an SIP to invest ₹5,000 in January, you can increase the amount by ₹1,000 every subsequent month. You can also ask the fund house to increase it by ₹5,000 after every 12 months.

In a regular SIP, you can choose the start and end date of your SIP. However, in a perpetual SIP, your SIP will continue until you indicate to the fund house to discontinue it.

In this type, you can set up your SIPs to be triggered if the NAV equals a certain value. With this type, you may even trigger your SIP based on the values of popular benchmark indices like Sensex and Nifty.

There are several benefits to investing in mutual funds through SIPs. In this section, we will be explaining all about it.

As we have mentioned above, Rupee Cost Averaging is one of the biggest benefits of investing in mutual funds via SIPs. Here are a few more.

Before we understand the power of compounding, we should learn about compound interest. Compound interest means the interest calculated on the principal amount and the accumulated interest.

Let's see an example where we tell you how much you can earn with compound interest in the long run.

You have invested a total amount of ₹7,20,000 lakhs for 6 years and have made a total wealth of ₹10,18,461. This means you have earned an estimated return of ₹2,98,461. You have close to ~ ₹3 lakhs in 6 years without ever having to increase your yearly SIP amount.

If you continue in the above example path, this is how much you will earn in the next 30 years.

In the above table, we can see how your investment of ₹1,20,000 via yearly SIPs will help you accumulate nearly ₹2.2 crores in just 30 years. This shows how compounding can work in your favor if you are consistent with your investment journey.

Paying a large part of your salary every month towards your investments might be a difficult task for many investors. With SIPs, you can start with a small monthly sum of even ₹100 with some Asset Management Companies (AMCs). As you start to make more money, you can increase your investments as well. This flexibility will help you keep control of your money all the time.

When you opt to invest via SIP, you can rest easy, knowing that your investments will be automatically deducted from your bank account every month at periodic intervals, like daily, weekly, monthly, quarterly, etc., This allows the investors to inculcate a sense of financial discipline into their lives.

Apart from your SIPs in ELSS funds, your SIP investments in pretty much every other mutual fund can be withdrawn anytime you want. This helps you during emergencies. So, if you are looking to build an emergency fund, you can build one gradually using SIPs in mutual funds.

Most investors have multiple SIPs in different mutual funds of the same amount running every month. This helps in case of sudden liquidation and using the money for emergencies. Also, this practice helps diversify your money across different kinds of funds, thus diversifying your portfolio and reducing your risk.

If something comes up suddenly during a month, you can choose to pause your SIP payments. You can skip your SIP payments without any consequences (i.e.) no penalty. This is not the case with other saving instruments like recurring deposits, where you would be charged a penalty for skipping payments.

SIP investments are more liquid than other kinds of financial instruments, such as fixed deposits, shares, securities, etc. You can stop an SIP payment at any time you want and withdraw your money and use it for other avenues or investments.

Starting an SIP in any mutual fund is pretty easy to do. You can start an SIP in a mutual fund of your choice from the comfort of your home. For example, Koshex is an all-around wealth management platform, where you can start an SIP in your favorite mutual fund, and track how your investments with ease. If you wish to start an SIP with Koshex, you can create an account with us for free and get started today.

Systematic Investment Plans are an ideal investment mode for both new investors, as well as, experienced investors. There are so many options available within SIP and they are preferred by many as it makes one a disciplined investor. It also helps you get your finances on track, stick with your budget and think twice before splurging on unnecessary things. Some AMCs even let you start an SIP in their mutual fund schemes for as low as ₹100.

We hope this article helped you understand all about Systematic Investment Plans, how they work, and their benefits. We are also hoping that you can take informed investment decisions and see whether SIPs will be a good addition to your financial plan.

Interested in learning more about personal finance and mutual funds? We have written articles, covering many topics, including different types of mutual funds, such as ELSS funds, as well as, other types of investment instruments, such as Fixed Deposits, Digital Gold, and Smart Deposits, head over to our Blogs section. You can also check out our Calculators, where you can learn more about how much wealth you can accrue in certain years.

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