What is a SIP Investment?
A SIP stands for Systematic Investment Plan. It is a method of regularly investing a small amount in market-linked investment options. It is a smart and convenient way to grow your money, as it allows you to purchase fund units consistently over time. A SIP investment plan helps to average out the market fluctuations, reducing the impact of volatility on your investment portfolio.
So, to answer "What is a SIP Investment ?" It is a disciplined approach to gradually build your wealth through the power of compounding and rupee cost averaging. The earlier you start, the greater the potential returns from your best investment options .
How Does a SIP Investment Plan Work?
You can learn the workings of a Systematic investment plan from the following to make better decision-making:
Step 1: Select the best SIP plan that aligns with your financial goals and risk tolerance by comparing the past performance, fund objectives and other features of a SIP investment plan.
Step 2: Decide how much to invest and whether to contribute monthly, quarterly, or yearly to the chosen SIP investment plan.
Step 3: Fill in the required plan details and complete your payment to invest in your chosen fund successfully.
Step 4: Once your SIP is active, the fund manager will invest your money in various assets (like equities, bonds, money market instruments, cash, or other securities) according to the fund objective of the chosen best investment plan .
Step 5: On the scheduled date, your SIP amount will be deducted and used to purchase units of the chosen fund at its current Net Asset Value (NAV).
Step 6: Your SIP investments grow over time and you can adjust your contributions anytime as per your investment strategy and market performance.
NOTE: The returns from your SIP will depend on the performance of your chosen fund. However, in the long term, SIP investment plans have been shown to be an excellent way to grow your wealth.
Illustration:
If you invest ₹10,000 at an expected annual return of 12% for a period of 5 years. A SIP calculator can help you estimate the SIP investment returns at the end of your investment period, which will be as follows:
Total Investment: ₹10,000 x 60 months = ₹6,00,000
Future Value: Using the SIP Calculator, the maturity amount after 5 years would be approximately ₹8,11,000. The interest earned with this SIP is ₹2.11 lakhs.
This SIP investment not only helps in wealth creation but also provides life cover, making it a balanced choice for long-term financial planning.
What are the Key Features of SIP Investment Plans?
The key features of the best SIP investment plans in India are listed in the table below:
Disciplined Investment: A SIP investment encourages regular, automatic contributions to build wealth over time.
Portfolio Diversification: A Systematic Investment Plan helps to reduce the overall risk of investment and maximise long-term returns by allowing you to invest in a mix of the following assets:
Small Investments: Start investing in SIP investment plans with as little as Rs. 100 per month.
Flexibility: Customise your SIP investment plan as per your changing financial goals and risk appetite by adjusting the following parameters:
Rupee Cost Averaging: Rupee-cost averaging in SIP investment allows you to invest the same amount at different market conditions. Sometimes you buy when prices are high, and other times when they are low. Over time, this averages out the cost, so you need not worry about market volatility as much.
Power of Compounding: In a SIP investment plan, the earlier and longer you invest, the more your money grows. The compounding effect can lead to significant growth over time by reinvesting your returns. So, a SIP allows you to earn on your earnings as well.
Professional Management: The SIP investments in market-linked funds are managed by expert fund managers. These professionals select and manage stocks and assets to maximize your SIP returns.
NOTE: You can use a ULIP calculator to learn about the future returns from your SIP investment in a ULIP fund.
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Types of SIP Investment in India
The following table lists the significant types of SIP Plans in India based on the way of investing in a SIP investment plan:
SIP Type Description Advantage
SIP with Insurance Offers life insurance coverage and SIP investment options.
Provides financial protection along with investment growth.
Fixed SIP Invest a fixed amount at regular intervals (monthly, quarterly).
Simple, disciplined investing
Flexible SIP Change investment amount or skip installments.
Adapts to changing income
Perpetual SIP Invest for an indefinite period (no end date).
Long-term wealth creation
Trigger SIP Invest only when a specific market event occurs (e.g., index falls).
Aims to buy at opportune moments (advanced strategy)
Top-up SIP / Step-up SIP Gradually increase investment amount at set intervals (fixed amount or %).
Grows investment with income
Multiple SIP Invest in multiple funds through a single SIP.
Diversified portfolio across different asset classes
Tax Benefits of SIP Investment
A SIP investment plan offers you the following tax advantages for the long term:
SIPs in a ULIP plan are eligible for tax deductions under Section 80C of the Income Tax Act, up to ₹1.5 lakh per financial year.
The maturity amount from your SIP investments in a ULIP plan is tax-free under Section 10(10D) if the annual premium is below 10% of the sum assured or is less than ₹2.5 lakhs per annum.
The death benefit provided with the SIP investments in a ULIP plan is tax-free under Section 10(10D).
You can avail of tax benefits of up to ₹1.5 lakhs under Section 80C with Equity Linked Savings Scheme (ELSS).
Annual Long-Term Capital Gains (LTCG ) up to Rs. 1.25 lakh is tax-exempt.
Taxation of SIP Investments:
Long Term Capital Gains (LTCG) from an Equity Fund is taxed at 12.5% with indexation benefits if redeemed after 1 year of the SIP investment, with an exemption limit of Rs. 1.25 lakh.
The LTCG from a SIP in a Debt Fund is taxed at 20% if held for longer than 3 years.
Short-Term Capital Gains (STCG ) from SIP investment in an Equity Fund is taxed at 20% if redeemed within 1 year, as per Union Budget 2024.
The STCG from a Debt Fund is taxed as per your income tax slab if held for less than 3 years.
Other mutual fund SIPs, except ELSS, do not qualify for tax deduction benefits.
What are the Documents Required for SIP Investment?
You need to submit the following documents to complete your SIP investment process:
KYC Documents (Any One): PAN (Permanent Account Number) card, Passport, Aadhar Card.
Bank Account Details: Account Number, Branch Name, IFSC code.
Address Proof (Any One): Valid Passport, Driving License, Voter ID Card, Utility Bills (electricity, gas, water, or telephone bills).
Top 7 Benefits of SIP Investment Plans in 2024
Some of the significant benefits of investing in a SIP plan are as follows:
Low Minimum Investment: Start a SIP with just Rs. 100, with no upper limit on contributions.
Compound Growth Benefits: SIP plans leverage compounding for substantial long-term investment growth.
Promotes Financial Discipline: SIP investment fosters discipline through regular fixed investments.
Emergency Fund Accessibility: SIP plans provide quick access to funds through Systematic Withdrawal Plans (SWP ) during emergencies.
Risk Diversification: SIP plans diversify investments across equities and bonds for reduced risk.
Automatic Investment: A SIP allows you to automate your investment plan with standing instructions to your bank, fund house, or Asset Management Company (AMC).
Top-Up Facility: Whenever available, add extra money to your SIP investments in ULIP and mutual fund plans or choose a Step-Up SIP Plan to achieve higher returns.
Which is Better: SIP vs Lump Sum Investment?
Let us briefly discuss the comparison between SIP investment and one-time investment from the table below:
Parameters SIP Investment Lump Sum Investment
Investment Strategy Allows to invest in regular and periodic investments (monthly/ quarterly).
Allows one-time investment in large amounts.
Risk Lowers risk as it spreads the investment risk over time.
Higher risk as the investment is exposed to market volatility at once.
Market Timing No need to time the market.
Good market timing is required to get optimal returns.
Rupee Cost Averaging Yes, helps in averaging the purchase price of your SIP investment.
No cost-averaging, as investment is locked at one price.
Flexibility Offers flexibility in investment amount and can start or stop the SIP anytime.
Less flexible, as it is a one-time investment commitment.
Affordability Ideal for small amount of regular savings.
Best if you have large funds available.
Suitability Suitable for long-term goals.
Suitable for short-term goals.
Best For Preferable for long term investors with regular income.
Investors with large capital and good market insight can invest.
Returns Provides steady returns, which are smoother over time.
Gives high returns if invested at right time.
SIP Investment in ULIP vs. Mutual Funds
As an investor, you are always confused about choosing between a SIP in a ULIP fund vs. a SIP investment in a mutual fund.
Although both these investment options offer different benefits, the following table will help you to decide the right SIP investment plan to meet your financial goals:
When to Start a SIP in ULIP? When to Start a SIP in a Mutual Fund?
Looking for medium to long-term investment horizon.
Wishing to grow wealth while securing the future of your family.
Have a low to medium risk appetite.
You want to save on your taxes.
Want less stress during market volatility.
A short-term or medium-term investment horizon.
Want to only grow wealth.
Have a high or medium-risk appetite.
Want high liquidity with no tax saving.
Have knowledge and expertise to manage market volatility.
Who Should Invest in a SIP Investment Plan?
A Systematic Investment Plan can be a good investment option for a variety of people, here are some characteristics that make someone a good fit for a SIP:
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How to Choose the Best SIP Investment for Your Financial Goals?
Before investing in a Systematic Investment Plan in India, the following important aspects should be kept in mind:
SIP Duration: Consider investing in a SIP for at least 5 years to gauge market performance.
Fund House Track Record: Evaluate the reputation and past performance of your SIP's fund house to assess their ability to manage market fluctuations effectively.
Rs. 500 Cr Asset Size Benchmark: For new investors, a fund with Assets Under Management (AUM) of Rs. 500 Cr can serve as a suitable benchmark when selecting the best SIP investment plan.
Define Investment Goals: Choose a fund for SIP that aligns with your financial objectives.
Choose Wisely: With numerous SIP investment plans available, make your selection based on the funds' historical performance.
Diversification Strategy: Spread your investments across multiple fund units to mitigate market volatility and optimize returns from your SIP.
Regular Portfolio Review: Periodically review your investment strategy to ensure it aligns with your evolving financial goals and make adjustments in your SIP investment as necessary.
Types of SIP Investment Returns Calculation?
You can learn how your money grows through a SIP, which involves measuring returns using different methods:
Absolute Return/ Point-to-Point Method: This method calculates the total profit or loss on your investment which is used to assess the immediate gains of your SIP investment.
Annualised Return: Annualised returns expresses your absolute return as an annual percentage, which does not consider compounding effects.
Compounded Annual Growth Rate (CAGR): CAGR offers a more accurate view by factoring in compounding. It shows the average annual return if your investment had grown steadily over the entire period.
Rolling Returns: Rolling returns measure how an investment performs over a specific time period across different intervals, giving a better picture of consistency.
Extended Internal Rate of Return (XIRR): XIRR calculation is essential to estimate the overall rate of return of the SIP investments made at irregular timings and different SIP amounts.
Point-to-Point Returns: This method calculates the return between two specific dates, i.e., from the start date of investment to the end date. It does not take into account any fluctuations in between and only considers the final value.
Top 10 SIP Investment Mistakes to Avoid
Some of the common SIP mistakes that you should consider to avoid low returns are as follows:
Not Setting Clear Goals: Investing without specific financial goals can lead to unfocused efforts. Define what you’re saving for, whether it’s retirement, a home, or education.
Ignoring Risk Tolerance: Not assessing your risk tolerance can result in choosing inappropriate funds. Understand how much risk you can handle and select SIPs accordingly.
Investing for Short-Term Gains: SIP investments are designed for long-term investing. Avoid the temptation to chase short-term profits; stay committed to your investment horizon.
Overreacting to Market Volatility: Panic selling during market downturns can hurt your investments. Remember that SIPs benefit from market fluctuations over time; stay the course.
Not Reviewing Your Portfolio: Failing to review and adjust your SIPs can lead to outdated investment strategies. Regularly assess your portfolio to ensure it aligns with your goals.
Neglecting Diversification: Putting all your money into one fund can increase risk. Diversify your investments across different sectors and asset classes for better stability.
Skipping SIPs During Market Lows: Many investors avoid SIPs when markets are down. However, investing during these times can lead to lower average costs and better long-term returns.
Underestimating SIP Amounts: Investing too little can hinder your ability to meet financial goals. Start with a reasonable amount that fits your budget and increases it over time.
Ignoring Expense Ratios: High fees can eat into your returns. Pay attention to the expense ratios of the funds you choose and opt for those with lower costs.
Lacking Discipline: Consistency is key in SIP investing. Avoid the temptation to skip payments or withdraw funds prematurely; stick to your investment plan.
Use SIP Calculator to Estimate Your Returns
An SIP calculator is a tool that helps you to estimate the returns you can earn from your SIP investment plan in a market-linked fund scheme. It considers various parameters like monthly/ yearly/ lumpsum investment amount, period of investment, and expected rate of return of your SIP for the calculation of the return.
The SIP calculator then calculates the following details for you:
Conclusion
Systematic Investment Plans (SIPs) are a disciplined and efficient way of investment, allowing you to contribute regularly to market-linked funds. The SIP investment plans help in averaging the cost of your investment and compound your returns over time, making it an ideal investment option for long-term financial goals.
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Frequently Asked Questions
Which SIP fund is best for 2024?
Some of the top-performing SIP mutual funds in India as of September 2024 include:
Tata AIA Top 200 Fund
PNB Metlife Virtue II
Birla Sun Life Pure Equity
Bharti AXA Growth Opportunities Plus Fund
Bajaj Allianz Pure Stock Fund
How can I cancel or stop a SIP in ULIP? To cancel or stop a SIP investment in ULIP, you need to contact your insurance company and fill out a surrender form. The insurance company will then process your request and calculate the surrender value of your policy.
Can SIP go in loss? Yes, SIP investments can incur losses if the value of the market-linked funds you have invested in decreases due to market fluctuations. However, it is important to stay invested for the long term to potentially smooth out these fluctuations.
What happens if SIP fails? A SIP investment plan does not guarantee returns as they are subject to market risks. If the investments in the SIP do not perform well or incur losses, you may not get the expected returns. It is a better practice to review your investment strategy and consider long-term goals when investing through SIPs.
Why choose a Systematic Investment Plan? SIP investments allow for disciplined and regular investing, averaging out market volatility over time. They are suitable for long-term wealth creation, goal-based investing, and benefit from the power of compounding.
What is the minimum and maximum amount I can invest in SIP? You can start investing in a SIP investment plan with a minimum amount of Rs. 100 per month. There is no maximum limit for investment in the SIP.
Can I miss the payment of SIP? Yes, you can miss a SIP payment, and still, your account will stay active. Various ULIP plans offer you a grace period to pay your due amount.
Do all SIP investments offer tax benefits? No, not all SIP investments offer tax benefits. The investment made through SIP in Unit Linked Insurance Plans (ULIPs) and Equity- Linked Savings Scheme (ELSS) offers tax benefits of up to the maximum limit of Rs1.5 lakhs under Section 80C of the Income Tax Act. ULIP Plans also provide tax deductions under Section 10(10D).
How safe is it to invest in SIP? SIP investments are considered safer because they spread your money over time, reducing the effect of market ups and downs. It helps you invest regularly and grow your savings, creating a financial safety net.
How to start a SIP investment? You can choose the online and offline methods to start SIP investment.
For the Offline Method: You have to visit the AMC office. Thoroughly fill out the application form and auto debit form. Provide important documents like address proof and ID proof along with a duly signed cheque to the address of the fund house.
For Online Method: Open your preferred SIP investment app or website. Enter all the details for online SIP along with your KYC details. You must submit a scanned copy of the cheque, address, ID proof, and account number.
How to decrease the SIP period? You can shorten the duration of your SIP investment plan by increasing the monthly investment amount or by choosing a market-linked fund with a shorter investment horizon.
How to increase the duration of SIP? Extending the duration of your SIP investment involves continuing to invest in the same scheme beyond the initially planned tenure. At the end of the tenure of the SIP investment plan, you have the option of renewal of the SIP.
Which SIP gives a 15% return? SIP investment returns can vary widely based on market conditions and fund performance. Historical returns suggest that equity-oriented funds (like large-cap or diversified equity funds) have the potential to deliver higher returns over the long term.
Which is the best SIP at Rs. 5000 per month for 20 years? Choosing the
best SIP for Rs. 5000 per month over 20 years involves considering funds that align with your risk appetite and financial goals. Funds with a long history of strong performance and suitable asset allocation may be considered.
What if I invest Rs. 10000 a month in SIP for 15 years? If you invest Rs. 10000 a month in SIP for 15 years, assuming a 12% annual return, you will have invested Rs. 18 lakhs. The total corpus of your SIP investment will be over 50.45 lakhs at the end of the tenure. This is a significant amount of money that can be used to achieve your financial goals, such as
retirement planning , a child's education, or buying a house.
Can I withdraw SIP anytime? Yes, you can withdraw your SIP investment anytime. However, there are a few things to keep in mind:
Is SIP a good investment? SIP investments are considered a good investment strategy for long-term wealth creation due to their disciplined approach, rupee cost averaging, and potential for compounding returns over time.
Is SIP better than FD? SIPs and FDs serve different purposes. SIP investment plans are ideal for wealth creation over the long term with potential for higher returns, whereas FDs offer capital preservation with fixed returns over a specified period.
What SIP for Rs. 5000 per month for 20 years? Choosing a SIP investment plan for Rs. 5000 per month over 20 years involves selecting market-linked funds that align with your financial goals, risk tolerance, and investment horizon. Consider diversified equity funds or balanced funds for long-term growth potential.
Can I invest ₹1000 per month in SIP? Yes, you can invest
₹1000 per month in SIP . Many market-linked funds allow investors to start with low monthly investment amounts, typically starting from ₹500 or even lower in some cases.
Is SIP 100% safe? SIP investments are not completely risk-free. They are subject to market risks associated with market-linked investments. The degree of risk varies depending on the type of fund (equity, debt, hybrid) chosen for the SIP.
When should you stop SIP? Consider stopping your SIP investment if your financial goals change, you need funds for emergencies, or if the investment is consistently underperforming after careful assessment.
How much SIP investment is good? The amount of contributions in a SIP investment depends on your financial goals, risk tolerance, and income. A good SIP amount is typically what you can comfortably invest regularly without affecting your essential expenses.
What is an example of a systematic investment plan? Suppose you decide to invest ₹5,000 every month in a mutual fund through a SIP investment plan. Over the course of a year, you will have invested a total of ₹60,000. This approach allows you to buy more units when prices are low and fewer units when prices are high, averaging your purchase cost over time.
What is systematic value investing? A systematic value investing is an investment strategy that involves consistently buying undervalued stocks over time, rather than making large, one-time purchases.
Why systematic investing? Systematic investing reduces the impact of market volatility, encourages disciplined investing, and can lead to better long-term returns.
Is SIP allowed in Islam? Yes, SIP investments are allowed if they invest in Shariah-compliant funds.
What are the benefits of a systematic investment plan? The key benefits of a SIP investment plan include dollar-cost averaging, disciplined savings, and potential for compounding growth.
How does SIP help with long-term financial goals? SIP investment plans promote consistent investing, helping accumulate wealth gradually to meet long-term objectives.
Is SIP better than a lump-sum investment? A SIP investment can be less risky and more manageable for most investors, while lump-sum investing may provide higher returns if timed well.
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Disclaimers
† Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. The sorting is based on past 10 years’ fund performance (Fund Data Source: Value Research). For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in
