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SIP – Systematic Investment Plan

Last Update Date : April 27, 2019
Estimated Read Time: 7 min

What is SIP & How Sip works

Investing your money through different types of schemes, such as SIP, has become an important part of one’s money saving mechanism. Understanding the process of investing in SIP and the way it works is beneficial for people who want to save their money. In this guide we will be discussing what SIP actually means and why you should consider investing in the same.

What is SIP?

If an investor wants to invest a fixed amount regularly in shares and want to earn return but due to lack of knowledge and time he is unable to do so, then for such people SIP is the best option available as it allows an investor to invest a fixed amount regularly in mutual fund scheme, instead of lump sum. The frequency of investment can be weekly, monthly or quarterly. It is similar to the Recurring Deposit which you open through a bank, but instead of a bank, the amount is invested into Mutual Funds which gives a higher rate of return.

The investor is allocated a number of units depending on the current Net asset value. Each time you invest or add any amount in you SIP balance, the number of units increase gradually.

Types of Systematic Investment Plans

Debt investments tend to be less risky than equity investments but usually offer a lower but more consistent return. They are more consistent returns than equity returns. The bond and mortgage market of debt instruments historically experiences fewer price changes than stocks and when a firm is liquidated, the ones who hold the bond are paid first. Mortgage investments, like other debt instruments, are backed up by real estate security.

Equity investments can change rapidly and with rapid changes in share values, it tends to be riskier to invest. The equity investments are aimed at generating capital appreciation while the debt investments serve as securities to prevent it from unforeseen market conditions. Equity investments are the best example of taking on higher risk of loss in return for a potentially higher reward.

How to Invest in SIP?

Once you apply for the SIP scheme, a predefined sum (as decided by you) automatically gets debited from your bank account on a fixed date at the fixed periodic intervals and gets invested into the specified mutual fund at the current Net Asset Value.

Hence, SIP Investment plans are the easiest and hassle-free way of investing in mutual funds.

Methods of Investing in SIP

Two methods that greatly benefit the investors under SIP scheme are – Rupee cost Averaging and Power of Compounding

Rupee cost averaging is an approach in which you invest a fixed amount of money at regular intervals. RCA helps the investors to get rid of the problem of which is the best time to invest and which is not. It allows your invested money to earn fewer units when the price is high and more units when the price is low. This averaging ensures that when the prices are low you can readily buy the shares for investment and less when its high.

Power of Compounding: Under this method whatever amount you invest, you earn interest on it. Such interest gets accumulated over a period. The longer the tenure, the higher would be the fund value.

Advantages of Systematic Investment Plan

  • For a successful financial planning, investment plays a major part. Investing in SIP at regular monthly or quarterly scheme helps you to save in a disciplined manner.
  • To initiate an investment we can start investing in SIP at a low cost of rupees 500.
  • It is the most hassle free and very convenient way of investment, An ECS can be authorized from the bank and payment can automatically be done for SIP at regular intervals.
  • When you invest over a long period and earn returns on the returns earned by your investment, your money would start compounding. You can thus build a large corpus and achieve long-term financial goals along with regular small investments.

Systematic Investment Plan Advantages

SIP Tax Benefits

One of the best tax saving instruments in the mutual fund space is the equity-linked saving schemes (ELSS), which are offered by mutual fund houses. ELSS Funds are an open-ended fund which not only helps you to save tax but also gives you an opportunity to grow your money.

It qualifies for tax exemption under Section 80C of the Indian Income Tax Act, 1961, and offers the twin advantage of capital appreciation and tax benefits.

Tax Benefits of Investing in ELSS

Best Time to Invest in SIP

It is a common misunderstanding that you should not start investing in SIP when the stock market is trading high. But generally, it is almost impossible to predict the condition of the market. Markets may get overvalued, but continue to move up due to higher liquidity or positive sentiments. Or there may be times when markets get undervalued & still they fall further.

Time spent in the market is more important than the timing of markets. Corrections are inevitable in stock market & they are bound to come. They spread panic in the short term but never last long in an ongoing price tend to rise in the (bull) market. That’s why it’s better to start investing as early as possible rather than wait for the correct time to invest.

[ Read: Best Investment Options ]

Difference between SIP and Lump Sum

SIP stands for ‘Systematic Investment Plan’ and is a regular investment that includes investing a regular amount at a fixed frequencyOne-time bulk investment is called lump-sum
Investor does not need to have bulk amount in hand, investing even Rs 100 per month is good enoughInvestor has to have bulk amount in hand while investing
SIP can be started any dayTiming the investment market is essential for investing in Lump-Sum
Investment process is automated through ECSInvestment is to be done manually
SIP buys at all levels, so costs get averaged out over a period of timeIt can yield great profits as it buys at low and sells at high

In SIP making a small amount of investment may not seem most attractive way. But it lets the investors get in the habit of investing. And over the years lump sum amount of money can be generated.

SIP or Lump sum: How should you Invest?

Choosing between the lumpsum mode and SIP mode of mutual funds investment is a common dilemma for first-time investors. In lump sum mode, a fixed sum is invested in a mutual fund scheme as a one-time payment, while in SIP mode small amount is invested in mutual fund schemes at partly intervals.

The cash flows are different – in case of lump sum investing, the investor has money on hand that can be invested. Whereas in case of SIP, the investor may not have lump sum on hand and may have regular surplus expected in future.

SIP mode can protect or save investments from market crash, while lumpsum can cause a high loss during the market crash.

Is SIP Beneficial for Long-term Wealth?

If you invest in a small amount of money in investments at partly intervals over a long period of time, the principal amount grows because of the amount getting compounded. So, when you invest regularly it helps you to fulfil or achieve the long-term financial goals.

Mutual funds typically give about 15% returns per year in the long run. You can double your investment in 5 years or less if you invest, taking the monthly SIP (Systematic Investment Plan) route, in 5-star-rated Balanced and / or Multi-Cap Mutual Funds, which would help in saving the taxes.

Common mistakes to avoid while investing in SIP

  • Investing too small amount: It is good to start with a smaller amount, but when you become comfortable with the regular investments, you should take the risk and raise the investment amount.
  • Picking wrong schemes: Picking wrong schemes for investing may result in a subsequent loss, therefore, you should stick to diversified equity schemes with long-term performance track record. It is important to choose the right scheme that would cater your needs.
  • Investing for very short time periods: In case you have invested for a one-year SIP, you are expected to review it. Once comfortable, you should increase the SIP amount over the period of time.

Other things to consider before investing in Systemtic Investment Plan

SIP returns and one-time investment returns may differ

SIP returns of an investment can be significantly different from that of the one-time investment. Many of the people believe that SIP returns will be higher than the point-to-point return as the average cost is about to fall. This is surely a myth. SIP returns depend on the return curve of the underlying asset movement and the rapidly changing of the asset class.

SIPs too need to be managed

Among all one of the concepts people believe is that SIP investment don’t need to be managed or reviewed since you have taken a long-term investment but on the contrary, you have committed to a SIP for a long-term, one must review the investments held.

How to Choose

Depending on someone’s individual needs one can choose to invest in the Systematic Investment Plan mutual fund.

How H&R Block can help you?

As the saying goes ‘It’s better late than sorry’, the best way to start taking advantage of SIP is to simply start with it. Our income tax experts at H&R Block India can help you make right tax-saving investment decisions as well as file your Income tax return accurately so that you can reduce your tax burden.

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CA Shreya Oturkar
Shreya is a tax advisor at H&R Block (India) with intensive experience in SME taxation and audit. She holds an advanced post graduate qualification in accounting and is highly skilled in financial analysis and reporting. Apart from her professional achievements, Shreya is a talented artist with a flair for free-hand sketching!

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