There is lot of buzz about the SIP. Everyone want to know the meaning of SIP. The interest rate of SIP from SBI, ICICI and HDFC. In fact, you would see a lot of confusion about it. Many people consider it as an investment like a FD or RD which gives fixed return. In this post I would try to to clear the concept of SIP. You would learn the meaning of SIP and its benefits. You would know why every financial adviser suggest it.
What Is Meaning of SIP
SIP or Systematic Investment Plan is an investment method available to mutual fund investors. In this method, you can invest small amount periodically instead of lump sum amount. The frequency of investment is usually weekly, monthly or quarterly. Note these points.
- SIP is not an investment but a method of investment.
- It is like a recurring deposit where you continuously invest after a fixed period.
- This method of investment is used for mutual fund investment.
- An SIP can be of weekly, fortnightly, monthly or quarterly.
- You can start it with a small amount.
So, SIP is just a method of mutual fund investment. The return of mutual fund SIP depends upon the type of mutual fund. Mutual fund can be debt based or equity based. Debt mutual fund give almost fixed return while equity mutual funds give higher return but it fluctuates.
Suppose, this year, you want to invest 1.2 lakh in the Axis long term equity fund for the tax saving. You can invest in this fund through these two methods.
1. You save Rs 10,000 every month for the investment. You keep your saving in the saving account and invest the total 1.2 lakh at the end of the year.
2. You start investing from today and invest Rs 10,000/month in axis long term equity fund directly.
In both of the method, you invest total 1.2 lakh in a year.
Features of Systematic Investment Plan
Systematic investment plan (SIP) is just like the recurring deposit. But in the recurring deposit, the interest rate and maturity amount are fixed. While in an SIP of the mutual fund, the only regular investment amount is fixed. These are the features.
- You invest small amount regularly.
- The regular investment continues till the given time.
- The amount of investment remains same throughout the period.
- You can give post dated cheques or Bank ECS mandate for regular payment to the mutual fund company.
- The regular investment happens automatically.
- Every month, you get mutual fund unit at a different rate as NAV of the mutual fund unit changes every day.
- The SIP is just a way of investment. Technically, every regular investment is a separate and one individual investment.
What is Not In The SIP
- It is not a tax saving option.
- It is not an investment option. The SIP vs ELSS or Mutual comparison is not justified. Any mutual fund investment can be done through this method.
- It has no relation to the return. It does not give any interest rate.
- You can’t change the regular investment amount during the SIP period. To alter the investment amount you need to start an additional SIP or close the existing.
Benefits of Systematic Investment Plan
SIP is becoming very popular. The financial planner always suggests investing through the SIP to build the wealth. Often, it is used parallel with mutual fund and ELSS. Once again, I would say it is not an investment option. It is a way of investing. Let us see the benefits of Systematic Investment Plan.
- It inculcates the discipline of regular investment.
- Because of the regular investment, one invests a higher amount at the end of the year.
- You can invest a small amount. You can invest even Rs 500/month through the SIP in an ELSS. Otherwise, many ELSS has set the minimum limit of Rs 5000 for the first investment.
- You don’t need to time the market.
- The money starts getting the return from the first day.
- You never miss the bus. You purchase a mutual fund unit at various prices during the SIP period. You get the mutual fund units at the average price because of this variation.
- You get the benefit of rupee cost averaging. i. e. You get more unit of a mutual fund if the price of a mutual fund unit (NAV) goes down. You get less number of mutual fund unit if the price of a mutual fund unit goes up. Therefore, you buy a less number of mutual fund units at the higher price and a higher number of mutual fund units at a lower price. This auto balancing helps to get a better return.
- You can start and stop it any time.
- You can choose many dates during a month.
- It can be monthly, quarterly, weekly or fortnightly. You can choose the frequency as per your wish.
- The regular payment through the post dated cheques (PDC) or Electronic clearing system (ECS) has made SIP very convenient.
Systematic Investment Plan FAQ
What is the minimum and maximum amount of investment through the SIP?
Different mutual fund companies have different minimum investment limits. But for an ELSS the minimum limit is Rs 500. However, most of the companies accept SIP of Rs 1000.
What should be the date of SIP investment in a month?
You have the flexibility to choose the date for regular payments in a month. But you can’t choose any date. The fund houses have fixed some dates in the month for SIP payments. You have to choose between those dates.
SIP or lump sum, which method of investing gives a better return?
It is a tricky question and depends upon the market condition. If market is going through the ups and downs, the SIP will work better as you get the mutual fund units at the average price. In a falling market also, the SIP will reduce the average purchase price.
But in a continuous rising market a lump sum investment would give better returns. However, you can’t predict the market movement, hence, settling for average annual return of ELSS is the best option as it also reduces the risk.
Do mutual fund companies charge extra for the SIP facility?
No. Mutual fund companies do not charge any extra amount for it.
What if I can’t pay SIP in a month?
You will miss the investment of that month. The mutual fund company will again try next month. If you can’t pay for the second consecutive month then it would be closed.
The mutual fund companies do not charge any penalty for nonpayment. However bank can charge for cheque bounce.
Can I prematurely close it? Would there be any penalty?
Yes, you can close it anytime. There would not be any penalty.
Can I also deposit some lump sum amount in the SIP account?
Yes, you can invest a lump sum amount in the same mutual fund folio. Well, every installment in a mutual fund is a separate investment.
Should I Stop SIP when the market falls?
Never, you will not get the benefit of averaging. You should think of increasing investment during market fall not to stop the investment.
What is the Appropriate time to start ?
Any time is appropriate if you are thinking of long term. The 5 year or 10-year tenure can be started anytime. The SIP itself is to mitigate the fluctuation of share market.
Will the units ‘allotted’ to me will be same every month?
No. Since you invest the same amount every month and the NAV of mutual fund charges, the units can’t be same. If NAV of the mutual fund scheme goes down, you would get more units.
Is SIP possible online?
You will get the option of SIP, irrespective of investment mode. You can open it online through the mutual fund company website and online distributor’s portal.
How can I reduce or increase tenure ?
Once a mandate is given, you can’t change it. To increase or decrease the tenure, you should go for ‘stop and start afresh’.