What is SIP is a very common question asked by investors new to mutual funds. The question what is SIP or what is systematic investment plan can be answered very differently by different people. But simply speaking, if you dream to become wealthy and want to work towards it, Systematic Investment Plans (SIP) of mutual funds may be able to help you achieve that.
SIP is a method of investing a fixed amount, regularly – monthly or quarterly in a mutual fund scheme chosen by you. An investor can invest a pre-determined fixed amount in a chosen scheme every month or quarter. In this article we will discuss the different aspects of SIP investments.
Mutual fund SIPs are designed for your convenience. You can select the scheme, the amount you want to invest, the frequency including the dates you want to invest etc. Let us discuss how to open a SIP account and how does SIP work.
SIP frequency refers to intervals at which you want to invest in your mutual fund scheme e.g. monthly, quarterly etc. Some asset management companies (AMCs) may provide facilities for daily, weekly or fortnightly SIPs. The most common SIP frequency is usually monthly because it allows you to invest from your regular monthly savings.
This refers to date of the month or quarter when you want to invest through SIPs. Some AMCs have specific SIP dates, while some AMCs may allow investment on any date of the month. You can choose a date as per your convenience. Ideally, you should choose a date at the beginning of the month just after your salary credit date or just after your EMI date (if you have a loan). Whatever date you choose, you should ensure that you have sufficient balance in your savings bank account on the SIP date. If you want to change the date for your SIPs you can submit an SIP transaction slip requesting for the change of SIP date to the AMC.
This is the amount you want to invest monthly in your mutual fund through SIP. You can choose any SIP amount according to your investment needs and financial situation. In most fund houses in India, you can start your SIP with minimum Rs 500 investment every month. There is no upper limit for SIP amount.
This is the date or month, when your mutual fund SIP will start. You can choose any start date or month, but there has to be minimum 30 days gap between two instalments. For example, if your SIP date is 2nd of every month and you made your first SIP investment on 25th April 2022, then your next SIP instalment will be debited from your bank account on 2nd June 2022. The third and subsequent SIP instalments will be debited on 2nd of every month (provided it is a business day).
This is the date or month, when you want your mutual fund SIP to end. There will be no more auto-debits from your bank account after the SIP date. You should understand that the units of your mutual fund schemes purchased through SIP will not automatically be redeemed on the SIP end date or month. You may continue to remain invested (own the mutual fund units) after the SIP end date. If you want to redeem the units of your mutual fund scheme, you will have to submit a redemption request to the AMC. You may choose any SIP end date / month depending on your investment needs. Alternatively, you may choose perpetual SIP, which has no end date (or end date of 2099). Please note that you can stop your perpetual SIP at any time by submitting a SIP closure request to the AMC.
New investors, who do not have a mutual fund folio with the AMC, should provide cancelled cheque, first SIP cheque details (cheque number, bank, cheque date, account type e.g. savings, current, NRE, NRO etc.) You will also have to provide the bank mandate for the SIP.
To invest through SIP investment plan, you need to register for Systematic Investment Plan by submitting a bank Electronic Clearing Services (ECS) or National Automated Clearing House (NACH) mandate where you have to specify the SIP amount, the interval and the SIP date. Through the ECS or NACH mandate, you instruct the bank to debit a certain amount at the specified date(s) of a month and credit to the mutual fund. The ECS or NACH mandate can be submitted online or through a paper form to the AMC or RTA. Some AMCs may also accept post-dated cheques for SIPs, but there is no advantage for the investor in submitting post- dated cheques; it simply requires more effort on your part since you will have keep submitting the post-dated cheques to the AMC throughout the SIP tenure.
How to open a SIP account? You should be KYC compliant to invest in mutual funds. If you are not KYC compliant submit the KYC documents to the AMC or RTA or consult with your financial advisor if you need help in getting your KYC done. To start a SIP, you will have to submit a SIP application or registration form to the AMC or the Registrar and Transfer Agent (RTA). The SIP application or registration form will require all the details mentioned above e.g. SIP frequency, SIP date, SIP amount, SIP start and end month, bank mandate etc. In addition you will have to provide personal details like the first applicant’s name, first and joint applicants’ PAN, mobile number, email address etc. You will also have to select the scheme, option (growth, IDCW) and plan (regular, direct).
We have discussed how to open SIP account and how does SIP work above. Let us now discuss the benefits of SIP investments.
Rupee cost averaging in a way ensures that you automatically buy more units when the NAV is low and fewer units when the NAV is high. Suppose you are investing Rs 10,000 every month. When the NAV is Rs 20, you will get 500 units because Rs 10000 ÷ 20 = 500. However, if the market dips and the NAV drops to 18, you will get 555.56 units, as Rs 10000 ÷ 18 = 555.56. As you can see you have bought more units when the markets are at lower level.
The table below illustrates how Rupee Cost Averaging works in mutual fund Systematic Investment Plan (monthly SIP plan of Rs 10,000) in Nifty 50 TRI in 2020, a year in which the market was highly volatile due to the COVID-19 pandemic. Over sufficiently long investment tenures, investors can get higher returns by taking advantage of volatility through Rupee Cost Averaging in SIPs.
SIPs help you achieve your long term goals, like - Retirement, Children higher education and their marriage or so on. You can actually set a target amount for your goal and invest every month over a period of time in order to achieve the same. For example – You are aged 30 and want to build a 5 Crores corpus for your retirement at age 55. You need to invest only Rs 27,000 per month for next 25 years (assuming return of 12%).
Mutual fund SIPs have become very popular among retail investors in India. As per AMFI data, there are 5.17 Crores SIP accounts (as on 28th February 2022). More than Rs 12,000 Crores is invested through SIPs in March 2022. In FY 2021-22, more than Rs 1.25 lakh Crores had been invested through systematic investment plans (as on 31st March 2022). With rising popularity of SIPs, few AMCs have launched Goal SIP and SIP Top-up facility.
You can specify the target value for your goal while making you investments. You can choose the mutual fund scheme to your savings on a periodic basis through SIP with the aim of meeting the defined goal. By starting your Goal SIP, you avoid the hassle of aiming for appropriate market timing, along with the added advantage of compounding and long term wealth creation. Goal based investing add a direction to an investment. It is a well thought out and structured process where you know the purpose of why each rupee is being invested. The performance of Goal based Plans is measured by how successful are the investments in meeting an individual’s lifestyle and personal goals, discouraging investor’s short-term impulsive actions.
SIP Top-up or SIP Step-up is a SIP facility using which you can increase your SIP instalments at regular intervals e.g. half yearly, annual etc. You can specify the SIP increment either in Rupees or in percentage terms. Let us assume that you have a monthly SIP of Rs 10,000 in mutual fund scheme. If you opt for Rs 1,000 SIP top-up on an annual basis, your monthly SIP instalments will be Rs 11,000 after one year and Rs 12,000 in the following year. If you opt for 10% SIP top-up on an annual basis, your monthly SIP instalments will be Rs 11,000 after one year and Rs 12,100 in the following year. Now that you know how SIP top-up works, let us discuss why you should opt for SIP Top-up.
As your income grows over time, your savings should also grow. SIP Top-up facility enables invest incremental amounts through SIP by increasing your SIP instalments over time. SIP Top-up can help you reach your financial goals faster and / or create additional wealth.
Taxation of redemptions in mutual SIPs depends on the type of the scheme and when redemptions are made. In SIPs, the principle of First in First Out (FIFO) applies for taxation; you should consult with your tax consultant or chartered accountant to understand how FIFO will be applied for taxation of redemption proceeds in SIPs. Taxation of redemption proceeds in SIP investments also depends if the scheme is an equity fund or non-equity fund; consult with your financial advisor to know which funds are treated as equity or non-equity funds for taxation purposes. Short term capital gains in equity funds are taxed at 15%, while long term capital gains up to Rs 1 lakh is tax free and taxed at 10% thereafter. Short term capital gains in non-equity funds are taxed as per your income tax rate, while long term capital gains are taxed at 20% after allowing for indexation benefits. If you are investing in IDCW (dividend) options through SIP, then IDCW (dividend) payments will be taxed as per your income tax rate, both for equity and non-equity fund.
In this article we have tried to address questions like, what is SIP investment, how SIP works, what are the benefits of SIP, value added SIP facilities (e.g. Goal SIP, SIP Top-up), what is SIP taxation etc. SIP is an ideal way of investing for your long term financial goals like children’s higher education, children’s marriage, retirement planning, and estate planning. Consult with your financial advisor if you want to start a SIP for your long term financial goals and start investing for wealth creation.