What is SIP? How Systematic Investment Plan Works

Systematic investment plans, also known as SIPs, are a popular investment option that allows individuals to invest small amounts of money on a regular basis in a disciplined manner.Raamdeo Agrawal is the Co-founder and Joint Managing Director of Motilal Oswal Financial Services, one of India's leading financial services companies and has over three decades of experience in the stock market and is considered one of India's top investment gurus has said " Systematic Investment Plan is a tool to create wealth over a long period of time. It is a simple, disciplined and automated way of investing in the stock market." Systematic Investment plans (SIP) were introduced in India in late 1990’s. Fun fact, the first mutual fund to introduce SIP in India was Franklin Templeton in 1996. However, it has only been in the early 2000’s when Systematic Investment plans have gained the attention of Investors. What accelerated SIP’s growth was the “Mutual fund sahi Hai” (Mutual funds are the right choice) campaign launched by AMFI (Association of Mutual funds of India) in the year 2017. The key objective of the campaign was to educate the investors to start investing early and to continue investing regularly. Also Read : 5 Smart Tips For Higher Returns With Best SIP Investment Plan

A story will be a terrific way to explain the concept of SIP.Imagine that there are two friends, Rita, and Sita, who are both interested in investing in the stock market. Rita decides to invest a lump-sum of Rs. 1 lakh in a mutual fund , while Sita decides to invest the same amount in a systematic investment plan.Over the next year, the stock market experiences significant volatility, with some months seeing high returns while others see losses. As a result, Rita's investment experiences significant fluctuations in value, with the value of her investment dropping by as much as 20% in some months.On the other hand, Sita's investment is spread out over several months through the SIP, and she invests Rs. 8,333 per month over the course of the year. As a result, she benefits from the power of rupee-cost averaging, which means that she is able to buy more units of the mutual fund when prices are low and fewer units when prices are high. This helps to reduce the impact of market volatility on her investment.At the end of the year, both Rita and Sita compare their investment returns. Despite the market volatility, Sita's investment has performed better than Rita's, with a return of 12% compared to Rita's return of only 8%.This is the power of staying invested in the market at all times. Investors often wait for the right time to start investing. But no one really knows the right time. As the legendary investor Warren Buffett once said “The best time to invest is always now. The longer you wait, the harder it gets to achieve your financial goals." As the name suggests Systematic investment plans help you to adopt a disciplined approach towards investment, help to average out the cost of investment over time, and benefit from the power of compounding. Over the years, SIPs have become increasingly popular among Indian investors. They have gained popularity because of their ease of use, convenience, and affordability. The minimum investment amount for a SIP is typically as low as Rs. 500, making it accessible to a wide range of investors, including those with limited financial resources. Also Read : Use SIP Calculator Month-wise amount collected from FY 2016-17 onwards through SIP are mentioned below:

Details of new SIPs registered and discontinued during FY 22-23are as under:

Also Read : What are Mutual Funds? How it Works, Meaning, Benefits & Types

There are several types of SIPs that investors can choose from, depending on their investment objectives and risk appetite. Here are some of the most common types of SIPs:

1. Standard SIP: This is the most common type of SIP , where investors invest a fixed amount at regular intervals over a period of time.
2. Step-up SIP: In a step-up SIP, investors increase their investment amount at regular intervals, usually every year. This type of SIP is suitable for investors who want to increase their investment gradually over time.

1. Disciplined approach to investment: Investors have to select a fixed amount they want to save, and this will be invested every month. The visible benefit is, there is no need to worry about saving every month as you have already started an SIP and it will take care of your savings.
2. Flexibility: SIPs are flexible, which means investors can choose the amount they want to invest and the frequency of investment. Investors can also increase or decrease the amount of investment based on their financial situation.
3. Low investment amount: There is a myth amongst investors that you need high capital to invest in stock markets . SIPs can be started with a low investment amount as low as Rs 500, which makes them accessible to a wide range of investors.
4. Easy tool for stock market entrants: The beginners who enter the stock market with little to no idea can use SIP as their first choice to learn about the markets. Avoiding the risk of losing capital due to wrong decisions, SIP can be an easy option to understand and start investing.
5. Power of compounding: SIPs benefit from the power of compounding, which means that investors earn returns not only on their principal investment but also on the returns earned on that investment. Historically it has been proven that though SIP returns are subject to market fluctuations, they have always outperformed fixed deposit returns in the long-term.
6. Helps in tax saving: Many of the mutual fund schemes are designed in a way that can help the investors to save taxes. In the old tax regime, investors get deduction up to Rs 1, 50,000/- by investing in Equity linked savings scheme.

While there are several advantages of SIP, there are also some disadvantages that investors should be aware of. Some of the disadvantages of SIPs include:

1. Investments will always be subject to market risk. Whether it is direct equity or mutual fund investing, the returns will always be impacted by market fluctuations.
2. No visible returns in the short-term. Investing through an SIP will require patience and a long-term view.
3. Many of the mutual fund schemes are subject to lock in and the funds will freeze during that period which the investors will not be able to withdraw immediately.
4. Mutual funds are also subject to various taxes like LTCG, STCG, Dividend distribution taxes etc.

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1. Fund inception date.
2. Fund manager background.
3. Expense ratio.
4. Top holdings in the portfolio.
5. Returns till date.

1. Identification of the financial goal: There can be various financial goals one would want to plan for like retirement planning , funding further education, purchasing a new house, child education etc. Setting a goal first and an estimated amount required to achieve that goal will help in selection of the right funds.
2. Selection of right mutual fund: Check the following criteria before selecting a mutual fund:
3. Identify whether to opt for direct plan or regular plan: This is a particularly important step. Let us first understand what is a direct plan and regular plan?In a Direct Plan, an investor has to invest directly with the AMC, with no distributor to facilitate the transaction. In a Regular Plan, the investor invests through an intermediary such as distributor, broker or banker who is paid a distribution fee by the AMC, which is charged to the plan.How to choose between a direct plan and a regular plan?
4. Determine your investment amount: Once you've chosen a mutual fund, you need to determine the amount you want to invest in SIPs. You can start with a small amount and gradually increase it over time depending upon the financial goal you want to achieve.
5. Choose the investment frequency: You can choose the frequency of investment, such as monthly, quarterly, or annually, based on your financial situation.

Here are some best practices to follow to maximize your returns when investing in SIPs:

1. Invest for the long-term: SIPs are designed for long-term investment, and you should invest for at least five years to get the maximum benefit of compounding. There will not be any visible gain in a shorter duration.
2. Diversify your portfolio: It is important to diversify your portfolio by investing in different mutual funds to reduce the risk of losses due to market fluctuations. For a diversification purpose, you can invest in the mix of Debt and equity mutual funds.
3. Review your portfolio regularly: It is important to review your portfolio regularly to ensure that it is aligned with your investment goals and to make any necessary changes. If you feel it is difficult to track performance, consider taking the help of a financial advisor who can help you take the right decisions.
4. Stay invested during market downturns: It is important to stay invested during market downturns to benefit from the power of compounding and to avoid making emotional investment decisions. Many of the investors panic during the market fluctuations and chose to discontinue their SIP. This can hamper your compounding. It is advisable to stay invested till the end goal is achieved.
5. Keep track of expenses: It is important to keep track of the expenses associated with SIPs, such as the mutual fund's expense ratio and any transaction charges.

Also Read : What are Mutual Funds? How it Works, Meaning, Benefits & Types