What is sip and How Does it Work, Investing is one of the best ways to grow your money over time, but it can be confusing for beginners. One simple and effective way to start investing is through a Systematic Investment Plan (SIP). In this blog, we will break down what SIP is, how it works, its benefits, and provide a clear example to help you understand it better.
What is a SIP (Systematic Investment Plan)?
A Systematic Investment Plan (SIP) is a method of investing in mutual funds where you invest a fixed amount of money at regular intervals (monthly, quarterly, etc.). It helps you build wealth gradually, making investing affordable even for beginners.
For example, instead of investing ₹10,000 at once, you can invest ₹1,000 every month through a SIP.
1. Types of SIPs:
Flexible SIP: Allows investors to adjust the investment amount based on their financial situation.
Top-up SIP: Enables increasing the investment amount periodically to align with income growth.
Perpetual SIP: Continues indefinitely until the investor decides to terminate it, offering flexibility without a fixed end date.
2. Common Myths about SIPs:
Myth: SIPs are only for small investors.
Fact: SIPs are suitable for all investors, regardless of investment size.
Myth: SIPs guarantee returns.
Fact: While SIPs mitigate market volatility, they do not guarantee returns; performance depends on market conditions.
3. SIP vs. Lump Sum Investment:
SIP Investment: Involves investing fixed amounts at regular intervals, reducing the risk associated with market timing.
Lump Sum Investment: Entails investing a large amount at once, which can be advantageous in a rising market but carries higher risk if the market declines.
SIPs help in averaging the purchase cost over time, while lump sum investments may yield higher returns if timed correctly.
4. Tax Implications of SIPs:
Equity Mutual Funds: Gains are subject to capital gains tax, with short-term gains (holding period less than 1 year) taxed at 15% and long-term gains (holding period more than 1 year) over ₹1 lakh taxed at 10%.
Debt Mutual Funds: Short-term gains (holding period less than 3 years) are taxed as per the investor’s income tax slab, while long-term gains (holding period more than 3 years) are taxed at 20% with indexation benefits.
5. Importance of Starting Early with SIPs:
Compounding Effect: Beginning SIPs early allows more time for investments to grow, significantly enhancing wealth accumulation due to the power of compounding.
Example: Starting a SIP of ₹5,000 per month at age 25 can yield a larger corpus by age 60 compared to starting the same SIP at age 35, assuming similar returns.
How Does SIP Work?
Choose a Mutual Fund: Select a mutual fund that matches your financial goals and risk level.
Decide the Amount: Choose the fixed amount you want to invest regularly (e.g., ₹500, ₹1,000, or ₹5,000).
Set the Frequency: Decide how often you want to invest – monthly, quarterly, or weekly.
Automatic Investment: The chosen amount is automatically deducted from your bank account on the specified date.
Buy Mutual Fund Units: The money is used to buy mutual fund units. The number of units depends on the Net Asset Value (NAV) on the investment date.
Continue Investing: Over time, your investments grow based on the market performance of the mutual fund.
Example of How SIP Works
Let’s understand SIP with a simple example:
Investment Amount: ₹2,000 per month
Duration: 1 year (12 months)
NAV (Price per Unit): Changes every month based on market conditions
| Month | Investment | NAV (₹) | Units Purchased |
| January | ₹2,000 | ₹20 | 100 units |
| February | ₹2,000 | ₹25 | 80 units |
| March | ₹2,000 | ₹18 | 111.11 units |
| April | ₹2,000 | ₹22 | 90.91 units |
| … | … | … | … |
| Total of 12 Months | ₹24,000 | Average NAV | Total Units: 1,100 approx. |
After a year, you’ve invested ₹24,000 through your SIP. If the market does well and the NAV increases to ₹30, your total investment value becomes:
1,100 units x ₹30 = ₹33,000
You made a profit of ₹9,000 by consistently investing through SIP!
Benefits of SIP
Affordable: You can start investing with as little as ₹500 per month.
Disciplined Investing: Regular investments help build a habit of saving and investing.
Rupee Cost Averaging: You buy more units when prices are low and fewer units when prices are high, reducing the average cost per unit.
Compounding Growth: Your money grows over time as you earn returns on both your investment and the returns you’ve already earned.
Flexibility: You can increase, decrease, or stop your SIP anytime.
Who Should Invest Through SIP?
Beginners who are new to investing.
Salaried individuals looking for monthly investments.
Long-term investors who want to build wealth gradually.
Anyone with financial goals like buying a house, funding education, or retirement planning.
A Systematic Investment Plan (SIP) is a simple and effective way to grow your money over time. Whether you are a beginner or an experienced investor, SIP helps you invest consistently without worrying about market fluctuations.
Additional Insights on SIP:
Why SIP is Better Than Lump Sum Investment?
SIP offers a significant advantage over lump sum investments, especially for beginners. It helps in averaging out the market fluctuations, reducing the risk of investing a large amount at the wrong time. With SIP, your investment is spread over different market cycles, ensuring better returns in the long run.
How to Choose the Best SIP Plan?
Selecting the right SIP depends on your financial goals and risk appetite. Some key factors to consider are:
Fund Performance: Check past returns over 5-10 years.
Expense Ratio: Lower ratios mean higher returns.
Fund Category: Choose between large-cap, mid-cap, or small-cap based on risk tolerance.
SIP Tax Benefits:
Investing in Equity-Linked Savings Schemes (ELSS) via SIP offers tax benefits under Section 80C of the Income Tax Act. The lock-in period is just three years, making it an excellent tax-saving investment option.
SIP for Retirement Planning:
A well-planned SIP in diversified mutual funds can help build a solid retirement corpus. The power of compounding ensures that even small investments grow significantly over time.
By starting early and staying consistent, SIP can help you achieve financial freedom effortlessly!
Start your SIP journey today and watch your money grow!
FAQs For Systematic Investment Plans (SIPs)
Q1: Can I stop my SIP anytime?
Yes, investors can stop their SIP anytime by submitting a request to the mutual fund company.
Q2: Is there a minimum amount required to start a SIP?
The minimum amount to start a SIP varies by mutual fund, but it can be as low as INR 500 per month.
Q3: What happens if I miss an SIP installment?
Missing a single SIP installment generally does not attract any penalty, but it’s essential to maintain sufficient balance in your account to avoid multiple misses.
Q4: Can I modify the SIP amount and frequency?
Yes, investors can modify the SIP amount and frequency by submitting a request to the mutual fund company.
