What is a Systematic Investment Plan (SIP)?
A Systematic Investment Plan (SIP) is a way to invest in mutual fund schemes in a smart and trouble-free manner. SIPs are easy and adaptable investment plans. Money is automatically deducted from your bank account and put into mutual funds. Through a monthly systematic investment plan, you can invest a small amount in a mutual fund of your choice. SIPs enable you to invest a fixed amount of money into a mutual fund of your choice on a monthly basis.
How does Systematic Investment Plan work?
- Systematic Investment Plans are flexible and easy to use. A specific mutual fund scheme is invested with a monthly automatic debit from your bank account. The number of units you receive each day is based on the current market rate (NAV or net asset value). The scheme purchases additional units at the market rate each time you invest money. Units are consequently purchased at different rates, so investors benefit from the power of compound interest and rupee-cost averaging.
● Rupee-Cost Averaging
With volatile markets, most investors remain sceptical about the best time to invest and try to ‘time’ their entry into the market. Rupee-cost averaging allows you to opt out of the guessing game. You earn more if the price is low and less if it is high since you are a regular investor. It means you buy the units at different rates and investors benefit from Rupee-Cost Averaging. Thus, you get more units when the market is low and fewer units when the market is high, and hence market averaging happens. You may be able to achieve a lower average price per unit during a volatile period.
● Power of Compounding
Compounding is the reinvestment of income over time to generate additional income. Interest is earned on the original interest rate. As a result, you earn more on your overall investment. It is called the power of compounding when you earn interest on the accrued interest. The compounding effect means that you earn interest on your principal amount of investment in a financial instrument as well as interest on the interest in subsequent years.
Types of systematic investment plans
A one-time investment in SIPs allows investors to adopt a disciplined investment strategy. SIP investments can be made monthly or quarterly. Investing in SIPs has several long-term advantages. Selecting the right type of SIP is crucial. SIP investments in India are available in the following forms:
The simplest investment plan is a regular SIP. SIPs allow investors to invest a fixed amount periodically. A regular SIP does not allow a change in investment amount during the investment period.
An investor can increase their SIP amount periodically through a top-up SIP or step-up SIP. By choosing a step-up SIP, recurring contributions can be made more flexible and investors can park larger amounts. The power of compounding will allow them to create their investment corpus faster.
Flexible SIPs allow their investors to adjust the amount of their investments, as their name implies. The fund house can be informed if the SIP amount or contributions change. It is also known as Flexi\Flex SIP. Nevertheless, the intimation needs to be made at least a week before the SIP instalment deduction date.
The investor must choose the tenure of the SIP in the SIP application form. In the absence of a tenure specification, the SIP becomes perpetual.
Investors with a good understanding of the market dynamics and confidence in its movements should use trigger SIPs. The timing of taking the buy and sell positions is very important in this type of systematic investment plan. An investor can choose when to start their SIP or redeem or switch it once the selected event occurs under this type of SIP.
SIP with Insurance
There are some asset management companies that offer long-term investment insurance. Usually, the initial insurance cover is ten times the initial SIP amount, and it increases over time. In addition, this feature is only available with equity mutual funds.
The multi-SIP is a way for investors to invest in various schemes of a fund house using a single investment instrument. Investors can diversify their portfolios in this way. There is less paperwork as well.
Key features of Systematic Investment Plan
- SIPs are done only in open-ended funds in which the investors can invest and take out the money anytime.
- There is no fixed tenure for running SIP. Even if you choose a SIP tenure, you can stop it at any time or continue it even after it expires by contacting the mutual fund company. You can also do a perpetual SIP.
- The SIP can be withdrawn either completely or partially during the tenure.
- SIP amount can be increased or decreased.
- A SIP is a method of investing in mutual funds, so its risk profile is the same as the asset you invest in.
- Mutual fund investors earning regular monthly income can benefit greatly from Systematic Investment Plans.
How to calculate SIP? With example
A SIP involves regular investments over a certain period, with the maturity amount returned at the end. We calculate SIP return on monthly basis for 1/3/5/10 year. For each month, we used the last date of NAV. For example, we made our investment of Rs. 10000 in a fund for a period of 5 years in Aug-13 on monthly basis. Then we get a certain number of units on basis of nav of 30/8/2013. Hence, we keep accumulated units from 30/8/13 to 30/8/18. On 30/8/18 when we exit the scheme we get the maturity amount, which is NAV of 30/8/18 (redemption day) multiplied by total units on redemption day. For our SIP calculation, we used XIRR Formula. We applied this formula in our calculation for a period of 1/3/5/10 year.
Steps to calculate SIP using XIRR:
Step 1- Enter all our SIP dates in one column.
Step 2 – Enter the SIP amount in another column corresponding to the SIP dates. The SIP amount, for instance, is Rs 2,000. It would have to be entered as -2000. The minus sign represents an outflow of cash and is therefore important.
Step 3 – Enter the date on which you are supposed to make redemption or the date on which you have made redemption.
Step 4 – Apply the XIRR formula =XIRR (B1:B7, A1:A7) *100
Here, B1:B7 is the range of cells of the amounts, and A1:A7 is the range of cells of dates. The result would show the return you have earned on your SIP investments on the date of your choice. Benchmark returns and category average returns are also calculated for the first three, five, and ten years, for easy comparison of fund performance to benchmark, category, and category average.
The Benefits Of Investing In SIP
Wondering about the benefits SIP has to offer? Here are a few of them.
- You can invest as little as Rs. 500 per month with most mutual fund schemes that offer SIPs. Compared with other investment options, this is a relatively small investment size.
- Flexibility is a key feature of SIPs. Your savings can be increased in the future or you can start a new SIP in the same mutual fund scheme or another of your choice if your savings increase.
- It is not necessary to invest in SIPs every month for a fixed period of time. You can skip SIP payments for a few months if you are not able to invest adequate funds in an emergency.
- You become a disciplined investor. Investing in SIPs adds more discipline to your investment journey by their very nature.
- You don’t have to time the markets in any way with SIPs. No matter what the market conditions are, you keep investing a fixed amount each month. If the market is down, you will receive more fund units, and if it is high, you will receive fewer units.
why to invest in sip?
Benefits of SIP are as follows:
how taxation works on SYSTEMATIC INVESTMENT PLAN ?
- In the case of SIP every investment is considered as a fresh investment. So if you have to get the benefit of long-term capital gains then each investment (SIP instalment) has to be held for a 12-month period in case of equity and for 3 years in case of debt funds.
- Example 1: Equity – SIP invested on 1st Apr 2018 has to be held till 31st March 2019 and SIP on 1st May, 2018 has to be held till 30th Apr, 2019 to get Long Term Capital Gain tax benefit.
- Example 2: Debt – SIP invested on 1st Apr, 2018 has to held till 31st March 2021 to get Long Term Capital Gains tax benefit.
- Things are different in ELSS as there is a lock in of 3 years. Therefore, each investment (SIP instalment) has a lock-in of 3 years. So, if you have done a SIP in an ELSS fund, each instalment will have its own 3-year lock-in. So, investment on 1st Apr 2018 has to be held till 31st Mar 2021 and investment on 1st Mar, 2019 has to be held till 31st Mar 2022.
types of Systematic Investment Plan
Different mutual fund houses provide different types of mutual fund scheme with SIP. But now a days traditional monthly SIP transformed into new varieties of SIP. Let see it. The detailed explanation of each of the type will be covered in the coming articles.
process of SIP calculation : example
- In a SIP, we keep investing regularly over particular period and get back the maturity amount upon exit. We calculate SIP return on monthly basis for 1/3/5/10 year. We used last date of NAV for each month. For example, we made our investment of Rs. 10000 in a fund for period of 5 year in Aug-13 on monthly basis. Then we get certain number of units on basis of nav of 30/8/2013. Hence, we keep accumulated units from 30/8/13 to 30/8/18. On 30/8/18 when we exit the scheme we get maturity amount, which is NAV of 30/8/18 (redemption day) multiplied by total units on redemption day.
- For our SIP calculation we used XIRR Formula. We applied this formula in our calculation for period of 1/3/5/10 year.
- How we calculate:
- SIP amount-10000
- Dates of SIP investments – Last date of each month
- Date of redemption- 1/3/5/10 year
- Maturity (redemption) amount
Steps to calculate SIP using XIRR:
- Step 1- Enter all our SIP dates in one column.
- Step 2 – Enter the SIP amount in another column corresponding to the SIP dates. For example, the SIP amount is Rs 2,000. You will have to enter the amount as -2000. Prefixing a minus sign is important as it depicts outflow of cash.
- Step 3 – Enter the date on which you are supposed to make redemption or the date on which you have made redemption. In front of that enter the redemption amount.
- Step 4 – Apply the XIRR formula =XIRR (B1:B7, A1:A7) *100
Here, B1:B7 is the range of cells of the amounts, and A1:A7 is the range of cells of dates. The result would show the return you have earned on your SIP investments on the date of your choice. On the same basis we also calculate benchmark return & whole category average return for 1/3/5/10 year, so that we can easily compare fund’s performance as compare to benchmark and category average.