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What is a Systematic Investment Plan (SIP)?

A Systematic Investment Plan allows you to invest regularly a fixed sum in your favorite mutual fund scheme. In SIP, a fixed amount is deducted from your savings account every month and directed towards the mutual fund you choose to invest in. It allows you to buy units continuously without worrying about the market ups and downs. Not only does investing in an SIP bring financial discipline but also helps you plan your budget and expenses better.

Benefits of investing in SIP

The concept of SIP focuses around the philosophy of “ Save First Spend Next”. With an SIP, you can invest small amounts at fixed intervals ( weekly, monthly or quarterly) instead of doing a lump sum investment. Your money is invested in equity shares of small-cap/mid-cap/large-cap companies and this diversification helps get a good balance between risks and returns.

Power of Compounding

The basic principle of Compound interest implies that small amounts invested over a long period of time would result in a larger return compared to a lump sum investment.

Start with just Rs 500

You can start investing in mutual funds through an SIP with amount as low as Rs.500 and still not feel a burden on your budget planning. Generally, over a period of time you can increase your monthly installments by a factor of Rs.500 .

Rupee Cost Averaging

The equity market is volatile in nature and when you do an SIP investment, you would be buying more number of units during a slump and less number of units in a blooming market and as a result you would decrease the cost per unit.

Become a desciplined investor

An SIP investment would make you more disciplined in matters of managing your finances.

Automated Payments

The automated payment means it is not something you have to remember every month.

Acts as an Emergency Fund

With One-click withdrawal SIP can act as an emergency fund for possible contingencies (like medical crisis or job loss) puts your mind at ease.

SIP or Lumpsum : How should I Invest?

Often first time investors get confused choosing between an SIP investment or Lump sum investment. In a lump sum mode, you make a one time payment of a considerable sum of money. On the other hand, in an SIP, a fixed amount of sum is deposited at regular intervals of time in a mutual fund scheme. In short, a lump sum mode can be chosen if you have money in hand right now that can be invested and an SIP can be chosen if you are expecting a regular inflow of money in future.

SIP Investment Lumpsum Investment
Periodic investments in a tenure One-time investment in a tenure (lump sum)
Earns better during market lows Earns better during market highs
SIPs can protect investments from potential market crash Lumpsum investments lead to major loss during market crash, which happens often enough

Lumpsum Investment: Suppose you had ₹2.3 lakhs to invest in Aug 2015. You invested the entire amount in lump sum on 20 August 2015 in a diversified multi-cap fund (like HDFC Equity). Then, the markets crashed by over 1600 points on 24 August 2015, which you never expected.
So, how would your lump sum investment of ₹2.3 lakhs have performed? Immediately after a month, your investment would be down by more than 6%. If you had been brave enough to continue holding your investment, it would have grown to around ₹2.7 lakh by 21 June 2017. But most investors would have run away after seeing a major loss. Very few would have stayed on course.

SIP Investment: In the same scenario if you had decided to start with a Systematic Investment Plan of ₹10,000 in the same fund for the same amount. Then, till 21 June 2017, you would have invested ₹2,30,000 and your investments would have grown to over ₹2.8 lakh. A return of more than 20% per annum!
This is the major benefit of investing through SIPs. We never know when the markets will crash. Hence, it is best to spread our investments over a period, instead of taking the risk of catching the peak with a lump sum investment.

How to Choose a SIP

The internet will provide you with the A-Z of the mutual funds you shortlisted including their past returns. However, please make sure that the fund you pick meet the below criteria.

  1. A 500 Crore asset size can be a reasonable benchmark when selecting a fund. This doesn’t mean that funds below this Corpus are bad. It is just sensible to play safe as a relatively new investor.
  2. The duration of SIP mutual fund is an important factor from a risk, return and tax point of view. Keep 5 years reference point and check how the fund performed across markets.
  3. Reputation of the SIP fund house is an important factor while choosing a plan as it tells how well they were able to handle market highs and lows without letting their investors feel the impact.
Invest in Handpicked Mutual Funds

Start a SIP with ClearTax & invest in best performing mutual funds to get better return on investment than Bank RDs / PPF

Tax Benefits of Investing in SIP

Equity Linked Savings Scheme (ELSS) is a diversified equity mutual fund. It invests your money in equity shares of companies across market capitalisation i.e. large-cap/mid-cap/small-cap. You can either make a lumpsum- one time payment or SIP – monthly investment to save taxes under Sec 80C deductions

SIP locking period
Lowest Lockin period

Compared to other tax-saving options, ELSS has the lowest lock-in period of 3 years. Being an equity fund, it will be advisable to stay invested for a longer duration.

SIP Tax Savings
Best Tax saving investment under Sec 80C

It helps you to avail tax deduction under Section 80C in the EEE format i.e. tax exemption, wealth accumulation and zero exit load.

SIP Power
Power of Compounding

Compound interest ensures better long-term benefits compared to lumpsum investmen

SIP vs RD
2x Higher returns than RD

As compared to the conventional FDs, ELSS gives higher returns to beat inflation in an efficient manner.

How To Invest in SIP

An online search can easily get you everything you need to know about the mutual friends you shortlisted including their past returns. However, please make sure that the fund you pick meet the below criteria.

  1. Set Investment Goals – Mutual fund is no journey without destiny. Every fund has a specific goal and purpose and you need to choose one that suits your requirements. Or let us know your financial goals and income details and we will handpick the plans for you.
  2. Choose – Make an informed decision based on your individual needs and choose an Systematic Investment Plan mutual fund you want to invest in. You can also delegate this task to the ClearTax team if you find this cumbersome.
  3. KYC – All our mutual fund investments mandate KYC documentation and a netbanking account and we offer the e-KYC option to upload all the documents online from the comfort off your home or office. There is usually no need to sign cheques and fill out forms. Our commitment to the environment rival our commitment to you.
Invest in Handpicked Mutual Funds

Start a SIP with ClearTax & invest in best performing mutual funds to get better return on investment than Bank RDs / PPF

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FAQs (Frequently asked Questions)

  • Why Choose Systematic Investment Plan ?
    If you are short on cash to make a lump sum investment or if you want to reduce your risks you can choose an SIP. Also, an SIP would bring in discipline, which helps you to make logical decisions instead of succumbing to greedy impulses.
  • When is the best time to invest in SIP?
    There is nothing like a good timing when it comes to investments.It’s more about what you need from that investment. In an SIP, you can automate your transfers, and be hassle-free about the date in a particular month.
  • Should I Choose SIP for Long term wealth ?
    Any investment period can be chosen by a customer. But, it has been proven that a long term investment has been rewarded with greater returns as compared to short term investment.
  • How much should I invest in a mutual fund through SIP?
    In an SIP investment you can start with as low as Rs.500 as your investment and you can go up to whatever limit you want to.
  • Can I miss an SIP payment?
    Yes, you can miss your payment and still your account wouldn’t be deactivated. There are options to pause your payments in various mutual funds.
  • Are all investments through SIP have tax benefits?
    Only investments in ELSS through SIP have tax exemption up to Rs. 1.5 lakh PA under Section 80C.
  • Is SIP safe?
    An SIP is just a mode of investment. The safe/risky component is related to the investment which you choose.
  • How do I start my SIP investment?
    Just choose the investment in which you want to invest and you are ready to start. One primary thing is that you have to fill your KYC documents before investing.
  • How to shorten SIP duration?
    You can send a written application or ask for an request online to the fund management company before the next SIP is scheduled. However, you should have completed the minimum investment period, which is generally 6 months.
  • How can I extend my SIP duration?
    At the end of the SIP term, you will get an option for renewal of your investment. You can fill out that form and then choose the desired duration of investment.