Systematic Investment Plan (SIP): Meaning and Benefits

Introduction to Systematic Plans

Recently, there have been a lot of investors talking about Systematic Investment Plans (SIP). But what do you mean by the word ‘systematic’ in the stock market? Well, there are various systematic plans available to you as an investor. These are broadly: 

• Systematic investment plan (SIP)
• Systematic transfer plan (STP) 
• Systematic withdrawal plan (SWP) 

These are systematic investing and withdrawal methods, each serving a different purpose. We will briefly learn about STP and SWP, as this chapter focuses on SIP.

Systematic investment plan (SIP)

A SIP allows you to invest small amounts of money over time to build an investment corpus. Thus, when you enroll for an SIP, a fixed amount is deducted from your bank account on a specified date for every period. It involves spreading out investments over a period of time, helping you to average your purchase cost. How? If your SIP instalment is due when the market is bearish, you can purchase more units of the fund.

Similarly, you buy fewer units if the market is on the rise. Therefore, averaging out the investment cost. This prevents you from putting all your money at a market peak and thus has the potential to maximise returns. SIPs also inculcate discipline in investing and make investing a habit. The frequency of SIPs can vary, but you can do a monthly, weekly, or daily SIP. 

Systematic transfer plan (STP)

Like an SIP, an STP helps you spread out investments over time to average the purchase cost, ruling out the risk of entering the market at its peak. However, with an STP, you tend to invest a lump sum in one scheme (usually a debt scheme) and then transfer a fixed amount from this scheme regularly to another scheme (usually an equity scheme). The reverse is also true, i.e., an STP can also be made from an equity fund to a debt fund.

The basic theory behind an STP is to earn a little extra on your lump sum in debt funds while it is being deployed in equity since debt funds tend to provide higher returns than normal savings bank deposits. 

You will learn more about the Systematic Transfer Plan in the upcoming chapter. 

Systematic withdrawal plan (SWP)

Now, simply from the name, you can figure out that an SWP allows you to withdraw a specific sum of money from a fund you invest regularly. Such a systematic plan is particularly suited to retirees expecting a fixed flow of income. SWPs also provide you with a certain level of protection from market volatility and help avoid timing the market. You will learn more about the Systematic Withdrawl  Plan in the upcoming chapter. 

 Let’s dive further into SIPs now. 

Difference Between a Lump Sum and a SIP

SIPs are the complete reverse of lump sum investments. The following points will help assess the differences between lump sum and SIP.

Aspect	SIP	Lump Sum
Investment Mode	Invested in instalments periodically.	The large sum invested at a single point.
	Follows a systematic way of investing.	Does not involve breakage or instalments.
Potential Investors	Safe investment instrument.	Usually preferable for experienced investors.
	Suitable for beginners or those unaware of the market. Often chosen by salaried individuals with regular paychecks.	Usually preferred by individuals with significant investment experience.

Benefits of SIP

SIPs solve four big problems that you might face while starting your investing journey:

• Option to invest small

The SIP allows you to invest in mutual funds starting at just ₹ 500 monthly. Suppose you think about the difference such a small monthly investment can make. In that case, we can factually say that your money will slowly but steadily grow, leading to a more considerable corpus over time.

• Lower risk

Starting small can be better in hindsight. Even if you make mistakes initially, much money would not be at stake. On the contrary, you may be too late if you keep waiting to accumulate a sizable amount before making your first mutual fund investment. That's because your mutual fund investments if given time, can proliferate.

• Financial discipline

Most of you might struggle to stick to an investment plan. Sometimes, it is the temptation to splurge money; sometimes, the market's volatility throws your plans off. This is where an SIP can be helpful. Here, your money is auto-debited from your bank account every month. Initially, this would help you avoid splurging your hard-earned money, and eventually, you would learn a secret sauce to grow your wealth, i.e. financial discipline. 

A monthly SIP has various benefits besides the maths of cost averaging. It develops a mindset of steadily investing without interruption. It fits your income pattern and makes it likely that once you start it, you will not stop. 

• Dealing with market volatility

Even the most experienced investors cannot time the market, i.e., invest money when the markets are low. This is why lump sum investing can sometimes backfire. What if you invest now and markets fall soon after? 

Let's look back at 2008 and understand this using an actual example. 

Scenario	Lump Sum Investment (₹ 12 lakh)	Staggered Investment (SIP)
Initial Investment	₹ 12,00,000	-
End of 2008 Value	₹ 5,94,000	-
Loss+	₹ 6,06,000	-
End of 2009 Value	₹ 10,60,000	₹ 16,39,000
Net Appreciation	-	₹ 4,39,000

In this table:

• The lump sum investment of ₹ 12 lakh is made at the beginning of the period.
• By the end of 2008, the value of the lump sum investment drops to ₹ 5,94,000, resulting in a loss of ₹ 6,06,000.
• By the end of 2009, the value of the lump sum investment grows back to ₹ 10,60,000.
• In contrast, with a staggered investment approach (SIP), the investor experiences a less alarming drop during 2008.
• By the end of 2009, the value of the staggered investment (SIP) reaches ₹ 16,39,000, resulting in a net appreciation of ₹ 4,39,000.

Why SIP Over Lump Sum?

A common question many of you have is - why you shouldn't be investing a lumpsum in equities. The question is quite obvious, specifically for self-employed individuals. Unlike salaried individuals, they don't have a fixed and known flow of money every month. That's one reason why many usually prefer investing in a lumpsum as and when they have a surplus instead of committing a fixed amount through a SIP.

However, that certainly is not the recommended way. Why is this so? When you invest staggered, you average the cost of purchase and reduce the risk of investing at a market peak. Also, equities are unpredictable and highly volatile over the short term. Thus, If the market crashes soon after making a lump sum investment, it can make you anxious, and you might redeem your money out of panic, making the losses permanent. 

Let’s understand this using an actual scenario:

Scenario	Lump Sum Investment (₹ 12 lakh)	Staggered Investment (SIP)
Initial Investment	₹ 12,00,000	-
January 2020 Value	₹ 12,00,000	-
March 2020 Value	₹ 8,56,000	-
Loss	₹ 3,44,000	-
April 2022 Value	₹ 16,74,000	₹ 18,82,000
Net Appreciation	-	₹ 6,82,000
Difference	-	₹ 2,08,000

In this table:

• The lump sum investment of ₹ 12 lakh is made at the beginning of January 2020.
• Due to the market crash in March 2020, the value of the investment fell to ₹ 8.56 lakh, resulting in a loss of ₹ 3.44 lakh.
• However, by April 2022, the value of the lump sum investment appreciates to ₹ 16.74 lakh.
• In contrast, with a staggered investment approach, the investor buys units at different NAVs, including during the market crash, resulting in a lower purchase cost and higher appreciation.
• By the end of April 2022, the value of the staggered investment (SIP) will reach ₹ 18.82 lakh, resulting in a net appreciation of ₹ 6.82 lakh.
• The difference between the lump sum and staggered investment approach is ₹ 2,08,000 in favour of the staggered approach.

Source: Value Research 

Now that you are aware of SIPs and their benefits, it becomes very important to understand who should do an SIP. Let’s understand this in the next section. 

Who Should Do an SIP?

SIPs are suitable for any investor, and anyone can choose an SIP investment mode. Specifically, it can be suitable to:

• Salaried individuals receive regular monthly salaries and thus have a periodic cash flow to support SIP payments. 
• Long-term investors who want to follow financial discipline in the market for investing. 
• Risk-averse investors who get worried about the volatility in the market. SIPs are a much better way to invest for such investors. 
• New investors who are just starting with their investment journey.

How Does an SIP Manage to Minimise Risk?

The answer is simple. It's because of the concept of rupee cost averaging. Since SIP allows you to invest periodically, you can buy more fund units when the market is down and fewer units when it goes up. This helps you average your price and the risk associated with investing at peaks. Since you can't predict the stock market, doing an SIP is a feasible option to bear the volatility of the equity market. Thus, SIPs safeguard you against sharp losses. This is crucial as it will help you stick to your investing journey. Therefore, do not wait to accumulate one if you lack a large lump sum amount to invest. Start with an SIP with any small amount you can. It carries the potential to give you significant results over the long term.

SIP Calculator 

The ultimate aim of SIP or lump sum is to achieve one’s investment objective. For that, it becomes essential to calculate the final value of the corpus needed to achieve your investment goal. Just like there are calculators to calculate the final value of your lump sum investments, SIP calculators are also available in the market. These calculators help you to calculate the final value of your SIP investments, assuming a rate of return during your investment horizon. Angel One’s website offers a free SIP calculator to help you calculate your returns from SIP investments. Not only this, but it also helps you to calculate the SIP amount needed to achieve your target goal. 

Here are the steps you can follow to use the Angel One SIP calculator to estimate the SIP returns on maturity:

1. Enter the amount you want to invest.
2. Enter the time period in which you want to invest.
3. Enter your expected rate of return.

The SIP calculator will instantly give you the following:

1. The final value of your investment after the investment duration.
2. Your total invested amount.
3. The expected returns from your investment.

The SIP calculator will compute the values and will show you the amount you need to invest monthly to reach your target as per the duration and rate of return.

According to the SIP calculator, if you pay a monthly SIP amount of ₹10,000 for 5 years at a 12% rate of return, the final amount you get will be ₹8,24,864 from the total invested amount of ₹6,00,000. If you are unsatisfied with the end amount, you can decide whether to increase the investment period or find another fund with a higher return.

Alternatively, you can follow a reverse order too. You can ascertain your SIP amount based on the target amount. Say that Mr B wants to buy a car worth ₹10,00,000 in 5 years. He has also identified an SIP that has given an average of 13% returns in a year. Here’s how he can use Angel One’s SIP MF calculator to get the SIP amount:

1. Select the Target Amount tab on the SIP calculator.
2. Enter ₹10,00,000 in the target amount.
3. Enter the duration, i.e. 5 years.
4. Enter your expected rate of return from the SIP that you have chosen, e.g. 13% per annum.
5. The SIP calculator will show that Mr B needs to invest ₹11,792 per month in the SIP to accumulate ₹10,00,000 at the end of 5 years to buy a car.

Benefits of Using the Angel One SIP Calculator

1. Leads to financial planning: The SIP calculator by Angel One can help you in better financial planning. You can know how much you need to invest periodically to reach your target amount. This will also help you in planning out your monthly budget. 
2. Assess and compare SIPs: The SIP Calculator helps you assess and compare various SIP investment strategies available based on the total invested amount, the final amount, and the expected return.
3. Free access: The online Systematic Investment Plan Calculator is free to use, irrespective of the number of times you use it. Additionally, You can access the Angel One SIP Calculator anytime from any part of the world. 
4. Generates instant results: The investment calculator gives you accurate and instantaneous results.
5. Easy to use: The SIP Calculator is easy to use. You are just required to input the basic details of your SIP and get results instantaneously. 

Myths Around SIP

There are various myths and misconceptions investors usually have regarding SIPs. let’s discuss some prominent ones and understand the truth behind them. 

• SIPs don’t give negative returns during falling markets.

No matter what you have been told, the truth is that a SIP does not protect you against equity market losses. All it does is ensure that your investments in a mutual fund are well spread out over a period at different market levels so that you don't make a big loss because you invested a lump sum at a market peak. 

SIP investments, too, will make losses if the market declines steadily after you begin your investments. But because SIPs help you invest in smaller instalments and spread them out over a period of time, you get to average your investments at lower levels in the hope that, when the market bounces back, those cheaper investments will pay off. Thus, If you take note of your SIP returns over just one market phase, particularly a bear phase, the investment will show a loss. 

In India, a typical market cycle lasts five to six years (from bull market to bear market and back again). That's why it is necessary to evaluate SIP returns on your mutual funds over five or more years rather than short periods like one year.

• SIPs generate higher returns than a lump sum. 

This is not true. This depends on the market movements, and no one can predict which will perform better as it depends on the point of the market cycle you started investing in. There are two types of market scenarios where a SIP investment will potentially earn lower returns than a lump sum investment:

1. One is a steadily rising market. A lump sum invested at the lower of the market cycle, just before the market starts rising, will lead to better returns than a SIP investment mode.
2. The other is when markets behave like a bell curve - they rise first and then tank. This leads to some mutual funds units accumulating at market peak levels, which drags down the overall portfolio performance. 

• SIPs in any fund can lead to better performance over the longer term. 

SIPs cannot help if the funds you selected for your portfolio perform poorly. If the fund you have selected has the habit of consistently lagging its peers or benchmark, its SIP returns will mirror those poor returns. One of the real dangers of SIP investing is that you can put a lot of money into a poorly performing fund. 

Unlike lumpsum investments, where you may put a lot of thought and research into fund selection, SIPs essentially put your investments in auto-pilot mode. Without you realising it, SIPs keep pushing more and more money from your earnings into a poor fund month after month. This is why it is even more important for SIP investors to track fund performance regularly. Unless you do this and make mid-way corrections to your portfolio, you may find that a poor fund has absorbed much of your hard-earned savings. 

So, if you are a SIP investor, don't forget to review your portfolio once every six months. If a fund you own is lagging its benchmark consistently, stop your SIPs. Invest in a better performer fund. 

• You should never stop SIP. 

SIPs can and should be stopped in any of the three circumstances mentioned below: 

1. if you realise that you have chosen the wrong asset class or fund for your portfolio, carrying on with the SIP, even after you know it, will only compound your losses, and your portfolio will not be tailored as per your investment objective. 
2. if a fund you invest in is a consistent underperformer (against its benchmark or category), you should stop SIPs and switch to a better fund. Also, don't forget to redeem the amount you have already accumulated in the fund. 
3. Stop your SIPs in an equity fund as you are about to reach your financial goal. Since equity markets can suffer sudden losses over one to three years, moving from equity investments into cash or debt at least three years ahead of a critical financial goal, be it your child's education or your own retirement, is preferable. 

• There is an ideal date for an SIP. 

There is no ideal date for a SIP. Changing your SIP dates will only work if the market follows a clear pattern of movement that played out like a clockwork every month (Imagine if the Nifty 50 began each month at a high on 1st, tanked 10 per cent by 15th and rose 20 per cent by 30th!). But we all know that market moves are a complete random walk. Therefore, there is no perfect date for your SIP investments. 

Taxation on SIP

The gain on a mutual fund investment is taxed on redemption, i.e., when you sell the fund. It is taxed as capital gains. You must note that to calculate capital gains, the holding period is calculated separately for each unit based on its SIP date. 

In the Indian context, taxation on mutual funds, including SIPs, differs based on the type of fund (equity or debt) and the holding period. Let's consider an example of investing in an equity mutual fund through a SIP and how taxation would apply based on different holding periods.

Assumptions:

• Investment amount per month: ₹10,000
• Annualized Return: 12%
• Tax rates:
• Short-term capital gains tax (STCG) on equity funds held for less than 1 year: 15%
• Long-term capital gains tax (LTCG) on equity funds held for more than 1 year: 10% (for gains over ₹1 lakh in a financial year)

Month	Investment Amount (₹)	Total Units Purchased	NAV (Assuming constant)	Investment Value (₹)	Capital Gains (Yearly)	Tax Applicable	Net Value After Tax (₹)
1	10,000	50	₹200	10,000	₹0	₹0	10,000
2	10,000	42.3729	₹236.22	10,000	₹3,622.96	₹0	13,622.96
3	10,000	35.8403	₹278.89	10,000	₹7,128.69	₹0	17,128.69
4	10,000	30.1767	₹331.46	10,000	₹11,992.08	₹0	21,992.08
5	10,000	25.2827	₹395.48	10,000	₹18,274.38	₹0	28,274.38
6	10,000	20.9755	₹477.01	10,000	₹26,198.08	₹0	36,198.08
7	10,000	17.1867	₹584.02	10,000	₹35,062.07	₹0	45,062.07
8	10,000	13.8585	₹729.84	10,000	₹45,140.85	₹0	55,140.85
9	10,000	10.9407	₹914.34	10,000	₹56,890.69	₹0	66,890.69
10	10,000	8.3908	₹1,192.13	10,000	₹70,854.97	₹0	80,854.97
11	10,000	6.1733	₹1,621.32	10,000	₹87,242.08	₹0	97,242.08
12	10,000	4.2446	₹2,356.64	10,000	₹106,488.90	₹5,648.89	110,839.01
Total	₹120,000	-	-	₹120,000	₹559,936.65	₹5,648.89	₹174,287.76

In this example:

• The investor invests ₹10,000 every month into an equity mutual fund through SIP.
• The total investment over 12 months sums up to ₹120,000.
• Assuming a constant Net Asset Value (NAV) for simplicity.
• The capital gains for each year are calculated based on the difference between the final value and the total investment.
• Since the investment is in an equity mutual fund and held for less than one year in the 12th month, short-term capital gains tax is applicable.
• Long-term capital gains tax is applicable from the 13th month onwards.
• The net value after tax is the total value minus the total tax paid on capital gains.

Please note that taxation rules can vary, and it's essential to consult with a tax advisor or refer to the latest tax regulations in India for accurate information.

Expense ratio calculation in case of an SIP

Assume you're investing in a mutual fund through a SIP with the following details:

• Monthly SIP investment: ₹ 10,000
• NAV (net asset value) of the mutual fund: ₹ 50
• Expense Ratio: 1.5%

Calculation:

Aspect	Calculation
Monthly SIP investment	₹ 10,000
NAV (net asset value)	₹ 50
Expense Ratio	1.5%
Total Monthly Investment	₹ 10,000
Number of Units Purchased	₹ 10,000 / ₹50 (NAV) = 200 units
Expense Ratio Deduction	200 units * ₹ 50 * 1.5% (Expense Ratio) = ₹ 15
Net Investment	₹10,000 - ₹15 (Expense Ratio Deduction) = ₹9,985
Actual Units Purchased	₹9,985 / ₹50 (NAV) = 199.7 units (This is due to rounding off to 2 decimal places.)

In this scenario:

• The investor's monthly SIP investment is ₹ 10,000.
• The NAV (net asset value) of the mutual fund is ₹ 50.
• The expense ratio is 1.5%.
• The total monthly investment is ₹ 10,000.
• The number of units purchased is 200 units.
• The expense ratio deduction is ₹ 15.
• The net investment after deduction is ₹ 9,985.
• The actual units purchased, considering the deduction, is 199.7 units due to rounding off to 2 decimal places.

Therefore, even though you invest ₹10,000 every month, only ₹9,985 will be invested in the mutual fund. The remaining ₹15 goes towards covering the mutual fund's expenses.

Mistakes To Avoid in a SIP

The following are some of the mistakes to avoid in SIP investments:

• Delay in starting an SIP: Procrastinating the start of an SIP can reduce the potential rewards of compounding over time. Remember, there is an opportunity cost associated with each delay. 
• Midway stopping an SIP: You should avoid stopping of your SIP midway as SIPs are meant to give their highest returns towards the end of their holding period. Thus, the short-term opportunity cost of leaving your SIP midway is really high.
• Wrong selection of the fund: Choosing a fund without proper due diligence and adequate research may lead to investment in SIP that does not align with your goals. Researching and choosing SIPs based on investment goals, risk tolerance, and historical performance is essential.
• Excessive investing: Investing beyond your means can result in financial strain. Thus, setting a realistic and affordable SIP amount ensures consistency in contributions.

Can Non-Resident Indians Invest Using SIP in Mutual Funds?

Yes, NRIs can do SIPs in Indian mutual funds if they adhere to the Foreign Exchange Management Act (FEMA).

The steps to be followed are:

1. Begin by setting up your NRE or NRO account: The Foreign Exchange Management Act (Fema) does not allow investments in foreign currencies for mutual funds, as per Indian laws. Also, NRIS need to have an NRE or NRO account. 
2. After activating their account, NRIs can invest through the following steps: 

• Self or Direct
• Through the Power of Attorney (PoA)

1. NRIs must also complete their KYC by submitting a copy of their passport (only relevant pages with name), date of birth, photo, and address.
2. NRIs can also redeem their investments through the AMC, which credits the accumulated corpus (investment+gains) after deducting taxes. One can also write a cheque to redeem their investments. 

Step Up SIPs

So, the step-up SIP that everybody encourages you to do is to at least increase your SIP investments by a certain percentage, which you decide, and it will be automated. 

For instance:

• If you start with ₹ 1,000 this year, and you decide to do a step up of 10% after 12 months. 
• Next year, you are given a debit mandate when you do set up a SIP, it will be ₹ 1,100.
• The year after that, there will be ₹ 110 added to it, which will be around ₹ 1,210. 

Likewise, your SIP keeps increasing by 10%. What are the benefits, you ask? It simply accelerates the compounding effect.For instance:

• If you invest ₹ 1,000 and earn 12%, it takes you 20 years for it to become ₹ 1 crore, but, 
• If you do the same amount but increase it by 10% every year, you will achieve that in 16 years. 

Thus, it takes four years less than in the earlier case, taking you 20% less time. So, you can either retire early or simultaneously but with a higher investment corpus. Thus, your investments compound even faster. 

SIP Pause

SIPs require a long-term commitment from your side. However, sometimes, for some reason, you might need to pause your SIP. Can you do that? Yes, you can. You can pause your SIPs both online or offline for up to six months. However, a few fund houses allow this pause facility for three months only. After the expiration of the pause period, your SIPs will automatically resume. Your mutual fund house charges no penalty in such a case. You can also pause your SIPs by visiting the fund house's website. While the process might differ for each fund house, remember to have your folio number. 

You can also pause your SIPs offline by asking your advisor. 

Now, let’s answer some of the most frequently asked questions regarding pausing of your SIPs:

How many times can I pause my SIPs?

You can pause your SIP once or twice for the duration of the SIP investment. However, it differs from one fund house to the other.

Why are my SIPs not eligible for pause?

The pause facility is available for monthly SIPs only. However, some fund houses like Axis allow the pause facility if your SIP exceeds ₹ 1,000 and has completed six months.

What happens if I miss my SIPs for two consecutive to three months?

Missing an SIP for a month or two may not be a problem. But missing it for three months straight will terminate your SIP.

Will I incur a penalty for missing my SIP investment?

Even if you miss making one SIP, your bank may charge a penalty for defaulting on your SIP payment. To avoid such a scenario, it's best you pause your SIP.

What happens if I am short of my SIP amount?

You will miss your SIP investment, and the bank may levy a bouncing charge for not paying your SIP that month.

Does missing or pausing my SIP affect my credit score?

No, it doesn't. Your credit score is impacted only when you miss repaying your loan. And SIP is an investment, not a loan.

How To Invest in SIP on Angel One?

1. Open the Angel One app. On the Home page, go to ‘Mutual Funds’.
2. Choose the Mutual Fund that you want to invest in from the various lists provided on the Mutual Fund portal.
3. Choose whether you want to invest via lump sum or SIP mode.
4. Enter the amount that you want to invest.
5. Click on the payment button to complete the payment and start your investment.

This was all about the SIP mode of investment. Whatever the chosen mode of investment, In the end, it is most important to remain invested for a longer period of time to reap the reward of compounding.