Mutual Fund Systematic Investment Plans (SIP) – All You Need To Know

If you are new to mutual funds, you should first read this, it is an introductory article about mutual funds for beginners.

When I was working in the bank majority of my mutual fund investment was through SIP. Today I have a single SIP and rest of the investment in mutual funds I do manually.

SIPs are one of the most popular financial products. Yet, the level of confusion about SIP is equally high. So what is an SIP? SIP stands for Systematic Investment Plan, it is an automated method of investing in mutual funds. You select a mutual fund, an amount and a date. On your selected date, the predecided amount is deducted from your account and equivalent units of the selected mutual fund are allocated to you. All this happens without any manual intervention.

What is a Systematic Investment Plan (SIP)?

In recent years mutual funds have seen an upsurge in popularity in India. A large number of people are aware of them, but some factors obstruct them from investing in mutual funds.

  • Lack of time: Currently many platforms like Groww, Zerodha, MFU, etc have made it very easy to invest in mutual funds. Yet, when a hectic job takes up the majority of your time, the desire for spending every last second with family, friends, and take rest is normal. Thus it is quite common to find people procrastinating the investment in mutual funds.
  • Lack of a sufficient amount: A majority of people find themselves capable of saving only small amounts. This is especially true for the younger generation. Thus the decision of investing is postponed for a day when a large amount will be available.
  • Lack of discipline: Many times an immediate need is given priority over investment. The latest gadgets, family vacations, gifts for family/friends, etc are some common culprits. This results in less amount left for investment. It’s human nature to seek immediate gratification and thus we sacrifice long term benefits.

SIP is a product which can help you tackle these type of issues.

How do SIP Works?

  • You do your own research or take the help of a professional advisor to select a mutual fund.
  • You apply for SIP either offline or online. In your application, you select the amount of investment, frequency (monthly, quarterly, etc), and date.
  • A mandate form is generated which you submit in your bank. You can also select online banking and complete this process through internet banking. This works as permission for AMC to deduct the amount from your account.
  • The set amount will be deducted regularly on your selected date and will be invested in the mutual fund of your choice. This will continue until the end date of the SIP.

This will remove the need to manually investing every time. You just have to monitor and manage your investments. You can start SIP with each installment as low as Rs. 500. Over time these small but regular investments result in a substantial MF portfolio.

Benefits of SIP

The popularity that SIP has gained among investors is not without reasons. There are quite a few unique advantages that SIP provides. The major benefits are listed below.

Convenience

As mentioned previously the time constraints and hassle of manually investing may lead to procrastination. SIP makes investing in mutual funds very convenient by removing any need for manual interference. You receive text alerts about unit allocations and the amount deducted from your account and your investment goal is achieved.

Discipline

In an ideal situation, it would be preferable that you research and invest based on your goals with strict discipline. But the reality is quite different, a number of factors can cause people to postpone the investment for a later date. The convenience and automatic manner of SIPs can introduce discipline in your investments. The only thing a person has to focus on is to make sure funds are available in their account.

Less Amount Required

As discussed early in the article many people wait till they have a substantial amount to invest in mutual funds. This causes them to miss out. SIPs can be started with an amount as low as Rs. 500.

Rupee Cost Averaging

Rupee cost averaging is one of the most advertised benefits of SIP. You may not have heard the exact term but this benefit is mostly used to market SIP. What it means is, when you invest the same amount regularly, you end up buying fewer units when the price is high and more units when the price is low. Thus averaging out the entry price of your investment.

But, at the same time, this has added to some of the most popular myths about SIP. We will discuss these and other myths in our next section.

Apart from these the benefits of the fund, you are investing in make SIPs quite advantageous.

Top 10 Myths About SIPs

With the growth in the popularity of SIP, a lot of misinformation and myths have also become popular. In this section, I will be discussing some of the most popular ones.

Myth #1: I am investing in a SIP

This misconception is the most common one, and it is a quite dangerous one too.

People consider SIPs as a separate investment product, like a recurring deposit (RD). I have personally met people saying, “I invest in SIP”. But when I asked them about the fund they invest in, they were clueless. Many didn’t even know the name of the AMC. People just go to a bank or a mutual fund distributor and ask for SIP.

This can prove very disastrous for the financial situation. People need to understand that SIP is a method of investing in mutual funds. The performance of your investment will entirely depend on the fund you invest in through the SIP method.

SIP IS A METHOD OF INVESTING IN MUTUAL FUNDS

YOU INVEST THROUGH SIP NOT IN SIP

Myth #2: SIP is only for small amounts

Not as troublesome as the first one, but equally common. People think SIPs are only for small amounts. I once had a SIP of Rs. 5000 per month and this was a surprise for many. There is no actual upper limit to how much you can invest through SIP.

Myth #3: SIPs protect against market volatility and thus are less riskier

This is one of those myths that born out of “rupee cost averaging”. And this is what it is, a complete myth. People believe or they are led to believe that as they are buying units of MF at the different price levels over time the volatility will average out and they will be less affected by any downfall.

Another popular explanation for this myth is that if the price fall and you still keep investing your future investments will average out your losses and in the long term, you will always make good returns.

Now let me explain this. You average out the entry price, and you never know what will cause the market to fall and how much it will fall. No amount of averaging or wishful thinking will protect you from a market crash. Imagine a person started a SIP in an equity fund in 1999 for 10 years, and in 2008 markets all over the world crashed, what would have happened to his SIP?

Further, imagine you have a long-running SIP of Rs. 1000 per month. You have accumulated Rs 2 lakh in this fund. Now the market falls drastically, do you think your next SIP of Rs 1000 can cover up the losses which your Rs 2 lakh has faced.

SIP is not something magical that can make risks disappear in the long term. The risk associated with the mutual fund you are investing in remains even when you invest through SIP.

Myth #4: SIP returns never go below a certain level / guaranteed return in the long term.

If you think so then stop immediately, and if some mutual fund distributor is propagating this they should be reported. This grows from myth #3. The same story is repeated rupee cost averaging, keep investing through the lows and highs, your losses will average out. A picture is painted that you will always have a return of at least a certain level.

I will repeat myself again, you cannot predict the behavior of markets. You cannot predict how low the market will go down.

You can lose money even if you invest through SIP.

Myth #5 SIP always give a better return than lump-sum

There can be instances when this is true, but not always. The money via SIP is invested through the lows and highs of the market. This gives you the benefit of rupee cost averaging but reduces the return potential.

A lump-sum investment when the market is at a lower level will easily beat the return of your SIP. What matters is, when are you taking out the money. At the time of withdrawal, if the average price of your SIP is more than the price of lump-sum units, the return of lump-sum will be higher and vice versa.

There are zero guarantees about which will give higher returns, SIP, or lump-sum.

Myth #6: The exit load or lock-in period applies to entire SIP investment

This is a huge misconception people generally have. In the case of SIPs, each installment is considered as a separate investment for exit load and lock-in period. For example, a SIP in ELSS with 3 year lock period does not mean you can withdraw your entire corpus after 3 years. It means that after 3 years only the first SIP can be withdrawn. The same is true for exit load, each SIP is treated as a separate investment.

Myth #7: You should not start SIPs during an upward trend/bull run

As I have said previously it is near impossible to predict when the market will fall. The same is true for an uptrend, you cannot be sure when the market will rise or by how much it will rise.

And if you are capable of timing the market why invest through SIP at all. You should only invest lump-sum whenever the market is at it’s low. If you keep waiting for the perfect timing to start your SIP, you might never find that perfect moment. If your goal and asset allocation are clear and finalized you should start investing as soon as practically possible.

Myth #8: SIP is the best way to invest

For the previous generation, LIC policies were the best investment. You can check the reality of LIC policies here and the reality of traditional life insurance plans here.

But the reality is, no investment is the best, every investment instrument has some type of risk involved. All of them have their benefits and drawbacks. The best thing is to define our goals clearly, finalize how much you need to invest and where to invest. If SIP suits your goals, needs, and strategy it is best for you otherwise not.

It is not a crime to have zero SIP. Focus on your goals and invest according to your needs.

Myth #9: Which is the best date for SIP?

After finalizing SIP for investment, the best date for SIP is the date you actually start your SIP.

You can take any mutual fund and check the returns of SIPs started on different dates of the same month. There is no proof that any date is more profitable for SIP. But many people prefer a date as close to their salary credit date. The reason behind this is that the investment is done at the start. But other than that you can choose any date of the month which suits you.

Risk Associated With SIP

No matter if it is equity, debt, or hybrid every mutual fund has some level of risk involved. The risk can vary from low to high but never zero. You can follow the statement, higher the returns higher the risks, with utmost certainty.

As I have stated earlier SIP is a method to invest in MFs, and it does not remove the risk involved. What determines the risk associated with SIPs is the mutual fund you are investing in. The rise and fall of securities held by the mutual fund determine your returns, thus the market risk is a major factor. This not only affects equity but every type of mutual fund. The prices of the bonds can fall very quickly in circumstances like downgrading by credit agencies. Apart from this, the threat of default of securities is also present.

SIP cannot protect you against the risk involved with the mutual funds, do not fall for marketing gimmicks and misinformation.

How to Manage Your SIP?

You did your research, have decided to start an SIP. Now what? How to keep track of the performance, when to stop, when to withdraw. These questions are quite relevant and common. And this section I will try to answer these.

The following questions form the most important factor which helps you manage your SIPs.

  • Why did you select MFs for this investment?
  • Why did you choose this particular fund?
  • Why did you choose SIP instead of the manual investment?

You should have an answer to these before you make your investment, otherwise, you will always be confused about your investment. You will have no idea for how long to keep investing, when to stop, and when to withdraw the money. If you have an answer to these, managing SIPs becomes a little easier

  • If the reasons which made you choose mutual funds are still true, continue with MFs.
  • If the reasons for which you selected the particular fund are still applicable, continue with it.
  • If the reasons for which you choose SIP are still valid, continue the SIP.

The easiest way to manage and monitor your SIP portfolio is by having a proper investment strategy. If you are clear about what you want to achieve and how SIP can help you achieve it, it’s quite easy to manage. But there are a few points you should remember.

  • Do not expect unrealistic returns from your SIP, I never expect a return of more than 10% from an equity mutual fund. Some people whom I follow diligently would say, even this is a bit too optimistic.
  • Give each of your MF at least 3 years before you start judging its performance.
  • Do not compare entirely different funds with each other. A blue-chip fund should not be compared with a mid-cap fund.
  • The performance of a fund should be compared with its benchmark, peers, and performance of the sector.

When to Stop Your SIP?

This query baffles a lot of people. I have heard distributors recommending perpetual SIP (without any end date), which is utter rubbish advice. So when should you stop your SIP?

  • Has the goal for which SIP was started, been achieved? If yes, stop the SIP
  • Is the SIP performing way below your expected returns, and you might not achieve your target? If yes, revisit your strategy, lower your expectations, calculate the extra investment you need to make, to achieve your target. If the current SIP fits in the new plan, continue it otherwise stop it. (Do not do this every time there is price fluctuation, you need to learn to distinguish between short term fluctuation and underperformance by the fund. Compare the performance of the fund with its benchmark and peers).
  • There was no strategy and no plan when you started this SIP, should I stop it? Determine your goals, insurance requirements, emergency corpus, etc. Make an investment plan. If your current SIP fits into your plan continue them, otherwise stop.

You can use our financial calculators to aid in your investment planning.

This article has been written with beginners in mind if you want to learn more about personal finance you can visit Freefincal. I have been following this blog for many years now, and a lot of what I write and practice I have learned from Mr. Pattabiraman Murari the owner of this blog

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This Post Has 2 Comments

  1. Nipun Mehra

    Very nicely explained for a new user like me.

    1. Ashish

      Thank you sir, I really admire your regular praise

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