Systematic investment plan for SIP, approach of investment in mutual fund schemes which allows mutual fund investor to invest in mutual fund with a fixed amount every day, every week, every month, every quarterly, based on his or her requirement. it is one of the most popular investment approaches among mutual fund investors in India and help them to invest in equity market in a discipline manner for long term and also provide benefit of rupee cost averaging to the mutual fund investors, with the same fixed amount during downturn the more number of units are bought in their investment portfolio.
The systematic investment plan is not generally the actual investing but more of a kind of saving, as from the regular savings of a mutual fund investor every month the amount is deducted and being invested in equity market and the debt market through the mutual funds.
And it is many times being misunderstood that SIP is a form of investment among the mutual fund investors, which is actually a mode of investment in a systematic manner in a mutual fund.
SIP is the systematic investment plan which also helps in reducing the overall risk held by the mutual fund investors by investing in mutual funds in their investment portfolio through the help of rupee cost averaging and also help them to gain the benefit of compounding in long term.
Systematic investment plan SIP also gives the mutual fund investors a complete flexibility in investing systematically but to start investment with very low amount of rupees 100 or 500 depending on the various mutual fund houses, and not just that it also helps investor to increase or decrease the SIP amount and also withdrawal partial or the full amount during or after the SIP tenure is over.
And that is why systematic investment plan is the best mode of investing in equity market or debt market through mutual funds, and that’s why various schemes which allows a very small investor also to invest with very low amount in a systematic and disciplined manner for long term for creation of wealth which can lead to success and better return in long term.
And also, the systematic investment plan has an edge over lump sum investment as it enjoys the benefit of investing in all market cycles of the market, and also reduces the risk of market volatility with the benefit of rupee cost averaging.
It also helps investor to avoid timing the market and helping them to invest for a long term through systematic investment plan, as the more time you give to the investment in the market the more return is the more wealth is going to create for to the mutual fund investors in long term with the power of compounding.
Taxation in SIP.
The taxation of systematic investment plan is same as the taxation of the mutual fund
investment which can be either equity or the debt Mutual Fund.
1. The Best Date to Start for SIP (Systematic Investment Plan)
The best date to start a sip is within the first week of receiving your salary as an income for salaried class mutual fund investors, as it reduces the risk of default of SIP.
And there is no as such the best particular date of a month in which one can invest via SIP in mutual funds.
2. Risk in SIP (Systematic Investment Plan)?
In long term investment there can be very minimum risk of market in terms of investment via systematic investment plan SIP and can generate a very good returns but in short term and especially when the market are down at the bear market at particular time, it can also give negative returns also because after all the investment is done in the market and if there is a fall in market then the same can be reflected in your mutual fund investment also so even if you have done it through systematic investment plan but in long term the benefit will be much more greater and higher then it seems to be in short.
3. Benefits of SIP (Systematic Investment Plan)
- It brings discipline investment.
- It brings the advantage of compounding in long term investment.
- No need to time the market.
- Benefit of rupee cost averaging which significantly increases Returns.
- Investment amount is low starting from 500 which makes mutual fund affordable for small investors.
- Very flexible, allows you to choose time amount and also allow partial withdrawal.
- Helps in achieving financial goal in systematic way.
4. Types of SIP (Systematic Investment Plan)
Now let’s look at the different type of systematic investment plans SIP.
Basically, five types of SIP systematic investment plans available to the mutual fund investor other than the normal traditional systematic investment plan SIP;
And they are:
- Step up or top up SIP
- Flexi sip
- Perpetual SIP
- SIP + free insurance
- Value averaging investment plan VIP.
(1) Step Up or Top Up SIP
First, we will look at step up or top up systematic investment plan SIP
It just works like increment in our annual salary which every year increases by a certain percentage and similarly a Step Up or the top up SIP, general form of systematic investment plan in which a fixed amount of investment for a fixed percentage of investment increases at predefined rate or at predefine period.
It is generally done at the beginning of a new SIP where we have the option in which we can increase the amount periodically by filling a form.
And step up or top of a sip can give a very good boost to your mutual fund investment in both ways either you increase a certain percentage of your SIP amount every year or increase a certain fixed amount every year and that we will understand by the below mentioned illustrations.
In one of the illustrations here we can see that,
With annually top of sip can help your investment to grow at a much faster rate than the traditional systematic investment plan and I can help you to beat inflation efficiently and achieve your financial goals much faster than the traditional systematic investment plan, and helps your investment match with your upgraded lifestyle.
You can do all these things without starting a new escape with the current SIP itself by sip top up facility.
And with this facility you can create a much higher Corpus than the traditional Sip,
Say for example you started as type of rupees 5000 and you talked 10% every year end with a return of 12% (approx.).
Then at the end of 25 years the SIP Corpus with the top up SIP facility will be 43 % higher than the traditional systematic investment plan which will be further more clearly to you by saying in this image.
So whenever you start a sip don’t forget to give early top up to create greater wealth.
(2) Flexi SIP (Systematic Investment Plan)
The flexi SIP can be a very powerful tool in maximizing the returns from the mutual fund portfolio because as from the name itself is clear that the amount of the systematic investment plan SIP is not fixed, here as an investor we have a choice to choose from a regular amount which we can pay every month and the other is the maximum amount which we wish to pay as SIP amount in future if required so every month before the investment date you can change the investment amount of the SIP in the mutual fund, and if no change is made then the regular amount will go as a SIP.
It can work the best when a mutual fund investor increases the amount of SIP during the downturn in the stock market and go for the regular amount in a bull market which can significantly increase the amount of Corpus which you can create through Flexi SIP than the traditional systematic investment plan.
This flexi SIP is also suitable for those investors whose monthly income is not fixed and is
(3) Perpetual SIP (Systematic Investment Plan) Option
Perpetual SIP option is nothing but a systematic investment plan SIP with no end date, and there for it can be stop only manually. This facility avoids paperwork which is required to restart a close sip, and gives you an option that if you are not satisfied with the performance of the scheme you can stop the SIP manually.
(4) SIP + Free Insurance
Under this facility which you selected fund houses like Aditya Birla Sun Life, ICICI Prudential Mutual Fund and Nippon Mutual Fund, offers free ERM INSURANCE cover if you INVEST India mutual fund for long term via. SIP.
The insurance cover is 10 times the monthly SIP during the first year will increase to the 50
times during second and to 100 times or 120 times from the third year onwards subject to maximum coverage of 22—50 lakhs per investor across all schemes for selected schemes.
And there is no effect on the performance of scheme due to this add on.
This facility is generally introduced by this fund houses to counter ULIP, unit linked insurance plan.
In case of death of the investor the sum assured through this term insurance is given to the nominee given in the mutual fund investment by the investor.
As it is a completely free add on by these fund houses the expense ratio of the fund does not increase and the insurance is given till the age of 55 and if you discontinue your escape within 3 years you will lose the insurance cover also.
Another thing to be noted over here is the exit load in this fund which offer free insurance add on is quite higher.
(5) VIP (Value-averaging Investment Plan) Fund
The next SIP option is known as VIP value averaging investment plan.
This is one of the most innovative systematic investment approaches developed by only few mutual fund houses, Namely HDFC mutual fund and Nippon Mutual Fund.
This works best because no human emotions are involved while making decision of increasing and decreasing of SIP amount in the mutual fund scheme because the VIP or the value averaging investment plan works purely on mathematics and allows you to invest more in bearish market and less in Bull market so VIP value averaging investment plan has an edge over Flexi SIP and keeps on changing depending upon the portfolio value of investment as per the prevailing market condition.