What is Systematic Investment Plan? and Its Benefits

Systematic Investment Plan (SIP) is one of the effective methods of accumulating wealth with regular investments in Mutual Funds.  It is the most effective way of having the habit of regular savings. 

SIP works just like Recurring Deposit (RD) where you invest pre-defined amount for pre-defined interest rate for pre-determined period as offered by banks.  Through SIP, you can invest pre-defined amount for pre-determined period regularly.  Returns are not pre-defined in Mutual Funds as it is linked with the share market.

Benefits of SIP

SIP helps to average the cost price you pay for buying units whenever the market goes up and down.  Whenever the market goes down you have the chance of buying more units for the same price. 

For example If you do SIP of Rs.1000/- on a particular date when the NAV of the scheme is Rs.25/-, you can get 40 units (1000/25) and at the same time if the NAV goes down to Rs.20/- in the next instalment, you can get 50 units (1000/20).  That means to say that you average out the cost of 90 units at Rs.22/- (Rs.2000/90 units).  You averaged the price of the first 40 units at Rs.22/- instead of Rs.25/-.

This averaging out of the price of the units saves you from loss happens when the stock market goes down.  Also, you pay higher price when the price of the NAV goes up.  But regular investment of SIP helps you to average out the cost and make profits in the long run.  It helps even small investors to invest in equity and get the benefit of compounding.  Compounding helps you to earn return on return.

SIP develops the habit of saving and investing money regularly for longer period.  Investment made in equity over the long period of time works better than investment made in Debt instruments.  If you invest through SIP for period more than 3-4 years, you have very less chance of making loss from your investments.  SIP helps for those who earn income from salary as they cannot invest lump sum amount at one time, they can invest a small amount every month.

Tax Implications on SIP investments

In order to get exempted from capital gains tax in equity related investments, you have to stay invested for more than one year.  Long term gains up to Rs.1 Lakh is exempted from tax.  The long term gains more than Rs.1 Lakh is taxed at 10%.  The same rule is applicable for each SIP investment on first-in and first-out basis.  Short-term capital gain tax is applicable for the gains made within one year and taxed at 15% for equity schemes.  Long term gains from debt schemes are taxed at 20% if held for more than 36 months.

How to start SIP

First choose a mutual fund scheme and fill up the application form along with KYC requirements.  You can either fill up the SIP details in a fresh investment or you can submit a SIP form for the existing scheme along with post-dated cheques for pre-defined instalments along with date of SIP for instalment and amount, say, if you have mentioned to invest in 12 instalments for Rs.500/-, you have to submit 12 post-dated cheques with Rs.500/- mentioned in each cheque.  The Mutual Fund will invest the cheques on the specified date and the units will be allotted according the NAV of the scheme on that date.

You can also do SIP through Electronic Clearing System (ECS) by submitting ECS form.  You can also invest through online. 

You can choose to invest monthly or quarterly through SIP.  You can start investing with just minimum of Rs.500/- per month to maximum of any amount you wish and for any number of instalments.  SIP can be done in both open-ended equity and debt schemes.