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Know all about Systematic Investment Plan (SIP), its benefits and how to invest in SIP in India.

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Systematic Investment Plan (SIP)

What is SIP?
Systematic Investment Plan (SIP) is an approach to investing small amounts at regular intervals rather than investing lump sum amount at one time. Considered to be the safest way to invest into Equity Markets by going the SIP route, Investor is not trying to capture the Highs and lows of the market, but trying to average the cost by investing at regular interval.
 
SIP into Mutual fund scheme is the most popular concept in India. The concept of SIPs is that when the markets fall investor gets more units. Likewise investor acquires lesser units when the market goes up. This means that investor buys less when the price is high and investor buys more when the price is low. Hence the average cost per unit falls down over a period of time.
 
Key Features:
Affordability: It is affordable as the investor can invest as low as Rs. 500, which is a bare minimum investment allowed for SIP.
 
Liquidity: The Mutual fund SIP allows exit from the Scheme at any point of time, except the Equity liked saving scheme (ELSS) which has a lock in of 3 years. Exit before the stipulated time period may attract some exit load, which varies from 0.01% to 2% broadly.
 
Mode of payment
There are two options here
  1. Through Electronic Clearance Service (ECS):- In this option, Mutual Fund will debit the stipulated amount from client’s account on monthly basis.
  2. Post dated cheques –In this option, Investor can give post dated cheques. Mutual Fund will deposit the cheques on the mentioned dates. The cheques should be issued with date mentioned at regular interval. 
Note: - All the mutual fund schemes do not offer SIP. Equity funds, debt funds and balanced funds belong to this category. Liquid funds, cash funds and floating rate debt funds also offer SIP.
 
Minimum Investment
The minimum investment is Rs.500/- and there is no maximum limit, though the tax benefit is available only upto Rs.100000/- if the SIP is done into Equity Linked Saving Scheme (ELSS).
PAN & KYC are mandatory for investing in to SIP.
 
Benefits:
Power of compounding:
The concept of power of compounding comes into picture when Investment through SIP happens at regular interval with loner time frame. The power of compounding underlines the essence of making money work if only invested at an early age. Saving a small sum of money regularly at an early age makes money work with greater power of compounding. 

Let’s take an example,

Age of Investment ( Start)
25 years
30 years
Monthly Investment
5,000
                 5,000
No of years
35
30
Total Investment
             2,100,000
             1,800,000
Rate of Returns
15%
15%
Corpus Built
           73,385,901
34,616,398

If we look at the above calculation, we can see that the contribution of Rs. 3 lakh done in first five years actually have a significant impact on Overall wealth creation.
 
Rupee Cost Averaging:
Timing the market is very difficult task; it’s very hard to predict the market. Rupee cost averaging is a mechanism which does not require the timing of the market. Here investor invests the money at regular interval irrespective of the market movement. When the market falls the investor receive more units, if the market rises, investor receives lesser units.
 
Convenience:
 SIP can be operated by simply providing post dated cheques with the completed enrolment form or give ECS instructions. The cheques can be banked on the specified dates and the units credited into the investor's account.
 
The SIP facility is available in the Equity Diversified Fund, Monthly Income Plan, Child Benefit Fund, Balanced Fund, Index Fund, and Tax Savings Fund etc.
 
Tax Saving:
Tax benefit under section 80C can be availed through SIP into ELSS, which limited to maximum investment of 1 lakh under section 80C. Only ELSS gives tax benefit.
 
Equity mutual fund (the scheme, which invest more than 65% into Equity related instrument), Long term( More than one year) capital gain on is zero, where as short term ( less than one year)capital gain is 15%.
 
Debt mutual fund (the scheme, which invest debt or money market instruments), Long term( More than one year) capital gain on is 10% without indexation & 20% with Indexation, where as short term ( less than one year)capital gain is taxed as per tax slab.
 
For immediate fund raising, this Mutual Fund could be pledged for loans with specified banks.
 
Limitations:
  • SIP into mutual fund, other than ELSS is not tax Free.
  • Liquidity could be of prime concern as your funds get blocked for 10 years.
  • The yield of these bonds is not higher than other Government securities.
  • Points to be noted while investing in mutual fund (SIP):
  • Investment into Equity or Debt mutual fund is subjected to market risk, so Please read offer document, risk associated with it , before investing into it.
  • Choose the fund based on the goal and objective of investment.

  • Suman Das:
    please give me some advice which mutual fund will be the best for me for SIP in present market situation for long term investment.
    22-Jul-2013 10:49 PM
  • sreelakshmi s:
    hi,

    I'm 19years old.i can invest 1000 rupees per month in mutal fund.please suggest best sip plan.
    30-Jun-2013 05:55 PM
  • Soma Saha:
    I want to invest 5000 rupees per month in a mutual fund. I also want tax exemption benefit.
    Which one will be the best?
    02-Jun-2013 12:08 AM
  • Jitendra wig:
    Dear Team,

    Hi, Jitendra wig,my age is 29 years, looking for a investment in sip or sip(ELLS) scheme, for 2 thousand per month for 31years.
    Very clear for a long time investment...kindly suggest me a good plan.

    Regards
    Jitendra wig
    05-May-2013 02:22 PM
  • GYANA RANJAN DAS:
    I want to take a sip 500/1000/- p/m for 35 years. Please advice which will be best fund for me. Don't give 3yrs, 5yrs or 10yrs fund performance record. Kindly recommend the correct fund which will be perform well in long time holding (35yrs) as per your fund research.

    Thanks And Best Regards
    GYANA RANJAN DAS
    MOB - 8860681533
    20-Apr-2013 07:51 PM
  • CHANDRA PRAKASH:
    mY aGE 26 mY iNVESTMENT CAPACITY IS AROUN 10000 P.M. PLEASE SUGGEST BEST SIP PLANS TO INVEST.
    18-Apr-2013 12:10 PM
  • prakash Sharma:
    plz advice me for good sip saving
    11-Mar-2013 08:30 PM