Everything you wanted to know about SIPs
5 min read • Updated: February 12, 2024, 5:07 PM
An SIP is a tool for individuals to invest a consistent sum of money in a mutual fund at regular intervals.
They say the key to success is consistency; an SIP applies the same principle to help you build long-term wealth. But what is an SIP and how can you set it up? Let’s find out.
Whether your goal is to get fit, read more, or become financially secure, the way to get there is by building a habit. And, one of the best ways to build an investing habit is through a Systematic Investment Plan or SIP.
What is an SIP?
An SIP is a tool for individuals to invest a consistent sum of money in a mutual fund at regular intervals. Think of it like a Netflix subscription: an amount is deducted from your account every month but instead of access to great content, you get to own units in a mutual fund that help you grow your money. SIPs are a great way to build a habit of saving and investing. Further, by ensuring automated payments, you can make it almost impossible to forget to invest.
So, how does an SIP work?
SIPs allow investors a chance to invest small sums of money over a longer period of time in a mutual fund, rather than having to make large investments in one go. Most SIPs require payments into the plans in consistent intervals: these could be weekly, monthly, or quarterly. The great part about SIPs is that you don’t need to commit a huge amount, so you can start with an SIP of as low as INR 500 per month.
Let’s assume, you’ve set up an SIP into your preferred mutual fund for INR 1,000 to be deducted on the fifth of every month. Let's assume that the NAV (NAV or Net Asset Value is the market value of the securities held by a mutual fund and changes daily) is currently INR 20, so you will be allotted 50 units for your investment of INR 1,000 in the first month. As the NAV of the mutual fund changes, the number of units purchased through the SIP will also change. So, if the next month, the NAV of this fund becomes INR 25, then you will receive 40 additional units. Over time, you will benefit when the market is down by buying units at a lower price and continue to ride the wave when the market is up in a disciplined manner, thus building wealth.
Now that we understand the basics, let’s answer the most commonly asked questions about SIPs:
Are SIPs and mutual funds the same thing?
No, SIPs are simply a way to invest in mutual funds. You can choose to invest in mutual funds through a lump sum in one go or break up your investments in regular intervals through SIPs. You can use an SIP to invest in all types of mutual funds, like equity funds, debt funds or hybrid funds.
Are SIPs safe?
Investing in mutual funds comes with certain risks, and you can choose what level of risk you want to take by choosing the type of fund you invest in. For example, an equity mutual fund typically carries more risks than a debt mutual fund. Investing through an SIP doesn’t take away this risk but it can certainly help you reap benefits in the long run through the power of compounding. Through a disciplined approach, you can average out the cost of your investment as some months will see the fund deliver a high NAV and other months will have a lower NAV.
Can you save tax through SIPs?
Yes, an SIP in a type of mutual fund called an Equity Linked Saving Scheme or ELSS can help you save tax up to INR 1.5 Lakh under Section 80C of the Income Tax Act 1961. This means, if you invest INR 10,000 in an ELSS every month through an SIP then INR 1,20,000 would be reduced from your overall taxable income.
What are the benefits of investing through an SIP?
There are many advantages of investing in mutual funds through an SIP:
Convenience: you can invest in a disciplined manner through an SIP and it gives you the convenience of starting your investment with as little as INR 500 a month. Invest across market cycles: predicting whether the market will go up or down is a task best left to the professionals, and even then they’re not always right. Through SIPs, you don’t have to try to time the market. You automatically end up buying more units when the market is down and less when the market is up, helping you average out the cost in the long run. This is also called rupee cost averaging.
Power of compounding: We’re firm believers in the power of compounding. Investing over a long period and earning returns on top of the returns generated by your previous investments helps achieve your long-term financial goals with small investments.
Is SIP suitable for long term investments?
Definitely, in fact they are designed to create wealth in the long term by starting with small but regular investments. The key is to start as early as you can, even if it means investing INR 500 per month in the beginning and increasing the amount as your income increases.
What if I miss an SIP payment?
There are no penalties for missing an SIP payment and you always have the option of restarting your investments even if you skipped one.
Can I start an SIP online?
Yes, definitely. You can start an SIP directly on Upstox by setting up your account and choosing which funds you want to invest in. You can customise the amount you want to invest and which date the SIP amount will be deducted. In conclusion, an SIP can be a powerful tool to cultivate the habit of investing and building wealth in the long term.