Systematically Designed For You

SIP is theoretically an acronym that stands for Systematic Investment Plan or a regular investment into an asset like mutual funds (MF). However, at a more transcendent level, they teach you discipline, planning, and organisation. And as a possible cherry on the cake, SIPs may help you beat the headaches associated with equity market ups and downs.

“The systematic investment plan is a Godsend to those who wish to multiply their wealth intelligently and efficiently, without putting too much of it at stake at any given time,” says Arun Kumar, Head of Research, FundsIndia.

Many investors prefer the SIP route because they do not have to monitor the market closely, it lowers the investment requirement and helps develop a habit of saving frequently, notes Anurag Garg, CEO and CO-Founder, Nivesh.com. And this stake at risk is perhaps the operative phrase.

There is a considerable difference between doing an SIP into MFs vis-à-vis an SIP into the more well-known stocks. “The biggest difference is that when you do SIPs into an MF, you invest in multiple companies at the same time, whereas an SIP in stocks will invest in a few selected companies,” says Harshad Chetanwala, Co-Founder of MyWealthGrowth.com. Another major difference is the diversification you get through SIPs with the same investment amount.

In stocks, you may not be able to invest in multiple companies through the monthly SIP amount.

“The risk in an equity SIP can be higher compared to an SIP into MFs,” says Chetanwala.

SIPs in mutual funds can work much better than those in stocks, as investors need not bother much about stock markets. There are professional fund managers who can take care of their investments while investors can focus on their professional and personal life.

“The simplest way to understand the basic workings of an SIP is to imagine a child and a piggy bank,” says Arun Kumar, Head of Research, FundsIndia. In this analogy, a child deposits a certain amount at certain intervals and before he knows it, the contents of the piggy bank have built up to a respectable amount.

Similarly, in SIP the investor or saver deposits a certain amount, at certain fixed intervals, which builds up over time. The amount can be as small as Rs 500 and the timeframe can be weekly, monthly, or annually.

However, there is one major contrast between your SIP and your piggy bank. When you put money in your SIP, it is not dormant, but you invest into a bucket of businesses that are (mostly) profitable and will give you a share of their earnings. Also, with every periodic investment, the amount being re-invested keeps growing, which means that the returns will increase simultaneously.

“SIPs give the investor an option to invest during different market cycles. Thus, the cost per unit is averaged out over the investment horizon,” says Garg. More units are purchased when the markets are low to compensate for units purchased when it was high and can be sold when the markets are back on track. Thus, SIPs help achieve superior returns compared to lump sum investments.

‘Mutual funds are subject to risk’ is a commonly heard phrase. This means that your SIP investment can end up in lower value depending on how the market behaves. “The risk of volatility in the returns is inversely related to the holding period. Longer the period lower will be the risk and vice-versa,” informs Garg.

There is no perfect time to invest via SIPs.

There is a famous saying which goes ‘The best time to plant a tree was 20 years ago. The second best time is now.’ Similarly, there is no correct time to start SIPs, the best time is right now. One of the primary advantages of SIPs is rupee-cost averaging which eliminates the need for investors to time the market.

Stock SIP allows the investors to park their small amount in stocks at regular intervals. Following this path, the investor would not need to time the market, invest through a regulated approach and protect themselves from volatile stock price movements. And you can certainly use SIPs for achieving your financial targets.

So let us take an example of a child’s education where the parents want to create a corpus of Rs 50 lakh by the time she reaches 18. If they have 12 years to achieve this objective, they will have to do SIPs of Rs 18,500 per month if we assume a 10 per cent return per annum. Experts guide us on how we could structure our investing as we age.

When you are young, your risk-taking ability is much higher, hence you can have some allocation in aggressive or high-risk funds. Young investors have a long holding period and can afford to give more time to their investment. “As one comes near the goal or retirement, the risk-taking ability also reduces. Hence at such stages, it is better to invest in SIPs of large cap oriented mutual funds rather than mid or small-cap funds,” says Chetanwala.

Before deciding on a type of SIP, it’s important to get the asset allocation in place. “The thumb rule of asset allocation is 100 less your current age should be equity allocation so when one is young, one can consider SIP investments in equity oriented schemes and near retirement, the allocation can reduce,” says Mehta.

“SIPs in equity scheme carry the same taxation as equity stocks i.e. 10 per cent LTCG for investments beyond 12 month and 15 per cent short term capital gains tax for investments less than 12 months,” informs Manish Mehta, National Head – Sales, Digital Business and Marketing, Kotak Mahindra Asset Management Co. Ltd. Each instalment of SIP needs to cross the 12 months threshold to enjoy the LTCG. “Dividends by equity schemes are added to one’s income and you have to pay tax accordingly,” says Mehta. “SIP is a fill it, shut it, forget it product,” ends Mehta.

How SIPs Work: A Practical Illustration

SIP investments facilitate a phenomenon called Rupee Cost Averaging. In October 2018, Anand had Rs 60,000 to invest in an MF scheme. His investment options were lump-sum or SIP.

Lump-sum – He decides to invest it all at one go in October. He goes online, signs with an online MF platform, and purchases units of a fund in exchange for his money. These Mutual fund units represent his ownership of the fund. Let’s assume that the NAV in October is 200, and Anand received 300 units for his Rs 60,000 lump-sum units.

SIP – In the same scenario, where the NAV in October is 200, Anand purchased 100 units for Rs 20,000. In November, the NAV rose to 250 and thus his next tranche of investment of Rs 20,000 got him just 80 units for the same price.

In December, the NAV dropped to 100 and his Rs 20,000 got him 200 units. So through SIPs, Anand’s Rs 60,000 has brought him a total of 380 units because of the fluctuating markets.

This typical illustration put across by Fundsindia.com shows how Anand got a greater number of units (380) through Rupee Cost Averaging than via lump-sum (300). While the NAV of MF schemes fluctuates daily, savvy investors get ahead of the game, by planning their investments around market fluctuations using the SIP route.

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All You Must Know about SIPs

Best time to start investing in SIPs: The sooner the better, due to the positive impact of compounding.

Minimum and maximum investments: Minimum investment into SIPs is Rs 500, to as high as the investor wishes. The chosen amount must be available in the investor’s account on the SIP investment date. The frequency can be decided by the investor like a weekly, monthly subject only to the option being offered by the Fund House, AMC, bank.

Fluctuating market conditions: Market conditions will not negatively or positively affect your SIPs as if the NAV (net asset value) is high one month, the number of units purchased may be lower, and vice versa. Thus, the number of units purchased averages out over time.

Risk: The inherent risk involved in mutual funds comes from the investments that the fund house makes. There are high risk investments that offer the potential for high rewards, and low risk investments that keep your investments safe but offer returns at a far lower rate.

Start and stop: The recurring amount being invested cannot be reduced, but it can be increased with online SIP schemes simply by intimating the fund house.

Missing payment: Nothing happens to your SIP if you miss one instalment. It will only be terminated or cancelled by the fund house if you miss three consecutive payments. However, if payments are made via ECS, then you will receive a penalty from the bank which you are auto debiting.

Brokerages: MFs can no longer charge an ‘entry load’ as per Sebi guidelines. Investors may pay for the services of a broker, distributor investment advisor, if the investor finds that the services offered are worth paying for.

Online: SIPs can be done online.

ELSS: In the case of an SIP investment into ELSS, every investment has to spend three years in the scheme before it can be withdrawn.
Payment modes: The various payment modes include ECS, PDCs (post dated cheques), or online payments.

Flexi SIP: Here the investment amount can vary before every instalment. The Flexi SIP is particularly useful for those whose investors and investable surplus varies month-on-month. In a Flexi SIP, the investor can choose the exact instalment amount, seven days before the amount is due. A minimum amount has to be defined in advance to ensure investments continue even if there is no active allocation of funds for that particular month.

Trigger SIP: A trigger SIP is a standing instruction given to a bank or AMC that a certain action must be taken in case of any events. For example, a trigger can be set up to purchase stock in a particular fund if the price drops below ‘x’ level. Thus, giving a first mover advantage. So instead of reading price variations and then issuing buy or sell instructions to your fund house (thus losing hours), a trigger will permit the same actions in a matter of seconds.

There are two main types of triggers – alert based and action based. Alert based triggers simply notify you when certain pre-mediated actions take place, so you can take your actions. Action based triggers, perform the activity of buying, selling, trading and switching upon the occurrence of certain events, without approval from the investor.

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Mistakes in SIP Planning

While SIP may seem to be a tranquil way of investing your money, nevertheless some mistakes are frequently made by those investing in MF via SIPs. And perhaps the most common is timing the market.

Some investors continue to look at market conditions before investing or stop their SIPs when they see a market correction. “Such reactions do not work in the interest of investors and affect the disciplined investment approach,” says Chetanwala.

It (stopping your SIP) hampers the growth potential of your investment through SIPs. At the same time, it is important to have patience as the investment is happening at regular intervals.

“Often many investors go overboard and stick to a particular asset class of their liking, ignoring the principles of asset allocation,” says Garg. Asset allocation depends on a person’s income, time horizon, and risk appetite. Based on these parameters, the amount to be invested needs to be allocated to equity, debt, or other assets like gold.

Secondly, investors often tend to get biased by past returns while selecting mutual fund schemes. It is important to understand what the future holds and invest accordingly.

“Many investors choose a mutual fund scheme based on peers’ discussion or hearsay,” continues Garg. They often neglect to take an objective decision before committing their funds.

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Types of SIPs

Mutual Fund SIP:

Choosing the right kind of SIP is the key and investors should select the one that best suits their financial requirements, goals and knowledge. There are six types of SIP investments available:

Regular SIP: Under this, the investor invests a fixed amount at regular intervals of time.

Top-Up SIP: Top-Up SIP allows the investor to increase their amount whenever they have extra funds. This will help the investor to create their corpus faster on the grounds of the power of compounding.

Flexible SIP: A flexible SIP allows changing the amount as per the investor’s convenience. Investors can adjust their SIP based on their financial conditions or market volatility. They are ideal for investors with irregular income.

Perpetual SIP: A perpetual SIP is the one that keeps running until terminated.

Trigger SIP: It allows investors to invest or redeem linked to pre-defined trigger levels, which could be index value or NAV value. It best suits those who understand the market conditions and dynamics.

Multi SIP: A multi SIP allows investors to invest in different schemes of a single asset management company. But it should be kept in mind that not all the funds of a fund house tend to perform well.

There are two kinds of SIP under the equity-linked category:

Amount based SIP: Here the investor can choose a fixed amount to be invested at regular intervals in a particular stock for a period.

Quantity based SIP: In a quantity based equity SIP, the investor can choose a fixed quantity of shares to be bought at regular intervals of a particular stock for a specific period.

The author is a Financial Journalist