Frequently Asked Questions (FAQs) about Systematic Investment Plan (SIP)

This article will answer Frequently Asked Questions (FAQs) about Systematic Investment Plan (SIP) or FAQs about SIP. To make investors aware of the functioning of mutual funds, this blog has been made to provide information about systematic investment plans (SIP) or SIP Calculator in question-answer format, which may help investors in making investment decisions.

What is “Online Mutual Fund Systematic Investment Plan” (Mutual Fund SIP)?

Online Mutual Fund SIP is a new facility where you can place buy orders for a pre-specified amount of your choice at regular intervals over a period as selected. For instance, you can select a Mutual Fund SIP for any installment, frequency, and amount specified by the Asset Management Company.

After you have provided the necessary details, i.e., the scheme, amount to be invested, frequency of investment, and total period, you can place your Mutual Fund SIP buy orders at market price.

How does SIP work?

Every SIP installment (weekly, monthly, quarterly, or bi-annually) leads to purchasing the new fund units at the prevailing NAV. As time passes by, the price of purchase of fund units averages out and gets on to the lower side. When investors continue their SIP when the market is down, they can purchase more fund units. On the contrary, when the market is up, the investor can purchase fewer units. This way, they can benefit in both cases when the market is falling or surging.

How can I invest in an SIP?

How do I start an SIP

You can start a hassle-free SIP without giving multiple post-dated cheques and by giving one-time instructions to debit your bank account using ECS/Auto Debit instructions for payment of SIP transactions.

Your account will be automatically debited every month or quarter as opted by you, and the proceeds will be utilized for the allotment of units of the mutual fund scheme of your choice.

To avail of this facility, all you have to provide is

  • Application form, duly filled and signed.
  • Complete and sign the SIP registration form with ECS/Auto Debit mandate Form (All applicants should duly sign the form and as per the signatures made available to the bank (as in bank records) through which you wish to opt for debit.)
  • A cheque for the first SIP investment Cancelled cheque or a copy of the cheque

What is NAV in SIP?

NAV is the Net asset value. In simple words, it is the cost at which investors can purchase or sell mutual fund units. It must be noted that the NAV of most mutual funds gets updated after the business hours on a day to day basis. Since all mutual fund transactions take place only at the prevailing NAV, when an investor invests in an SIP installment, their cost of purchase is the prevailing NAV.

 How can someone with a fluctuating income invest through SIPs?

It depends on how fluctuating your income is. If the fluctuation is high – for instance, in one month you may make Rs 1 lakh and in the next three months you don’t make anything – you should invest in a liquid or an ultra-short-duration fund and give a standing instruction to move that money over a period of time, say three to six months, into equity funds.

If your fluctuating income has a minimum base, make lump-sum investments every month. Be disciplined about them. Whenever you have a surplus, invest it. In effect, this would be like an SIP.

Can I register for multiple SIPs in the same scheme?

Yes, you can register for multiple SIPs in the same scheme same plan in the same month however on different dates. However, you need to submit separate ECS/Auto Debit Mandate forms to register for multiple SIPs in the same scheme same plan.

 How are SIPs taxed?

SIPs are taxed in a FIFO (first in first out) fashion. This means that if you redeem part of your investment made through SIPs, the earliest SIPs are redeemed first and the later SIPs are redeemed later. For instance, if you made 12 monthly SIP installments during a year and then you redeem part of your investment, your initial SIPs (first, second and so forth) are redeemed first.

This means that in order to qualify for long-term capital gains, each of your SIP in the invested corpus must complete at least one year. For equities, long-term gains (those made over one year) over Rs 1 lakh are taxed at 10 per cent and short-term gains are taxed at 15 per cent.

Can SIP Installment amount be increased? (Step-Up)

Yes, SIP Installment can be increased by using “Step-up” feature available at the time of SIP Registration. Investors can Step-up their SIP Installment Amount only if the period of SIP is “Till Cancellation”. If investor didn’t opt for “Step-up” feature while registration, then it can be done later any time from SIP book.

Why should I invest through mutual fund SIP?

The MUTUAL FUND SIP offers the following advantages

Disciplined investment approach
Instead of investing large amounts sporadically, you achieve better results by investing smaller sums regularly. The MUTUAL FUND SIP ensures that you save some amount at least for the next 12-month period

Rupee cost averaging
With MUTUAL FUND SIP you buy more units when the prices are low and fewer units when the prices are high. This results in averaging of cost per unit

Avoids sentiment-driven investments
By making you invest the same amount every month (or every quarter), the MUTUAL FUND SIP helps you avoid the common error of investing larger sums in bull markets (when the markets are at a high) and smaller sums in bear markets (when the markets are at a low)

Allows investments in small amounts
With a monthly investment of as little as INR1,000*, you can easily include the MUTUAL FUND SIP within your monthly budget, without altering your financial plans significantly

you have the option of directly debiting your bank account for payments made towards the MUTUAL FUND SIP. All you need to do is give standing instructions once towards the same, and leave the rest to us

Is it fine to step up SIP contributions for a limited period?

The whole idea of SIPs is that you should be systematic with your investments. When you step up your SIPs for a limited period, this is not being systematic. You may actually end up investing more at a market high. If you have some extra money to invest, just spread it over a period of time. For instance, if you have received an annual bonus, spread it over six months. If you have got a sizeable amount on selling an asset, spread it over the next three years. How you deploy your windfall is determined by two factors: how crucial it is and how large the amount is.

What is the difference between Set Step-Up and Modify Option?

Modify option helps a user to change the SIP investment date, SIP investment amount, SIP Period & frequency of investment. A SIP could only be modified after the completion of 6 installments. For example, if you have registered a monthly SIP which would start from Jan 12, 2017, then you could modify the SIP after 6th installment i.e. only after June 12, 2017.
Please note there are select dates allowed by Mutual Funds on which SIPs get triggered, so while modifying SIP you can select the date of trigger of SIP from the available dates only.
Set Step-Up option allows the user to set-up Step-Up for SIP to automatically increase the SIP investment amount after every period selected by the customer.

Is it fine to continue an SIP in a small-cap fund when the stock market is at its peak?

Always invest through SIPs in small-cap funds. Never invest a lump sum. Small-cap funds are more volatile. But don’t stop your SIPs and wait for correction. It is very difficult to catch the bottom and the peak. Even if you get lucky with the correction, it will be extremely difficult for you to get in again. So, continue with your SIPs. They will help you average out your buying price and will improve your returns over time.

How come the equity funds I own have delivered meager returns via SIPs in the last 5 and 10 years?

Poor SIP returns over 5 and 10 years are a sure sign that the equity funds you own are underperformers. While SIPs are a good tool to protect your portfolio against adverse market moves, SIPs cannot help you if you have selected poor funds. Now, the difference between top-rated funds and the bottom ones is easy to point out with the benefit of hindsight. Hardly anyone could have predicted exactly 10 years ago which set of funds would end up at the top of the rankings and which would scrape the bottom. But by regularly tracking your equity funds and replacing the ones which chronically underperform their benchmarks and category, you would be able to effect mid-way corrections in your portfolio.

 My advisor tells me never to stop an SIP. Is that right?

SIPs can and should be stopped in three circumstances. One, you realize that you have chosen a wrong asset class or a wrong fund (for instance, a large-cap fund when you wanted the growth of a mid-cap fund) for your portfolio. Two, a fund that you are investing in is a chronic underperformer (versus its benchmark or category). Finally, stop your SIPs in an equity fund as you get closer to your financial goal. Many investors lose their motivation when the markets enter a bear phase. It is to discourage such self-defeating behavior that advisors ask you to continue with your SIPs through ups and downs of the market.

I am a first-time investor and want to invest through SIPs. How do I go about doing so? Can I do SIPs online?

You can invest online directly through the website of the mutual fund company. As a new investor, there is a one-time documentation, called KYC (know your customer), which you will need to complete. If you have an Aadhaar card and online-banking facility, then you can start investing in mutual funds with e-KYC, wherein you can invest up to Rs 50,000 per annum per fund house. The other way is to contact a mutual fund agent and invest in the regular plans of mutual funds. The agent will help you with the entire procedure and this is convenient for a beginner.

What is a SIP Calculator?

A Systematic Investment Plan (SIP) calculator is a free online tool that can be used to compute the returns you can earn on your mutual fund investments through the SIP route. It gives you a break-up of the invested amount and total returns earned. Using a SIP calculator, you can estimate how much you need to invest every month in reaching a target corpus. It can be a helpful tool to plan your short-term and long-term financial goals.

How does a sip calculator work?

An SIP returns calculator works according to the mathematical formula FV = P [ (1+i)^n-1 ] * (1+i)/i, wherein:

FV= Future value, i.e., the amount one gets upon maturity of a mutual fund scheme.

P= SIP investment amount

i = Compound rate of return

n = Duration of an investment expressed in months

r = Estimated rate of return

How to Make the Best Use of an SIP Calculator

  • An SIP calculator requires three different sets of information. These are the SIP amount, SIP duration, and the expected return rate on the SIP per annum. Investors must be sure of these three factors before making use of the calculator.
  • The SIP amount is not just a measure of the capital one is willing to invest. It also helps one calculate one’s risk exposure; consider one’s income structure, the amount of risk one is willing to bear and more. SIP investment amount is one of the two things that determine the category of investor one falls in.
  • The tenure and goal of any particular SIP is also an essential factor. It determines the nature of financial needs and the expected gap between investment and the requirement of said investment.
  • Finally, the expected return rate signifies whether the investor wants to be aggressive or balanced in the investment.
  • SIP can be used in two ways with the above-mentioned basic information. One is the corpus calculation method, and the other, the contribution calculator.
  • The SIP corpus method allows you to calculate the corpus of funds they can generate based on the SIP amount and the tenure you are willing to invest. In this method, the SIP data must receive input regarding the monthly amount, step up, if any, annual CAGR return, the tenure of investment, the date of commencement of investment etc.
  • In the SIP contribution method, the SIP calculator calculates the amount of investment needed to get a specific corpus size at the time of redemption. In this method, the SIP calculator must receive data input regarding the target amount, any step-ups, the annual CAGR rate expected, the tenure of investment, and the date of commencement of investment, among other data.

Is it possible to start an online SIP with auto debits from my bank account?

Yes, many fund companies provide this feature. In order to set up an auto-debit facility, go to the website of the fund house, choose the fund and provide the required details such as the amount and period of SIP. Keep your PAN handy. You will get a URN number from the fund company. Now log into your bank account and enter the number there. Some fund houses may have another method to set up a standing instruction. In this, a small amount (for instance, Rs 1) is credited to or debited from your account.

In the future, if you wish to discontinue your SIP, just login to the fund company’s website and exercise the option. You can also exercise this option through your bank, online or offline.

When I invested in SIPs, I was told they would protect against falling markets. But how is it that I am sitting on losses?

An SIP does not protect you against equity-market losses. All it does is that it makes sure that your investments in equity funds are well spread out over a period of time so that you don’t catch a market peak. Now, SIP investments, too, will make losses if the market declines steadily after you begin your investments. But because SIPs help you invest in smaller installments and spread them out over time, you get to average your investments at lower levels in the hope that when stock prices bounce back, those cheaper investments will pay off. If you take stock of your SIP returns over just one market phase, particularly a bear phase, the investment may show a loss.

I invested in some top-rated funds and their SIP returns are lower than lump-sum returns. Why is that so?

SIP investing is designed to max out your returns when you get off the starting block at a market high, keep investing through a decline and then see the markets recovering to scale new highs. It doesn’t work well when the markets don’t stick to this script.

There are two types of market scenarios where an SIP investment will earn lower returns than a lump-sum investment. One is a steadily rising market. The other scenario is when markets behave like a bell curve: they rise first and then tank.

What if I choose a different date or split the SIP into weekly installments instead of monthly ones? Will my SIPs do better?

There is no ideal date for an SIP. Changing your SIP dates would only work if the markets had a clear pattern that played out like clockwork every month. But we all know that market moves are a complete random walk. Splitting your SIPs into weekly installments and trickling them into the fund in smaller doses doesn’t have a big pay-off. Your intention in taking the SIP route is to avoid worrying about timing. So pick any date and just stick to it.

What are advantages of Using a SIP Calculator

  • SIP calculators are simple to use. All you have to do is input the information required, such as the investment amount, expected rate of return and duration, to get what your total corpus will be. 
  • The calculator is free and can be used by anyone to plan their finances. 
  • It can be used to meet financial goals with ease. You can calculate how much you need to save every month to arrive at a corpus that you want to build. 
  • You do not need to submit any additional information apart from the three key inputs required. 
  • It saves you the effort of manual calculation to understand the returns on your investment. 
  • You can also use the SIP calculator in combination with other online calculators to find out the best mode of investment for you. For instance, you can use an FD or RD calculator and compare it with SIP investments to understand how each of these will contribute to your wealth creation. 

 Is a bear market the right phase to start an SIP in equity funds for the long term?
It is always the right time to start an SIP in equity mutual funds. Buying stocks when the market is low and selling them when the market goes up may sound like a great idea, but it is almost impossible to do so – at least on a regular basis. That is why investors shouldn’t concern themselves with market movements beyond a point. They should start and go on with their investments irrespective of the market conditions.

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