We have talked about systematic investment plans (SIPs) several times, but only with respect to ETFs, and there is no post here that talks about systematic investment plans in general, so I thought I’d do a post about the nuances of a SIP.
A systematic investment plan or SIP (as it is more commonly known) is a way to invest in mutual funds regularly.
The idea is for you to set apart a sum every month or quarter, and use that to buy units of a particular mutual fund, regardless of its price. People like such a system because it helps them save regularly and build up an investment.
Setting up an SIP is really easy, and all you need is an account with a stock broker. I will take an example of ICICI Direct, and show you how easy it is to set up an SIP.
All you need to do is log in to your account and go to the “Mutual Funds” tab and click on SIP.
You will then see three drop-downs. One with “AMC” on top, second with “”Fund Category” and third with “Fund Sub – Category”. Say you want to buy SBI Magnum Taxgain; select “SBI FUNDS MANAGEMENT PVT LIMITED”, from the AMC, “Equity” from Fund Category and “Tax Planning” from Fund Sub Category. Click on “Go”, and you will see a list of options with your SBI Magnum Tax gain in it. Choose the Dividend or Growth option and click SIP.
Next you will come to this screen which gives you the options to set up the SIP in terms of days, months, amount etc.
Once done – you will be all set, and as far as setting up a SIP is concerned, it couldn’t get any easier than this. The hard part of course is knowing what to buy.
Benefits of SIP
Before I tout the benefits of SIPs let me state that I don’t get into SIPs because this type of regular investing is not something I am looking at right now.
With that said, let’s take a look at two benefits of SIPs.
1. Regular saving habit: Perhaps the best benefit of setting up a SIP is that it forces you to set apart some money every month and enforces saving discipline on you.You could argue that this can be done without a SIP also, and you are right, – just that automation enforces a little more rigor.
(Image by Alan Cleaver)
2. Protects you from timing the market: If you have already committed money to a SIP – you will most likely continue to invest regardless of a big fall or huge gains in the market. This in turn will enable you to invest regularly rather than try to time the market, which not many small investors can do successfully.
(Image by Grant MacDonald)
Non benefits of SIPs
I don’t know what else to call them, but I am talking about things that people tout as benefits of SIPs, which in fact are benefits that you gain from SIPs, but are not exclusive to them.
1. Tax planning: Yes, setting up a SIP in a tax planning mutual fund will help you reduce taxes, but if you invest the same amount at one go in the same mutual fund – you will get the same tax benefit. Tax benefit is not something exclusive to a SIP.
2. SIP lead to building wealth: Good saving and investing habits are more likely to help you accumulate wealth in the long run, but there is no guarantee that you will end up doing so. Especially, if you invest in equity mutual funds.
3. Ignore the spreadsheets: I came across more than a couple of websites that had examples of how a person could accumulate more units because of regular investing when compared with someone who buys in bulk. These calculations are just based on the assumptions the respective authors make, and there is no guarantee that you will accumulate more units if you bought units regularly. A lot depends on market gyrations and nothing can be said with certainty.
Conclusion
As almost everything here – the conclusion is for you to decide. This might work very well for one person, but may not work at all for another. Just keep these factors in mind, while making a decision.
If you are just getting started with your investments then read my investing for beginner series that is currently going on.
SIP or Post Office racking plan, which one is best to invest
Thanks
Prabir
How to Close an SIP being taken at ICICI Direct . I have sold my units in SIP. Will it not close automatically after i sell the units?
Better check with them if it is closed or not. When you start one you have to specify the number of installments so if those number have not elapsed I think the SIP won’t stop if you just sell the units.
Dear friends,
I want to invest 1,000/- month in SBI SIP magnum tax gain scheme for 5-7 years. How can I start investing. I have sbi account and online account.
Thanks in advance.
Regards,
Anandkumar
Hello,
I want to invest 6,000/- per month in SIP, please advise the appropriate mutual funds to choose from. I have a long term goal of investing for 25 years, am 29 years old.
Kindly advise the way forward.
Regards,
Deepa
Deepa,
You should select two scheme – one large cap and one mid cap.From large cap HDFC equity, DSPBR Top 100 equity and Birla Sun Life Frontline Equity are good options.In Mid Cap IDFC premier equity, HDFC Mid cap Opportunities are good funds.
I have an Account in SBH, Andhra Bank, Corporation Bank. How can I apply SIP plans. Can you please tell me…
Please call up one of the mutual fund companies, and they will help you through the process.
Can you explane sip plan with relation to 80c investment?
There are some mutual funds that have tax benefits under section 80C. If you do a SIP on these mutual funds then you will get the tax benefit. That’s the only relation. You can buy these funds lump sum also and that will get you the same tax benefit.
One benefit of SIP often cited is that you buy more units when price goes down and buy less units when price goes up! Is the benefit significant as you are investing a fixed amount each month?
what if I say that actually you are buying more units when a mutual fund is going downhill and are buyIng less when it starts performing better?
When you say buying more units when the price is low that’s actually at that point in time, but not forever – that’s exactly what you want to do. Buy low and sell high.
Warren Buffet wrote about this with an awesome example about how people will be happy if the price of hamburgers went down for 5 years, but not if stock prices went down for the next 5 years even if that gives them a great opportunity to buy stocks at a discount and keep that 20 or 30 years down the line!
Here is a post I wrote about it:
http://www.onemint.com/2008/11/22/warren-buffets-hamburger-example/
which company started this SIP at first and When was it started
Can you elaborate your questions a little bit Yuvarani? I don’t understand the context of it – is this for an assignment or something?
Systematic Investment Plan or commonly known as SIP is one of the important concept of investing. The concept of Systematic Investment plan is not new. Recurring deposits, Insurance Premium payments are also a form of Systematic Investment Plan. With respect to Mutual Funds, it is a regular/recurring investment in Mutual Fund Schemes.
To read more —-http://www.investmentbazar.com/systematic-investment-plan/
Few queries regarding Systematic investment plan in Mutual fund.
Like I have ICICI Direct, now lets say I apply for a SIP in XYZ mutual fund for 36 months – with monthly investment of Rs 3000.
Will ICICI direct or XYZ mutual fund company
Q. allow me to change the monthly deposit at later point during this 36 months (change means increase or decrease)
Q. allow me to continue the SIP plan after 36 months or will it be considered a new sip plan where I start from 0 deposit in account (thus loosing the compounding benefit)
Q. in case I take plan for 10 years, how much penalty/fine would be imposed in case I back out after 5 years.
In case somebody has invested in a SIP, your reply would be helpful
Companies offer you to switch SIPs or stop mid-way and start afresh, so you’d be able to do most of the things you mention here. If you stop after 36 months, and start with a fresh SIP, you will not lose out on the benefits of compounding. This is because regardless of the stage of the SIP, the units allotted to you are based on your amount and the fund’s unit price, so you are not losing out on anything.
Here is a link to Sundaram Paribas which has a lot of info on this: http://www.sundarambnpparibas.in/sip_faqs/sip_faqs.htm#21
I need my feed back.
All the information are wort but the conclusion is not upto the standard for the briefly explain. As a financial expert you can suggest strongly the SIP is best to create the wealth in long term, it may not be use for short term. Bcoz each drop of water makes an ocean
Since you poke holes into “building wealth” and “spreadsheets”, I take the liberty to poke a hole into the first benefit “regular savings habit”. This benefit depends on the assumption that regular savings are available which may not always be the case. What if the saver loses her income for a year?