SIP in Mutual Funds: A Guide to Systematic Investment Plan

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For new and experienced investors, a systematic investment plan (SIP) is a way to automate investments, where a set sum is invested every quarter or every month. This is ideal if you want to get started by investing a small amount instead of lump-sum investment. In this article, we will cover in detail as to what is SIP investment and how to invest in it.

What is SIP (Systematic Investment Plan)?

With the Systematic Investment Plan (SIP), you invest in mutual funds by setting aside a specific amount of money each month or on a regular basis. By staying invested for the long-term, a SIP mutual fund allows your investments to benefit from compounding and mitigate market volatility through rupee cost averaging.

How Does SIP Work?

A Systematic Investment Plan (SIP) is a disciplined approach to invest in mutual funds. Here’s how SIP works, step by step:

1. You can invest a certain amount in a mutual fund, in return for which you receive units of the fund. The number of units allotted depends on the Net Asset Value (NAV) of the mutual fund on that specific day.
   The NAV represents the market value of one unit of the mutual fund. When the market is low, fewer units are allotted for the same investment amount, and when the market is high, more units are allotted.
2. Eventually, the returns on your investments grow exponentially through compounding.

Example of how SIP works

Let’s assume you start a mutual fund SIP investment of INR 5,000 per month in an equity scheme, expecting a 12% annual return compounded monthly.

1. Every month INR 5,000 is automatically invested in your chosen mutual fund.
2. If the mutual fund’s Net Asset Value (NAV) is INR 50 in one month, you receive 100 units (5000/50 = 100).
3. If the next month the NAV rises to INR 62.50, you receive 80 units (5000/62.50 = 80).
4. Over time the compound interest rate would grow to INR 62,809 in a year. The extra INR 2,809 is the gain from compounding.

Also Read: Tax on Debt Mutual Funds

Benefits of SIP Investment

Investing through SIP Investment mode offers investors benefits not only in growth but also makes investments more efficient and simpler. Here are some key benefits of SIP Investment:

Power of Compounding

Your return on investment is reinvested to generate even more returns over time, which is beneficial if you’re looking for the best SIP for long term returns.

Rupee Cost Averaging

By investing a fixed amount in SIP, you can benefit from the reduction in NAV, which gets you more units of the mutual funds. This lowers your average purchase price and reduces risk due to market fluctuations. Consider this table

As per this table, the average purchase price of 525 units is INR 38.10 per unit. By averaging out the cost, you can protect your investments from market volatility.

Financial Discipline

SIP encourages investors to invest regularly, which builds a habit of investing and saving, essential for long-term wealth creation.

Flexibility and Convenience

You can start, pause, increase, skip, or stop your SIP as per your financial situation, and the process is automated, making it easy to manage without manual intervention.

Affordability

SIPs allow you to start investing with small, manageable amounts, making it accessible for individuals with varying income levels and enabling gradual wealth accumulation.

Professional Management

SIPs are managed by experienced fund managers who use their expertise and market insights to make informed decisions.

Diversification

Investors can choose to invest in different mutual funds through SIPs which allows them to diversify their mutual fund portfolio, mitigating the risk and ensuring portfolio stability.

Types of SIP

Depending on their investment profile, investors can select from a variety of SIP types. Some of the most popular types of SIPs are:

Regular SIP

You invest a fixed amount at regular intervals, usually monthly, making it a straightforward and disciplined way to build wealth over time.

Flexible SIP

This type of SIP lets you increase, decrease, or pause your investment amounts and intervals based on your changing financial situation, offering greater control and convenience.

Top-up SIP

This allows investors to increase their investment amount towards their SIP aligning with their growing income and accelerating wealth creation.

Trigger SIP

Investments are automated when certain market conditions or preset triggers are met, which streamlines your investments as per the market conditions without manual intervention.

Perpetual SIP

This SIP continues indefinitely without a fixed end date, letting you invest for as long as you wish, helping you stay invested for long-term goals. Many Indian fund houses offer SIPs for NRIs, allowing them to invest in India‑based mutual funds, subject to KYC and country specific compliance.

Multi SIP

You can invest in multiple mutual fund schemes from a single fund house through one SIP, making diversification easier and reducing paperwork.

SIP with Insurance

This type of SIP provides the dual benefit of wealth creation and life insurance coverage, giving you added financial security along with your investments. 

When to Invest in SIP

There’s no such ideal time to invest in SIP, starting early is advised as it allows your investment to grow through compounding, provided you have a stable income and are willing to stay invested. More important than timing is consistency and learning how to invest in SIP based on your financial goals and risk appetite.

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Things to Consider Before Starting a SIP

Before starting a SIP, it’s important to keep a few key factors in mind to ensure your investment journey is smooth and aligned with your financial goals:

• Financial Goals
  Define your investment objectives and time horizon.
• Risk Appetite
  Assess your comfort with market fluctuations and potential losses.
• Fund Selection
  Research and choose mutual funds that align with your goals and risk profile.
• Investment Amount & Frequency
  Decide how much and how often you can invest comfortably.
• KYC Compliance
  Ensure you have completed all necessary KYC formalities.
• SIP Flexibility
  Check if the SIP allows modifications, pauses, or top-ups as your needs change.
• Past Performance & Fund Manager
  Review the fund’s historical returns and the expertise of its manager.

How to Invest in SIP: Step-by-Step

The steps to invest in a SIP with DBS Treasures are as follows:

1. Open a DBS Treasures investment account if you don’t already have one.
2. Complete KYC requirements by submitting necessary documents such as PAN, ID, and address proof.
3. Log in to the DBS Treasures online portal and navigate to the mutual funds section.
4. Choose the SIP mutual fund plan that best suits your objectives and risk tolerance.
5. Set up your SIP details, choose the investment amount, frequency, debit date, and tenure (fixed or perpetual).
6. Authorize auto-debit from your DBS account for seamless monthly investments.
7. Review and confirm your SIP registration to start investing.

You can monitor, modify, or stop your SIP anytime through the DBS Treasures portal, ensuring flexibility and convenience.

Types of Funds for SIP

Through SIPs investors can invest in different types of mutual funds, each different in terms of investment strategies and securities it holds. Here are different types of mutual funds for SIP:

Common Myths About SIP

Many common misconceptions about SIPs can discourage investors from starting or continuing their investments. Here are some myths clarified to help you make informed decisions:

• SIP is an investment product - SIP is not a product, but a method to invest regularly in mutual funds.
• SIPs are only for small investments - SIPs are suitable for all investors since either large or small amounts can be invested.
• SIP guarantees return - SIP does not guarantee returns. The returns depend on market performance.
• SIPs are only for equity funds - You can invest in equity, debt mutual funds, or hybrid funds through SIPs.

Tax Implications of SIP

SIP investments are subject to tax based on the type of mutual fund, holding period, and nature of returns. Understanding these rules is essential for effective tax planning and maximizing your post-tax returns.

Navigating SIP taxation requires informed and strategic planning. DBS Treasures offers wealth management solutions tailored to your financial goals. Leverage expert insights to optimise post-tax outcomes and preserve long-term value.

Also Read: Mutual Fund Taxation

Risks Associated with SIP

Before starting a SIP, it’s important to understand that, like any investment, SIPs carry certain risks that can affect your returns and financial goals.

• Market Volatility Risk - SIP returns can increase and decrease with the market movement, particularly in the case of sector and stock funds.
• Liquidity Risk - They can be hard to withdraw from quickly, limiting the ability to access your cash on demand.
• Fund Selection Risk - Investing in the wrong or poor-performing funds can damage your returns.
• Goal Mismatch Risk - Investing short-term targets in high-risk funds or long-term targets in low-risk funds may not provide you with the highest returns.
• Discontinuation Risk - Halting SIPs during market downturns may result in the loss of long-term benefits.
• Inflation Risk - Some funds' returns will not always be ahead of inflation, impacting your true wealth in the long run.

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Conclusion: Is SIP the Right Choice for You?

SIP is a smart choice if you seek disciplined, long-term wealth creation with manageable risk and flexibility. It suits investors of all experience levels, enabling regular investment without needing to time the market. However, assess your goals, risk appetite, and financial situation and choose the top-rated mutual funds for SIP.

SIPs are not risk-free, but they offer a practical path to financial growth. Pairing your SIPs with a DBS Treasures premium savings account ensures seamless auto-debits, efficient fund management, and enhanced banking privileges.

FAQs

1. Can I skip SIP payments?

   Yes, many mutual funds allow you to skip or pause SIP payments for a limited period. However, frequent skips may lead to automatic cancellation of your SIP by the fund house.

2. Can I withdraw SIP anytime?

   You can withdraw your SIP investments anytime unless your scheme has a lock-in period (like ELSS). Each SIP instalment is treated as a separate investment, and applicable exit loads or taxes may apply.

3. How much should I invest in SIP?

   The amount depends on your financial goals, risk appetite, and monthly budget. Start with an amount you can comfortably sustain over the long term and gradually build a diversified mutual fund portfolio aligned with your objectives.

4. Is SIP only for mutual funds?

   Yes, SIP is a method of investing regularly in mutual funds. It is not a product, but a disciplined investment approach.

5. What happens if I miss a payment?

   Missing one or two payments usually doesn’t affect your investment, but repeated missed payments may result in the SIP being cancelled by the fund house.

6. Is SIP 100% safe?

   No, SIPs are subject to market risks. Returns can fluctuate based on the performance of the underlying mutual fund scheme.