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Understanding Systematic Investment Plans
May 07, 2025
Table of Contents
Beginners looking for disciplined investing can opt for a systematic investment plan, a mode of investing in selected mutual funds. Rs. 100 is what you require to start the SIP investment process for a predetermined period. Multiple SIP investment options are available for those who intend to increase their monthly contribution. The contribution, initiating dates and periodicity can be different for each SIP. SIP in mutual funds eliminates the stress of monitoring market fluctuations, and the methodical investment yields substantial returns over time. Understand what is systematic investment plan, begin your investment journey, and reap the benefits of substantial returns.
How Does SIP Work?
Without understanding how SIP works, learning about what is SIP and how to invest may not help. SIP for wealth creation uses the power of compounding and rupee-cost averaging for the exponential growth of the investments.
Power of Compounding
Long-term SIP returns leverage the cumulative effect of compounding. The returns generated in a mutual fund investment are ploughed back every year into the fund to earn a cumulative return to eventually create a huge corpus.
Let us now understand how this power of compounding works in different cases.
Ms A started a SIP investment for retirement planning when she turned 22. She chose to invest Rs. 5000 at 9% returns for 38 years.
Similarly, Mr B began the SIP investment at 45. The contribution was Rs. 5000, tenure 25 years, and returns expected 9%.
Let us see the outcome:
Ms A invested for 38 years and earned returns of 1.5 crores (approx.) for an investment of Rs. 22.80 lakhs.
An investment of Rs. 15.00 lakhs for a tenure of 25 years earned returns of Rs. 38.27 lakhs (approx.).
The power of compounding has yielded exponential returns, but staying invested for longer has shown better results.
Rupee Cost Averaging
Rupee cost averaging reduces the effect of market volatility on returns. It allows investors to buy more units when the prices are low and fewer units when the prices are high.
For instance, a Rs. 15000/- investment when the Net Asset Value is Rs. 60/- fetches 250 units. In the subsequent month, if the Net Asset Value drops to Rs. 55/-, the same Rs. 15000/- fetches 273 units. If it reduces to Rs. 50/- the following month, Rs. 15000/- buys 300 units. In all, you accumulate 823 units in 3 months. This SIP investment strategy makes it cost-effective as the price of each unit averages down to Rs. 18.22 and boosts the returns over time.
Features of the SIP Investment Plan
You acknowledge the meaning of what is SIP investment if you know the features of a SIP investment plan.
Fixed and Regular Contributions
It is not easy on everybody’s pocket to invest a lump sum for wealth-building. SIP allows small contributions of Rs. 100, 500, 1000, etc., at regular intervals. This approach benefits small investors as it is easy on the pocket. They can enhance their contributions in the future as and when their resources increase.
Flexibility in Investment Duration
This investment plan facilitates altering the investment duration between weekly, monthly, and quarterly to suit your financial circumstances. You can start SIP online and similarly alter the investment duration online. A written application for modification is also permitted.
Long-Term Wealth Creation
A monthly SIP contribution for longer durations helps you leverage the power of compounding and rupee cost averaging for long-term wealth creation. The best SIP plans are ideal for long-term financial goals such as retirement planning, children’s education, etc.
Cancellation Provision
The SIP investment plan permits terminating the plan at any time by submitting an online request or by filling out an SIP cancellation form and handing it over to the respective mutual fund provider.
Easy to Track and Manage
Online platforms and apps simplify the monitoring and management of SIP investments. You can make adjustments through online platforms according to your changing goals and circumstances. Consistent updates and reports on performance make managing and controlling the investment easy.
Benefits of SIP Investment Plan
You will appreciate the plan better if you get to know the SIP investment benefits alongside knowing what is SIP plan. They are:
Makes You a Disciplined Investor
SIP vs lump sum explains why SIP investment suits a small investor. It makes you a disciplined investor. Being easy on the wallet helps maintain consistency and earn better SIP returns over time. You can use the SIP calculator to understand how regular small investments in SIP help earn sizeable returns over time.
Flexible Investment Options
You are not committed to investing regularly without a break in SIP. This savings plan allows you to halt, enhance, or decrease the contributions depending on circumstances such as changing financial goals or an increase or decrease in income.
Tax-Saving Opportunities
Investing in SIP through ELSS (Equity Linked Savings Scheme) provides tax-saving opportunities under Section 80C* of the Income Tax Act 1961 up to Rs. 1.50 lakhs.
Power Of Compounding
SIP meaning in finance is deriving exponential returns for investing small amounts for longer durations by leveraging the power of compounding. The returns earned in a year on monthly contributions are put back into the mutual fund to accrue the yields. This approach yields considerable returns eventually to fulfil long-term goals.
When to Invest in SIP?
Understanding what is SIP investment is not adequate to succeed in the SIP investment journey. You should also know when to invest to optimise the returns on investment.
Start Early
If your intention is an easy-on-the-pocket investment for the best yield, starting early is the best way. With time to your advantage, the power of the principle yields considerable returns for small, consistent contributions for longer periods.
Middle-Age
For retirement planning, you can start in your early 40s or 50s. Though the power of compounding may not be as beneficial as when starting early, consistent contributions do bear good returns over time.
When You Have a Regular Income
Disciplined and regular savings are the key to success in SIP investment. Before starting a SIP investment, you should assess your economic status and begin only when you can comfortably make regular contributions.
Life Insurance Integration
While SIPs are excellent for building wealth over time, it's equally important to protect your financial goals from unforeseen events. Life insurance plays a critical role in ensuring that your loved ones are financially secure even in your absence. For example, if you're investing in SIPs for your child’s education or home purchase, having a life insurance policy ensures these goals remain funded even if something happens to you.
When integrating life insurance into your financial plan:
Consider term insurance to provide a lump sum payout to your family in case of untimely demise.
Look for ULIPs (Unit Linked Insurance Plans), which combine life insurance with investment components similar to SIPs. These products allow you to invest in equity, debt, or balanced funds while offering life cover.
Ensure that the coverage amount aligns with your long-term financial goals, especially those supported by SIP investments.
By combining SIPs with life insurance, you create a comprehensive financial plan that builds wealth while safeguarding your family's future.
Types of SIP
For an informed decision, you should know the types of SIP besides knowing what is systematic investment plan. The SIP variants are:
Regular SIP
Regular SIP is a plan where you invest a fixed amount at regular intervals, i.e., weekly, monthly, or quarterly. You continue with the same amount till the determined period unless you decide to make any changes. This investment type helps in creating a substantial corpus. You can opt for automated debit to maintain consistency.
Top-up SIP
The top-up SIP allows you to increase the contribution when your residual income or resources increase. You can get the best yield by investing in performing funds.
Flexible SIP
This variant offers the flexibility to increase or decrease the contributions based on your income or cash flow. The change in contributions can also be according to your changing goals.
Perpetual SIP
Under this variant, you are not committed to continuing with the SIP till the end date. Every SIP carries an end date of either 1, 3, or 5 years. You can terminate the plan and withdraw the funds at any time based on your financial goals.
Factors to Consider Before Starting SIP
After an in-depth knowledge of what is SIP investment, how it works, its benefits, and the types of SIPs, an insight into the tips before starting a SIP will help make an informed decision. The factors to consider are:
Set Your Investment Goals
Goal-setting is the initial step in financial planning. Define your goals and set a timeline before you invest in a SIP plan.
Decide How Long You Want to Invest
Decide how long you want to invest, depending on your short-term liquidity needs and long-term financial goals.
Use a SIP Calculator to Estimate Returns
To ascertain if the determined fixed amount for a period fetches adequate returns to fulfil your goals, you can use a SIP calculator and evaluate the yield on your contributions for the predetermined duration.
Talk to a Financial Expert
If you find the investment process overwhelming and are not able to select the right mutual fund, consult a financial expert for guidance.
Conclusion
Systematic Investment Plans are ideal for beginners and small investors who prefer disciplined and gradual investments in mutual funds. Understand what is SIP investment is before starting to invest in an SIP. Defining financial goals and time horizons is a fundamental requirement to succeed in this investment plan. You can use an SIP calculator to evaluate the returns or understand the timeline and amount required to create a corpus for a long-term financial goal. Seek expert advice if required to choose the right fund and head towards financial stability. Additionally, integrating life insurance into your overall financial plan ensures that your hard-earned investments and future goals remain protected against life’s uncertainties.
FAQs on What is SIP Investment
What is SIP, and how does it work?
SIP is an investment plan that allows you to invest small amounts in a mutual fund of your choice. Using the power of compounding and rupee-cost averaging concepts, the regular contributions accumulate to create a huge corpus eventually.
How much is 1 lakh in SIP?
A contribution of 1 lakh in SIP monthly yields returns commensurate with average annual returns. It also depends on the chosen timeline and expected return rate. For example, if the investment is for 10 years with an expected return of 12%, the estimated returns will be Rs. 1.04 crores for a contribution of Rs. 1.2 crores.
Is SIP a good investment option for beginners?
Yes. SIP is a good option for beginners as it enables regular fixed contributions to mutual funds. The rupee-cost averaging effect minimises the impact of market fluctuations and eventually earns good returns for the investment.
Is SIP safe to invest in?
SIP offers a structured and steady approach to investing in mutual funds, aiming for long-term growth. It manages market volatility by acquiring more units at lower NAVs and fewer units when NAVs are higher.
What is the minimum amount to start a SIP?
Yes. You can start a SIP with a minimum amount of Rs. 100.
Is SIP 100% safe?
Though SIP is a simple and safe way to invest in mutual funds, the returns are not guaranteed. However, gradual investments in mutual funds instead of a lump sum minimise the risk. SIP is considered a reliable option for long-term wealth creation.
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Francis Rodrigues
Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.
Written By:
Vishal Subharwal
Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.
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NOTE: This material has been prepared for information purposes only, should not be relied on for financial advice. You should consult your own financial consultant for any queries.
* It is essential to note that the total deduction available under section 80C of the Income Tax Act, 1961, considering all the above investments allowed under this section should not exceed Rs.1,50,000 per year. Tax benefits & exemptions are subject to the conditions of the Income Tax Act, 1961 and its provisions. Customer is requested to seek tax advice from his Chartered Accountant or personal tax advisor with respect to his personal tax liabilities under the Income-tax law.
ARN - MC/05/25/23299