Step-By-Step Guide to Starting a SIP: Everything You Need to Know

Features of SIP

A systematic investment plan (SIP) allows you to invest a specified amount, at a specified frequency in a specified mutual fund scheme, for a specified period. For example, Shirin started a Rs. 10,000 monthly SIP in a large-cap mutual fund scheme with an investment horizon of 20 years.

In the above example,

• The specified amount is Rs. 10,000
• The specified frequency is monthly
• The specified scheme is the large-cap mutual fund scheme
• The specified investment period is ten years

Some of the features of a SIP include the following.

a)    Minimum Investment Amount Is Low

Each AMC fixes their minimum investment amount for SIPs. The minimum investment amount for an SIP starts from as low as Rs. 100 in the case of most AMCs. Hence, SIPs are affordable to all individuals across various income categories. 

You can start with the appropriate amount and scale up as your annual income increases. The step-up SIP allows you to increase the monthly investment amount either by an absolute amount or a percentage of the base SIP amount. The SIP amount increases annually.

b)    Inculcates a Savings and Investment Habit

Financial products like recurring deposits and SIPs are some of the best ways to inculcate the habit of regular savings and investments. Once you set up the SIP, it works in auto mode. Every month, on the specified date, the SIP amount will be deducted from your bank account and invested in the selected mutual fund scheme.

Habits, depending on whether good or bad, can make or break a person. Hence, you should develop a good habit of SIP right from the start of your career. It will help you fulfil your financial goals and create wealth for yourself.

c)    Provides Rupee Cost Averaging (RCA)

Stock markets move in cycles of boom, peak, fall, bottom, recovery, etc. Each cycle may last from a few months to a few years. With a SIP, you keep buying units of the mutual fund scheme through every phase of the market cycle. 

During a bull phase, you accumulate fewer units at a higher NAV. Similarly, during the bear phase, you accumulate more units at a lower NAV. Thus, with SIP, your overall purchase price gets averaged with Rupee Cost Averaging (RCA).

d)    Benefits From the Power of Compounding

When you invest through SIP for the long term, you give your money time to grow. In the long run, your SIP investments benefit from the power of compounding. With time, your investments will grow and help you accomplish your financial goals.

Now that you understand the meaning and features of SIP, let us look at how to invest in a systematic investment plan.

How to Invest in Systematic Investment Plan?

To invest in an SIP, take the following steps.

• Decide the mutual fund scheme that you want to invest in.
• Visit the AMC website/app or the intermediary website/app
• Select the new investment option.
• Select the scheme name and the SIP option from the lumpsum/SIP option
• Enter the SIP details like SIP start date, frequency, amount, end date/tenure, etc.
• Set up the SIP mandate of automatic debit of the SIP amount from your bank account.

Once you complete the process, you will get an email/SMS from the AMC mentioning your SIP has been successfully set up.

How Does SIP Work?

In the earlier section, we understood the process of how to start SIP. Once the SIP starts, it will work as follows.

On the start date, your first SIP instalment amount will be deducted from your bank account and invested in the selected mutual fund scheme. The AMC will credit the equivalent number of the mutual fund scheme units to your folio account. The process will repeat every month for an SIP with monthly frequency until the SIP end date.

The AMC declares the net asset value (NAV) of all schemes after the markets close on every business day. Your capital gain/loss (profit/loss) will be the difference between the NAV at which you redeem the units and the NAV at which you bought the units. For the units you hold in your portfolio, the notional capital gain/loss will be the difference between the current NAV and the NAV at which you bought the units.

You will receive periodic statements from the AMC with the SIP updates. You can also log into the AMC website/app to check the status of your SIP. It will help you track the performance of your SIPs and assess whether you are on track to achieve your financial goals.

What is Better: SIP or Lumpsum?

After understanding how to start SIP investment, a common question that many investors ask is whether to invest in lumpsum or start a SIP. It is recommended that you do an SIP instead of a lumpsum investment. If you make a lumpsum investment and the market suddenly experiences a big fall, you will be sitting on losses. However, with a SIP, you will keep averaging your purchase cost during all phases of a market cycle.

SIPs allow you to make regular investments from your monthly income. You can increase the SIP amount annually as your income increases. Thus, SIPs offer some benefits compared to lumpsum investments.

Things to Consider Before Investing in SIP

Before investing in an SIP, you should sit with an investment expert and plan. They can help you list your financial goals, make a goal plan, recommend the appropriate mutual fund schemes for SIP, review the progress regularly, and handhold you till the financial goals are achieved.

Consider the investment time horizon before investing in an SIP. The longer the investment horizon for equity mutual funds, the better. Let us understand how SIP can grow and create wealth for you in the long run with an example.

(Source: HDFC Mutual Fund)

Note: The above table considers a Rs. 10,000 monthly SIP in HDFC Equity Fund, invested on the 1st of every month from 1st January 1995 to 31st March 2020. 

As we can see, over 25 years, an investment of Rs. 30.30 lakhs has become around Rs. 5 crores, growing at a CAGR of 18.36%. During these 25 years, the market went through several significant corrections due to events like:

• Asian currency crisis in 1997
• Pokhran nuclear tests that led to US sanctions in 1998
• Kargil war in 1999
• Dot com bubble burst in 2000
• NDA losing elections in 2004
• US subprime crisis in 2008
• European sovereign debt crisis in 2010
• US credit rating downgrade in 2011
• Demonetisation in 2016
• Covid in 2020

All the above events led to a correction in stock markets. Some corrections were small, while some were big. Some corrections were short, while some lasted for a long time. However, after every correction, the market bounced back and went on to make new highs.

With a long-term SIP, you can benefit from the RCA and power of compounding and generate wealth inspite of short-term corrections. Hence, mutual fund SIPs are one of the best options to invest, achieve financial goals, and attain financial freedom.

FAQ's

What Are the Types of SIPs?

There are various types of SIPs that you can choose from.

• Regular SIP: It allows you to invest a specified amount in a specified scheme at a specified frequency for a specified period.
• Step-up SIP: It allows you to increase the SIP amount on an annual basis
• Perpetual SIP: It has a start date but no end date
• Flexible SIP: It allows flexibility in terms of SIP amount, frequency, etc.

Can SIP Be Paused or Redeemed Before the End Date?

Yes, an SIP can be paused or redeemed before the end date. However, it is recommended you continue the SIP till the financial goal is achieved.