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What is SIP? Systematic Investment Plan Explained

By Emitoolbox • 2025-08-14

Tags: sip, mutual funds, investing, beginners, guide

What is SIP? Systematic Investment Plan Explained

An Systematic Investment Plan (SIP) is a method of investment that is disciplined which allows you to invest a specific amount of money in regular intervals (usually each month) through mutual funds. As opposed to making a huge lump sum all in one go, SIP enables you to invest in as little as 500 per month, making it affordable to investors of all ages regardless of income. Consider SIP as an ongoing deposit, however instead of earning a fixed return, the money you deposit is put into professional managed mutual funds with the potential of generating more returns over time. The benefit of SIP is in its simplicity. Once you have set it up, the set amount will be instantly debited from your banking account and deposited into the mutual fund scheme you choose.

What is the process behind SIP Function?

SIP is based on two fundamental concepts that allow it to be extremely efficient for creating wealth:

Rupee Cost Averaging

This is the main benefit that comes with SIP investing. When you make a commitment to invest a certain amount each month, you will purchase larger units when market prices are in a downtrend (NAV lower) and less units during times when it is rising (NAV can be high). Over time, this balances out the purchase price and lessens the effect of volatility in the market.

Example: If you invest at least Rs 10,000 per month when that the NAV is Rs50 in a single month, you receive 200 units. If the NAV decreases to Rs40 in the next month, you will receive 250 units in the same amount. So, market fluctuations favor you.

Compounding Power

SIP utilizes the power of compounding. Your gains generate more yields. The longer you invest the more evident the effect gets. For example, beginning early with just Rs1,000 per month can yield substantial wealth over the course of 20-30 years because of compounding.

How to invest in SIP: Step-by-Step Guide

1. Completion of KYC requirements
Before investing, be sure that you've finished the know Your Customer (KYC) process. You'll need:

  • PAN Card
  • Aadhar Card
  • Address evidence (driving license utility bill, bank statement)
  • Sized for passports
  • Bank account details

Second Step: Determine the Investment Goals
Set your financial goals and your tolerance to risk. You should ask yourself:

  • What are you planning to invest in? (retirement or child's education, buying a house)
  • What risk are you willing to accept?
  • What's your investment plan?

Third Step: Select your Right Mutual Fund Scheme
Find out more about mutual fund schemes according to your objectives and risk profile. Take into consideration factors such as:

  • Fund performance over the course of 3-5 years
  • Ratio of expenses
  • The track record of the fund manager
  • Asset Under Management (AUM)

4. Choose the investment amount and frequency.
Choose how much you'd like to put aside each month (starting between Rs500 and Rs1,000). The majority of investors opt for monthly SIPs because they are in line with the salary cycle.

The 5th step: Select SIP Date
Choose a date that is convenient for automatic withdrawal from the bank account. You can also select multiple dates for various SIPs within the month.

6. Submit the Application
You may start SIP by:

  • Online: On AMC websites investment platforms, websites, or banking portals
  • Offline: Forms can be submitted at branch locations of banks or through distributors

Is SIP safe for Investors?

SIP is usually regarded as an investment strategy that is safe for mutual funds. However, it is important to know what "safe" is in this case.

The reason SIP is deemed to be secure:

  • Risk distribution It spreads the risk of investing across various market cycles, instead of concentrating it all at one moment in time. This helps reduce the effect of the timing of markets on your investments.
  • Rupee Cost Averaging Safety: The automatic averaging effect helps you avoid making bad timing choices. It is not necessary to worry over whether or not the price is either high or low, when you invest.
  • Disciplined Approach: SIP enforces investment discipline, preventing emotional decisions during market volatility.

Important Considerations:

  • Market Risk Remains: While SIP reduces timing risk, it doesn't eliminate market risk entirely. It is important to remember that the value of your investment will fluctuate in response to market fluctuations.
  • Non-Guaranteed Returns Like deposit accounts that are fixed, SIP return aren't guaranteeable and are contingent on the success of the mutual fund.
  • Fund Selection is Critical: The safety of your SIP is largely dependent on selecting the best mutual scheme for funds. Insufficient fund selection could result in subpar returns.

The Best SIP Options that can be used for Different Investment Horizons

The best SIP to use for one year (Short-term)

For investments lasting one year these funds are more appropriate as opposed to equity-oriented funds.

  • Ultra Short Duration Funds:
    • Sundaram Ultra Short Duration Fund (7.8 percent return)
    • LIC MF Ultra Short Duration Fund (7.7% returns)
    • Nippon India Ultra Short Duration Fund (8.0% return)
  • Short-Duration Funds:
    • ICICI Prudential Short Term Fund
    • SBI Fund for Short-Term Debt Fund
    • HDFC The Short Term Debt Fund

NOTE: Equity SIPs are not recommended for one-year time frames due to their high volatility. Debt funds are more stable to meet short-term goals.

The best SIP for 3 years (Medium-term)

For a 3-year time frame it is possible to think about traditional equity funds, or hybrid funds

  • Top-Performing 3 Year SIP Investment Funds
    • Bandhan Small Cap Fund (32.92 percent XIRR over 3 year)
    • Motilal Oswal Large and Midcap Fund (30.36 percent IRR)
    • ICICI Prudential Pharma Healthcare Fund (30.18 percent IRR)
    • Invesco India Midcap Fund
  • Medium Duration Debt Funds:
    • Aditya Birla Sun Life Medium Term Plan (10.12% 3-year returns)
    • Nippon India Medium Duration Fund (8.77% 3-year returns)

The best SIP for 5 years (Long-term)

5-year SIPs could include diversified equity funds that have higher growth potential:

Top 5 Year SIP Performers:

  • Quant Small Cap Fund (37.07 percent 5-year returns)
  • ICICI Prudential Infrastructure Fund (36.47% 5-year returns)
  • Motilal Oswal Midcap Fund (35.08% 5-year returns)
  • Nippon India Small Cap Fund (34.81 percent 5-year returns)
  • HDFC Flexi Cap Fund (28.27% 5-year returns)

The best SIP to last 10+ years (Wealth Creation)

To create wealth over the long term SIPs with a focus on equity are ideal:

Top 10 Years of SIP Performers (Monthly SIP Results of Rs10,000):

  • Quant Small Cap Fund: Rs49.1 lakh corpus (26.82 percent annualised returns)
  • Nippon India Small Cap Fund: Rs44.6 lakh corpus (25.05 percent annualised returns)
  • Motilal Oswal Midcap Fund: Rs42.1 lakh in corpus (23.97 percent annualized returns)
  • Quant ELSS Tax Saver Fund: Rs41.2 lakh corpus (23.58 percent annualised returns)
  • ICICI Prudential Infrastructure Fund: Rs41.0 lakhs corpus (23.50 percent annualised returns)

The Recommended Categories for the Long-term:

  • Large Cap funds (for stability)
  • Cap Funds (for growth) Cap Funds (for the growth)
  • Small-Cap Funds (for rapid growth)
  • The Flexi Cap Fund (for a balanced approach)
  • ElSS Funds (for Tax benefits)

SIP: A Good or Bad Investment?

SIP is good when:

  • Long-term Goals SIP is extremely effective when goals are more than 5 years in the future. The longer the timeframe for investment and the more successful the outcomes because of compounding and market cycle average.
  • Regular income: When you earn an income that is steady SIP can help you develop an investment habit that is disciplined. It's ideal for professionals with salaried jobs who are paid monthly.
  • Market Timing Issues: SIP does away with the requirement to predict the market, which makes it perfect an investment option for those who do not wish to worry about entry points to markets.
  • SIP Capacity for Small Investments Beginning with as little 500 rupees per month, it makes SIP available to everyone in the income range.

SIP May Not Be Optimal If:

  • Short-term Goals for investments that are less than 3 years, SIPs into equity funds could be dangerous because of market volatility.
  • Bull Market scenario: In continuously rising markets lump sum investments may outperform SIPs due to the cost of rupees averaging against the investor.
  • Inconsistent Income If you aren't able to commit to investing regularly SIP's benefits decrease.
  • Very conservative approach: If you can't take any volatility in the market conventional savings strategies might be better suited.

The Key Benefits of SIP

  • Disciplined Investing Automates the investment process and helps build consistent savings habits.
  • Rupee Cost Averaging Limits the risk of market volatility by systematic investment.
  • The power of compounding long-term wealth creation via investing returns.
  • Flexibility: Can increase, reduce, or even pause SIP according to financial conditions.
  • Professional Management access to fund administration experts with no any deep knowledge of markets.
  • Tax Benefits ELSS SIPs allow tax benefits up to Rs1.5 lakh under Section 80C.

Important disadvantages to consider

  • Market Risk It doesn't completely eliminate the risk of market volatility; your investments will still be at risk during market declines.
  • Non-guaranteed Returns Contrary to fixed-deposits SIP returns are based on the performance of the markets and the fund you choose.
  • Long-term commitment required: SIP works best when you are invested for a longer period of time; stopping before the end of the term can reduce benefits.
  • Risks of Fund Management: Fund manager performance that is poor can have a major impact on your returns.
  • Cost Ratios: Management fees can lower your overall return particularly over a long period of time.
  • Lock-in Time Periods: Certain funds, like ELSS have lock-in period requirements that reduce the liquidity.
  • Complexity for beginners: Choosing the right fund requires a thorough knowledge of the various choices.

Final Recommendations

SIP is a great investment option for long-term wealth accumulation, particularly for those who wish to develop disciplined investment habits without stressing about the timing of markets. It's especially beneficial for:

  • Investors who are first-time starting their journey to invest
  • Professionals in the field of Salaried with a regular income
  • Save for goals that are long-term (5plus years)
  • For those who are looking for a professional approach to fund management
  • Investors who want tax advantages via the ELSS

Make sure to:

  • Select funds based on your personal risk tolerance and objectives
  • Have a long-term outlook (minimum 5 years with equity funds)
  • Diversify your portfolio across various fund categories
  • Rebalance and review your portfolio regularly
  • Have realistic expectations for return

Be aware that SIP cannot be described as a product, but rather an investment method. Success of the SIP depends on a number of factors, including the appropriate mutual fund scheme that are compatible with your financial objectives as well as your risk tolerance and investment timeframe.

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