What is a Systematic Investment Plan?

What is a Systematic Investment Plan?

Last updated: 26 Nov, 2021 | 01:54 pm

Systematic Investment Plan (SIP): What is SIP in Mutual Fund? | INDmoney

Systematic Investment Plan or SIP is an instrument that allows regular, small investments in a mutual fund scheme. With SIP, a fixed amount is deducted from the investor's bank account periodically and gets invested in the mutual fund of their choice. 

How does SIP in mutual funds work?

The journey of SIP starts with choosing a mutual fund scheme. After which, a predetermined fixed sum will be invested periodically towards the fund scheme. This amount lets the investor purchase a certain number of units of the fund.

Investing in SIP over a long period helps you invest even during the highs and lows of the market. One does not need to monitor the market for the same regularly. Hence, SIP removes the unpredictability factor of stock markets.

Also, after setting the regular payment limit, frequency and tenure, one can give standalone instructions to their bank for direct payments from the bank account into the mutual fund scheme. 

Types of SIP in mutual funds

There are various SIP options available with different fund houses based on the needs of the investors. However, the most common types are: 

  • Flexible SIP: Flexible SIP, also called Flexi SIP, allows a person to adjust the number of investments based on their financial condition or the market conditions. At times of financial crunch, a person can choose to reduce the SIP amount and similarly increase the SIP when they have more funds at their disposal, such as bonuses. They can also choose to do so for a specific period. However, in the case of market conditions, a pre-decided formula is already available that allows the investor to invest more when the market is falling and invest less when the market is going high.
  • Top-up SIP: A top-up SIP lets the investor increase the regular payments at fixed intervals. For example, an investor has chosen to opt for a mutual fund scheme with a monthly SIP of Rs. 5000 and has instructed the fund houses to increase the SIP by Rs. 1000 semi-annually.Hence, after investing Rs. 5000 monthly for the initial six months, the SIP will be increased to Rs. 6000. And similarly, after the end of the year, from the 13th month, the SIP amount will be increased to Rs. 7000. This type is most relevant for salaried employees who expect a hike over regular intervals.
  • Perpetual SIP: Out of all the types of SIPs, this requires special attention as it is linked to the tenure of the investment. While starting a SIP, every investor has to fill in the start and end date for the SIP. However, many investors fill just the start date and not the end date. In such cases, these SIP plans turn into perpetual SIP, where the SIP goes on until 2099. For an investor to stop the SIP, they have to submit a written application to their respective fund houses. Therefore, if an investor chooses to start investing in a SIP for a fixed period, they should mention the end date too. 
  • Trigger SIP: This SIP is recommended for experienced investors. Trigger SIP allows one to set a trigger for withdrawal of payment from the bank account only after the fulfillment of certain trigger options, for instance, on specific dates or if Nifty or Sensex reach certain points or if the NAV of the fund goes below a certain value predetermined by the investor. Hence, experienced investors can use these triggers effectively with their knowledge and past experiences. 

Benefits of investing in SIP mutual funds 

  • Compounding Effect: Compounding is a process that takes place when the returns on investment start gaining returns. It might seem simple in words but have a substantial effect over time. Investing in SIP helps the investor take advantage of the power of compounding since the returns on investment are reinvested. Hence, it is necessary to stay invested through SIP to gain the maximum benefits, which have a manifold effect. Also, to gain these benefits for a long period, it is beneficial to start investing early.
  • Minimal initial investment: The investment in mutual funds through SIP lets one start with a very minimal amount of Rs. 500 or Rs. 1000 every month. Though, this can be increased with time with the help of step-up or top-up SIPs. Top-up SIP lets you increase the number of payments over the years to reach the goals early. 
  • Rupee cost averaging: Under the rupee cost averaging, more units of a fund are purchased when the NAV of the fund is low and fewer units of the fund are purchased when the NAV of the fund is high. It averages out the cost of the fund over the tenure of the scheme. It eliminates the need to time the market for making investments. 
  • Convenience: SIPs are a convenient mode of investing as the monthly payments are directly deducted from the bank account of the investor. The investors who do not have the time to conduct regular market research and invest accordingly have to find a good fund and start the SIP that will take care of the periodic investments. 

How to start SIP in mutual funds?

  • Set investment goals: The initial step towards the investment in SIP is setting a goal for which the investment is being made. It is important to know the goals one wishes to achieve with the investment as every mutual fund is designed with a specific objective. Once the goal is set, the best-suited mutual fund can be chosen accordingly.
  • Complete the KYC process: KYC is essential for every investor as it is mandated by SEBI, and without that, no one can start their investment journey. For the KYC process, basic documents, including identity proof, address proof, and photographs, have to be submitted, and this can be done online by visiting the fund house’s website and choosing the e-KYC option. 
  • Selecting the SIP: Once the particular plan is selected, the SIP option is chosen by filling in the details like the tenure of investment, the frequency of investment, the total investment amount. 

How to invest in SIP online?

For starting a SIP online one needs to visit the official website of the fund house, select the mutual fund scheme and choose the SIP option best suited to their needs. With INDmoney, all this process can be done in minutes hassle-free and without any paperwork.

How to choose the best SIP to invest in in 2021?

Various quantitative and qualitative factors help an investor choose the best SIP such, as:

  • The mutual fund ratings given by various agencies such as CRISIL, ICRA, etc., form important parameters to select the fund to invest in.
  • The historical returns of the scheme help in forecasting future returns.
  • The expense ratio as less expense would mean more profit and the exit load that needs to be paid to the fund houses while exiting the scheme.
  • The fund house is also an important factor as a good asset management company will give good investment options.
  • The investment process of the fund house should be well-designed as it will help one ensure that the scheme is well managed. 


Q: Is a systematic investment plan safe?

A: Yes, a systematic investment plan is a very safe way of investing in mutual funds. It helps one invest in the scheme with regular investments and saves from a single lump sum investment which might result in paying more due to overvaluation of the fund based on market conditions. 

Q: How to open a systematic investment plan account?

A: For starting a SIP, one needs to have a clear goal, after which the person has to complete the KYC process and select a mutual fund scheme that is in line with their goals and choose the SIP option best suited. 

Q: Do I need a Demat account to start SIP?

A: Although SEBI has mandated the need to have a Demat account to invest in the stock market, it is not compulsory to have a Demat account to start a SIP. The modernization in technology has eliminated the need to have a Demat account for the investment in mutual funds.

Q: Which systematic investment plan is best?

A: Various criteria help one decide which SIP is best, such as the rating of the mutual fund, historical returns, expense ratio, exit load, the investment process, etc.

Q:  What is the difference between a systematic investment plan and a lump sum investment?

A: A systematic investment plan allows one to invest in the mutual fund scheme periodically like monthly, quarterly, semi-annually, or annually. However, in lump sum investment, the bulk of the whole investment is made in one go.

Q: What is the difference between a systematic investment plan and a fixed deposit?

A: SIP is a mode of investment in a mutual fund with the option of regular deposits into the scheme. On the other hand, FD is a way of investment where people deposit a certain amount for a specified period and earn interest on the same.

Q: How to stop SIP?

A: To stop the SIP, the investor has to log in to their mutual fund website with their credentials, then select the SIP they wish to discontinue. The deductions stop after the waiting period, the funds stay invested in the fund until a redemption request is made. 

Q: How to redeem SIP?

For redemption of SIP, one can use the online portal of their fund house, where they can sell a part or whole of the units of their investment. Once the request is processed, the redemption amount gets transferred through NEFT or cheque.