SIP: What Is It And How Does It Work?

SIP, short for Systematic Investment Plan, is like a steady sailboat guiding you toward your financial aspirations. Mutual fund SIPs have become increasingly popular, frequently featured in advertisements on television and digital platforms. But what exactly is SIP, and how does it function? Let’s unravel its essentials.

To gain a deeper understanding, here are answers to ten key questions about SIP investments:

What Is SIP Investment?

SIP, an acronym for Systematic Investment Plan, is a disciplined way to invest regularly in mutual funds. Unlike the lump sum investment approach, where you invest a large amount at once, SIP allows periodic contributions to a mutual fund scheme. This systematic approach promotes financial discipline and consistency, making it a go-to choice for new and seasoned investors.

How SIP Works

SIP investments are simple and automated. You choose an amount, select a mutual fund scheme, set a frequency (e.g., monthly), and decide on a deduction date.

• Minimum Investment: SIPs start at just ₹500 monthly, making it accessible for most individuals.

• Process: To begin, log into a SIP app, complete your KYC, authorize a bank mandate, and you're set after approval.

The best trading app in India streamlines this process, enabling automatic contributions, monitoring of your portfolio, and seamless tracking of returns.

How To Start SIP And Number of SIPs You Can Have

Starting an SIP is straightforward. Choose a fund that aligns with your goals, register via an app, and begin investing. While there's no limit on the number of SIPs, aligning them with your financial objectives ensures better management. For instance, you can designate one SIP for retirement planning and another for emergencies.

Opening a free Demat account further simplifies your investment process, offering a unified platform to manage and track your contributions securely.

Choosing the Best SIP App

Selecting the right SIP app can significantly enhance your investing experience. Consider features like user-friendliness, speed, and robust customer support. Some apps even allow you to manage mutual funds alongside other investments, such as stocks and bonds. Compare ratings, reviews, and functionalities before deciding.

Taxation on SIP Investments

SIP investments may attract Short-Term Capital Gains (STCG) or Long-Term Capital Gains (LTCG) tax based on the holding period of your units.

• STCG applies if units are redeemed within a year.

• LTCG is applicable for units held beyond a year, with updated rules detailed in Union Budget 2024.

Keep in mind that indexation benefits for investments have been removed under the latest guidelines.

Starting Small: ₹500 SIP

Yes, starting with just ₹500 a month is possible and highly beneficial. This small, consistent investment can grow significantly over time through the magic of compounding.

• Flexibility: You can increase or modify your SIP amount anytime using your chosen app.

When Does Compounding Start in SIP?

Compounding begins with your very first SIP investment. The process involves earning returns on your initial amount and reinvested earnings over time. Staying invested for the long term amplifies the compounding effect, helping your wealth grow exponentially.

Paying SIP After Due Date

SIPs are auto-deducted on the chosen date. However, if a deduction fails due to insufficient funds, you can invest the missed amount manually in the same mutual fund scheme as a one-time lump sum. This helps you stay on track with your financial goals.

Monthly SIP vs. Yearly SIP

The primary difference lies in the frequency of investment.

• Monthly SIPs offer better cost averaging and consistency, making them a preferred choice for most investors.

• Yearly SIPs, while possible, lack the regularity that promotes disciplined investing.

SWP and STP: Examples

Beyond investing, mutual funds also allow systematic withdrawals and transfers:

1. Systematic Transfer Plan (STP): Transfer a fixed amount or units from one fund to another within the same fund house. Example: Moving from equity to debt during market volatility.

2. Systematic Withdrawal Plan (SWP): Withdraw a fixed amount or units periodically. Example: Using SWP for monthly expenses during retirement.

Conclusion

SIP investments offer a simple, systematic, and goal-oriented approach to wealth creation. They harness the benefits of compounding, cost averaging, and financial discipline. Whether you’re just starting or looking to diversify your portfolio, SIPs provide a hassle-free way to achieve your financial milestones.

Get started with your investment journey through the HDFC SIP investment app or explore the HDFC Sky platform for an enhanced investing experience.