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Meet Mehak! Mehak has just started her investment journey & is getting confused with the terms used in Mutual Funds!

She wonders, is SIP the same as a Mutual Fund? Is a Systematic Investment Plan (SIP) a type of Mutual Fund?  Eventually, every new investor may have experienced or is still experiencing a level of difficulty like that of Mehak!

If you’re someone who likes or is familiar with Systematic Investment Planning, you already know the answers to these questions. On the other end, if you are not, we’ve got you covered –

What are SIPs?

SIP stands for Systematic Investment Plan. A SIP is not a Mutual Fund’s substitute, nor is it a Mutual Fund’s category. It is a way of investing a set amount of money in a Mutual Fund on a regular basis. When you set up a SIP, a specific amount is deducted from your bank account regularly (monthly, quarterly, weekly, etc.) The deducted amount is then put into a Mutual Fund of your choice, which grows and accumulates over time. SIPs are popular because it’s economical, and having an automated mandate makes it easier, allowing you to tick something off your to-do list.

Whereas, the other type of Mutual Fund investment is a Lump Sum purchase, in which you purchase units of a Mutual Fund scheme as and when you have the funds. For instance, Ms. Pari got a bonus of ₹50,000 from her company and she invested the entire amount in an Equity Mutual Fund at one go!

How do SIPs work?

Before you start investing, it’s important to understand how Systematic Investing Planning works. A SIP allows you to invest in any type of Mutual Fund, allowing you to build wealth over a period of time. For instance, Ms. Pari starts investing a set amount of ₹1000 (from March 2022) in a monthly SIP and has her SIP date set as 5th of each month. As a result, on the 5th of every month, this amount will be automatically deducted from Ms. Pari’s bank account and invested in the Mutual Fund of her choice. Herein, on March 5, 2022, the NAV of the Mutual Fund scheme was ₹10, and Ms. Pari had invested ₹1000. As a result, Ms. Pari was allotted 100 units & so on for further months.

DateParticulars NAVAmountUnitsTotal Units
5/3/2022Monthly SIP₹10₹1000100100
5/4/2022Monthly SIP₹8₹1000125225
5/5/2022Monthly SIP₹12₹100083.33333333308.3333333
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

According to the example above, Ms. Pari has 308.333 units, as on May 31, 2022. If the NAV of this scheme is ₹13, the current value of Ms. Pari’s investments will be ₹4008.33 (308.33*13).

How do SIP Benefits differ from that of a Lump sum investment?

SIP benefits, as compared to Lump-sum Investments (when you make a single payment investment), include:  

1.Rupee Cost Averaging-

When the market is low, you get more units of your chosen Mutual Fund, and when the market is high, you get fewer units, like Ms. Pari received 100 units in March and 125 units in April. After a period of regular Systematic Investment Planning, your average cost of purchase falls below the scheme’s current NAV. This is known as Rupee Cost Averaging.

2. Low Entry Level-

To invest in SIPs, you don’t need a large sum of money. That is, you can start investing with just ₹100.

3.No need to time the market-

Investing in SIPs on a regular basis allows you to take advantage of Market Volatility while removing the need to time the market. When we invest, one usually aims to buy Low and Sell high (in order to earn profit). However, it is not always easy to buy low, especially when investing in the stock market. When investing through SIPs, however, this is not a concern. It’s because a systematic investment plan (SIP) is a disciplined way of investing in Mutual Funds.

4. The Power of Compounding-

When you invest through a SIP for the long term, you profit from the Power of Compounding. For example, if you put ₹100 in a fund and get 4% interest in the first month, the total value of your funds at the end of the month will be ₹104. Now, in the coming month; you will earn interest on ₹104 & not just ₹100. That is, earning returns over the returns already earned. And this is where the Power of Compounding plays its role!

How Can SIP Benefit Women?

Many women today earn well, implying that they are equally capable of managing their finances. We’ve all watched our mothers manage household finances, often in parallel with their work responsibilities & save a good amount of money here & there every month. But when this money is invested, it will help you to generate returns over her investments. And this is when SIP investing comes into play. SIPs are a great way to build up your investments for long-term goals like your retirement, education, and marriage for your children. You can also use SIPs to pursue other aspirational goals, such as a foreign trip by just saving a little portion of your money at regular intervals! 

How can you invest in SIPs?

The LXME Calculators under the MyMoneyTab will assist you in determining the SIP amount with which you can start investing. The funds given under this tab are backed by the expertise of the Anand Rathi Research Team, which holds an experience of 25+ years. Not just that, these funds are further diversified into time-based baskets to reduce the overall risk of investing (For instance, 70% in Equities & 30% in Debt). To get started on your investment journey, you’ll require an Investment Account. At LXME, opening an Investment Account is free of cost. You can start investing once your Investment Account is ready. All you have to do is follow these simple steps-

  1. Open the LXME App & Click on MyMoneyTab.
  2. Select an investment option based on your Financial Goals (like planning for your retirement, or child’s education), risk tolerance (the amount of risk the investor is willing to take) & time period of investing (years of investing).
  3. Once done, click on Invest Now.

Is there a lock-in period for SIPs?

In Mutual Funds, a lock-in period means you can’t get your money out until a certain amount of time has passed since you invested. In SIP investments, Open-ended Mutual Funds have no lock-in period. The only Open-ended Mutual Fund with a 3 years lock-in term is ELSS (Equity Linked Savings Scheme). 

Is SIP tax saving?

Yes, SIP does help in saving tax, ELSS lumpsum and SIP tax benefits can be availed up to ₹1.5 Lakh every year. You can learn more about it by reading the ELSS blog. Why is making an investment in SIP so popular? SIP is a simple approach to building long-term wealth through small investments. Also, SIPs are cost-effective because they allow you to invest a small amount every month & in turn average out the cost of investing. On that note, at LXME, you can start your SIP investments in Equity & Debt Mutual Funds with as little as ₹100. 

Overall, SIPs can be a great investment option for investors who want to build wealth through Mutual Fund investments over a period of time.

Frequently Asked Questions (FAQs)

1. When to invest in SIP?

Many investors believe that SIPs should not be initiated when markets are at higher levels of trade. However, timing the market is very impossible. As Short-term changes are unavoidable and can cause investors to fear, but they rarely endure long. As a result, if you’re looking for long-term growth, you should start investing as soon as possible.

2.Are Equity SIP returns taxable? 

If a SIP of an equity mutual fund is held for less than 12 months then SIP returns on the sale of mutual fund earned will be taxed at 15% plus cess. However, if an equity fund’s SIP is held for more than 12 months, only gains above ₹1 Lakh are taxable at 10% plus cess.

3. Who can make an investment in SIP?

Individuals (Indian citizens), Non-resident Indians (NRIs) & HUFs are all allowed to make an investment in SIP. Further, the investor must be over the age of 18, have the necessary funds in the bank account & must be KYC Compliant. Conclusion In recent years, SIP has been the preferred method of Mutual Fund investment. It helps you save for your future Financial Goals without putting too much strain on your current financial situation. All you have to do is be mindful when selecting a fund that suits your investment horizon and make sure you pay the required monthly amount on time. LXME, on the other hand, offers time-based baskets of Mutual Funds. Hence, an investor can directly invest in them without having to think about individual goals. These baskets of Mutual Funds are backed by the expertise of the Anand Rathi Research team and are actively managed by them.

Yes, you got that right! 

SIP investing is as effortless as sipping a cup of tea!

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