Every person wishes to live a comfortable life in terms of health and finances. Now as we all know, this requires money. So unless you are earning exorbitantly, you might want to plan your finances starting today.

However, if you want to start small and inculcate a saving habit, a SIP may help you achieve your goal. To understand the meaning of SIP and how it can align with your financial goals, take a few minutes to read this blog.

What Is the Meaning of SIP?

Systematic Investment Plans, or SIP, allow you to invest a fixed sum of money in a mutual fund at predetermined intervals for a long period of time. It lets you pick your interval based on your suitability and use it as a medium to invest in funds in a disciplined manner. 

Let’s say you invest ₹500 in a mutual fund through SIP on 2nd March, 2023. This means that the same amount will get invested in the fund again on a monthly, quarterly or semi-annually basis.  

Why Should You Start Investing in SIP? 

If you have a big expense lined up, you might not be able to gather a large sum of money in one go. But had you been investing small sums over a period of time, it would have become your saving grace. 

Through SIP, you can start your investment for an amount as low as ₹500. Over a period of a few years, you can build your wealth and also mitigate risk at the same time. You can do this at a pace that you are comfortable with without having to blow up your budget.

There is no such thing as the ‘best time’ to start your SIP investments. All you need is the determination to start and the will to be consistent. Markets are bound to fluctuate, so you can never pick the lowest or the highest point. 

How to Start Investing in SIP?

With the introduction of online platforms and apps, the process to start investing in SIP has become quite easy. You just need to follow a few steps, and you can start your investment journey.

Step 1: First of all, you need to prepare your documents in advance. You would need your PAN card, address proof, and a digital photo to start with.

Step 2: Now, for your KYC, you can visit any AMC website for the same. You can also complete the process through any authorised bank or post office. This is a mandatory process, and you can do it both online and offline. Some online platforms also allow you to do KYC verification through Aadhaar OTP. 

Step 3: Next, you need to register yourself as a new investor on the website of AMC or the online platform through which you want to invest. It would ask you to furnish your PAN card and bank details.

Step 4: Now select the scheme that you wish to invest in. Since this is the step of utmost importance, take due care. 

Step 5: Now select an amount that you are comfortable with depositing on a periodic basis. It can be monthly, quarterly, semi-annually, etc. The same amount will get invested in the mutual funds on a recurring basis. 

Step 6: You will also have to choose your mode of payment, i.e., whether you want to invest through NEFT, RTGS, Net banking, One-time mandate, etc.

Step 7: Once you submit these details, the concerned AMC will send you a confirmation via email. If there is any discrepancy in the submission process, that will also be communicated to you.

How Does SIP work? 

When you invest in a SIP, you get units of mutual funds in exchange for the amount you have put in on a periodic basis. This keeps repeating for every SIP investment you make. However, the concept of SIP is not limited to just this. It works on two core concepts:

1. Rupee Cost Averaging: It is not news that markets keep fluctuating. Since you invest a fixed amount of money in a SIP at every interval, based on the market trend at that time, the number of units you receive changes. 
   
   Let’s say you invest ₹1,000 in a SIP where one unit is ₹100 at present. So you get 10 units of the fund added to your account. At the next payment cycle, this per unit cost rises to ₹200 per unit. 
   
   This time you will receive only 5 units in your account. Similarly, on some other due date, if the market is bearish, you can get a higher number of units in your account.
   
   Since the markets constantly fluctuate, it also averages out your cost for every unit you receive. This relieves you from the stress of constantly worrying about market trends, and you can continue to invest your money with mitigated risk.
2. Compounding: The true power of SIP lies in the concept of compounding. The more time you allow for your funds to ripen, the stronger the effect of compounding. 
   
   With SIP, you do not need to wait to collect a substantial sum of money to start investing. Depending on how early you start, you can gain much better returns. Let us see it with an example:
   
   Say two people X and Y start investing in a SIP with an average CAGR of 12%. X started with ₹1000 at the age of 20, and Y started with ₹3000 at the age of 40. They both invested the money till they attained the age of 50. 
   
   Now, in the case of X, he remained invested for 30 years and received roughly around ₹30.8 lakh. In the case of Y, he remained invested for 10 years and roughly received around ₹6.7 lakh. 
   
   As you can see, even though Y started with three times the investment of X, his returns are still much less than that of X. This is all because of the time the investments compounded for.

Advantages of Investing in SIP

Here are some of the ways SIPs can benefit you: 

1. Disciplined investment habit: Regular deposit of a predetermined sum of money inculcates a disciplined saving habit in you. It compels you to put aside a certain sum of money at fixed intervals, even if you forget at times as the entire process is automated. 
    
2. Start Small: With SIP, you can start investing with as little as ₹500. It is cost-efficient, and you can get exposure to a range of stocks with little investment. 
    
3. Mitigated risk: The concept of rupee cost averaging brings the risk factor down by a certain notch. It defends you against market fluctuations, thus allowing you to invest worry-free. 
   
   This concept bends your investment according to the present market performance and averages out the value of your money. This not only helps you mitigate risk but also allows you to start small.
4. Flexible investments: Investing in SIP allows you to choose your tenure and investment amount as per your suitability. You can modify them as per your financial goals. 
    
5. Convenience factor: With the introduction of online payment modes, investing in SIP has become very easy. You can also enable a one-time mandate to instruct your bank to automatically transfer the money on every due date. 

Tax Implications of SIP 

Tax implications of SIPs vary based on how long you have held the units for. Each instalment counts as a separate investment, and its holding period is determined according to when the investment was made.

When you terminate your SIP, the First-In-First-Out (FIFO) method is applied to determine the holding period of every unit.

Say, for example, you started your SIP on 1st January 2022 and terminated it on 1st March 2023. Now when you sell your holdings, only the units credited in the month of January and February 2022 shall be considered long-term holdings. This is because they were held for a period longer than one year.

The taxation of your SIP depends on the tenure of investment and the type of mutual fund you have invested in. The types of capital gains that you can realise from two primary types of mutual funds based on the holding period of the fund units are as follows: 

The taxation of the capital gains realised from equity and debt-oriented funds are as follows: 

It is to be noted that if you invest in a tax-saving mutual fund through SIP, then every deposit you make in the plan gets locked in for three years from the date of such deposit. 

Conclusion 

Now you must have understood the meaning of SIP and how it works. If you have decided to start investing in mutual funds via SIP, make sure to consider all the associated factors before putting your money in. 

Some of these factors include the time frame of your investment, the amount you wish to invest, your financial goals, etc. Make sure to also analyse your risk appetite and the market trends. Always remember investing smart is the key to healthy financial planning.