Systematic Investment Plan (SIP)

Context:

The number of Systematic Investment Plan (SIP) cancellations in India more than tripled to 162.3 lakh in April 2025 compared to March. Contrary to perceptions of investor panic amid market volatility, this spike was primarily due to a SEBI circular enforcing stricter rules on failed SIP payments.

Systematic Investment Plan (SIP)

A Systematic Investment Plan (SIP) is a disciplined method of investing in mutual funds, allowing investors to invest a fixed amount at regular intervals instead of a lump sum. SIPs help investors build wealth gradually through consistent and automated investments.

What is SIP in Mutual Funds?

• SIP stands for Systematic Investment Plan
• Enables small, regular investments in mutual funds
• Reduces the need for market timing
• Promotes disciplined and long-term investing

How Does SIP Work?

• A fixed amount is automatically debited from the investor’s bank account at chosen intervals (e.g., monthly).
• The amount is invested in the selected mutual fund scheme based on the Net Asset Value (NAV) on the date of investment.
• With each contribution, new mutual fund units are added to the investor’s portfolio.
• Over time, the investor builds a large corpus through compounding and regular contributions.

Example: SIP vs Lump Sum

Suppose you want to invest ₹1 lakh in a mutual fund:

• Lump sum: Invest entire ₹1 lakh at once
• SIP: Start a monthly SIP of ₹500. The amount will be deducted every month on a fixed date and invested in the mutual fund.

Types of Systematic Investment Plans

1. Regular SIP
   • Fixed amount at fixed intervals
2. Top-Up SIP
   • Increase investment periodically (e.g., annually or semi-annually)
   • Useful for adjusting contributions with rising income
3. Flexible SIP
   • Vary your investment amount based on your cash flow
   • Offers flexibility in amount and investment date
4. Perpetual SIP
   • No fixed end date
   • Continue investing until you choose to stop or redeem

Key Benefits of SIP

1. Disciplined Investment Habit
   • Automates savings and builds consistent investment behavior
   • Ideal for investors with limited market knowledge
2. Rupee Cost Averaging
   • Buys more units when market is low and fewer when high
   • Reduces average cost per unit over time
3. Power of Compounding
   • Small investments grow significantly over time
   • Reinvested returns generate more earnings (compound interest)
   Example:
   • Investing ₹1,000 per month for 20 years
   • At an average 10% return, grows to ₹7,18,259
   • Your total investment = ₹2,40,000; returns = ₹4,78,259
4. Convenient & Hassle-Free
   • Auto-debit or post-dated cheques can be used to set up SIP
   • No need to track the market regularly

SEBI Circular on SIP Invalidations

• Issued on January 3, 2024 by SEBI.
• SIPs with more than three consecutive failed installment payments (daily, weekly, monthly, fortnightly) are deemed invalid.
• SIPs with quarterly and bimonthly contributions become invalid after two consecutive missed payments.
• Asset Management Companies (AMCs) must process cancellations within 10 days of investor request.
• SEBI set a deadline of April 1, 2024, for AMCs and AMFI to provide transparent data on cancelled SIPs.

BS