Advantages of SIP (Systematic Investment Plan) and Why is it a Safer Approach?

When it comes to investments and personal finance management, there are quite a few options and instruments available in India. Based on your risk profile, risk appetite and liquidity requirements there are options like fixed or term deposits, postal deposits, recurring deposits, mutual funds (equity based), equities, gold investments, real estate, bonds etc.

As for the equity market linked investment opportunities, open-ended mutual funds are probably one of the easiest to pick and dispose (liquidity). Though, investing in mutual funds still has stock market linked risks, you are managing and reducing that risk by allowing your fund manager and fund house (e.g. HDFC, Reliance Capital, SBI etc) make investment decisions for you.

Investing in mutual funds through SIP (Systematic Investment Plan) for longer term will reduce these market linked risks further. Just in case you do not know what a SIP is, here’s the definition:

SIP is a method of investing regularly (e.g. monthly) in a mutual fund. It’s very similar to a recurring deposit whereby the investment amount is the same for each deposit, but you get to purchase a varying number of mutual fund units based on the current market price of the particular fund.

For example, when you open a SIP with Reliance Growth Fund for 2 years with a monthly recurring deposit of say Rs.1000/-, the amount that you invest per month is always fixed. But for a particular month, the Reliance Growth Fund’s market price (called NAV or Net Asset Value) may be Rs. 450 and some other month it may be Rs. 250 based on the equity market fluctuations. Hence, the number of units that you receive per month also varies. For example, when the mutual fund NAV is 450/- you get only 2.22 units for your thousand rupees where as when the NAV is 250/- you get 4 units (1000 / 250 = 4).

In other words, when the mutual fund NAVs are cheaper, you are getting more units and hence you average out your prices. e.g. based on the above two transactions for two months you are getting 6.22 units for 2000 rupees or your per unit cost is 2000 / 6.22 = ~321.54

My current Mutual Funds Portfolio

The following is my actual mutual fund portfolio as of June 28, 2010. I am not specifying the number of units or amount invested.

Fund name Investment Date Overall Gain
Reliance Growth Fund 22.02.2007 (SIP) 65.67%
HDFC Tax Saver Fund 15.01.2007 (SIP) 47.44%
Reliance Vision Fund 15.01.2007 (SIP) 27.44%
HDFC Equity Fund 08.08.2007 44.19%
SBI Magnum Global Fund 08.06.2007 16.43%
Franklin Prima Plus Fund 07.09.2007 5.65%
DSP Blackrock Focus 25 Fund 14.05.2010 3.08%

Off the above, the first three were done on Systematic Investment Plan with monthly contributions for at least 24 consecutive months (Ideally you need a much longer duration). You will notice that despite, the Sensex hitting 21,000 in December 2007 and correcting big time all the way to 8000 two years back, the funds invested via SIP are still returning a handsome positive figure. On the other hand the other funds which I invested also in 2007, returned digit figures the only exception being the HDFC Equity Fund which was like a fluke when it comes to timing.

The moral of the story is that SIPs for long term always return well while managing your risks.

6 Unique Advantages of SIP

The following are some of the major advantages of SIO or investing in mutual funds through Systematic Investment Plans.

#1 You don’t need to time the market

One of the key problems of investing in equities (or even mutual funds other than the SIP route) is that unless you time the market, you are in trouble. But in the case of SIPs you don’t have that issue – Just keep investing a fixed amount per month (or biweekly) via the SIP route for long term and the rest is taken care of. When the market is down you get more units and when the price is high you automatically buy smaller amounts, as explained above.

#2 It’s not a crime, if you miss one SIP installment

Unlike your bank loan EMIs, nobody will come after you with legal notice even if you miss one SIP installment due to lack of funds or you just forgot it. However, in order to make the best out of SIPs, you should have the disciplined approach of investing at the predetermined frequency without fail.

#3 High liquidity – You can terminate it any time

If you are investing in Open Ended mutual funds, you can terminate your investment at any point of time and get your deposited money in the bank within two business days. Unlike fixed deposits, there is no penalty for terminating a SIP earlier. Please note that tax saver funds usually have a lock in period of three years. This is not specific to SIP but about the nature of the tax free funds.

#4 Relatively low risk

Investing via SIPs offer reduced risk exposure to the stock markets as compared to putting money in bulk via funds or stocks. Basically, in long term you do the risk leveling without even you knowing about it and there is a automatic cushioning against the volatility of the stock market due to cost averaging.

#5 No special fees

Investing in SIPs do not need any special fees per month or at the time of opening. The entry load of the underlying instrument (i.e. the fund), if applicable, will be the only charges.

#6 Long Term Tax benfits

Unlike Fixed Deposits, the Mutual Funds enjoy long term tax benefits as the returns from these investments are not taxable if you hold them for more than a year at least. The same inherent benefit is available when you take the SIP route as well.


I hope you got some ideas about the Systematic Investment Plan and advantages of the same. Sorry if you already knew about it but this post was mainly meant for the newbies in personal finance. I shall talk about the Systematic Withdrawal Plan in another post.

Start your SIP today because any day is a good day for SIPs…

Happy Investing!

Disclaimer: It is highly advised to pick only the best and stable funds for SIP investment from well known fund houses such as HDFC Asset Management and Reliance Capital. Also, it’s not a good idea to enter SIPs on new fund offers (NFOs). There are a number of funds with proven track record of 5-10 years to choose from.

Further, I am not a Certified Personal Finance Advisor and this post is meant for educational purpose only. Always consult a qualified professional in this field or do your own homework before making your investment decisions.

20 Replies to “Advantages of SIP (Systematic Investment Plan) and Why is it a Safer Approach?”

  1. Dear Sir,

    I have invested in mutual fund for saving purpose for 5 years span through SIP route in 5 funds, 2000 per month in each fund,which are as below
    1.HDFC equity- growth
    2.HDFC top 200- growth
    3.UTI dividend yield fund- growth
    4.Reliance growth- growth
    5.Franklin india flexi cap- growth
    Can you plz tell me Is my portfolio is well diversified ?
    I think to stop investting in Franklin india flexi cap and start investting in DSPBR top 100 equity. Will it be right or not??
    PLZZ do reply at my e-id
    I will be thankful to you.

  2. @fahed,
    I am not an investment expert nor a financial adviser. However, when I look at those five funds you have I must say that you have done a lot of homework while picking them. HDFC Equity/Top 200 and Reliance Growth are the bets in their class owing to great fund managers. UTI is turning around a bit and you could try keeping it. I have a MF accounts manager friend UTI and he says that they are doing great now. As for Franklin, I do not like their funds much – probably because I had a lot of mid cap funds that were not performing.

    DSPBR (both top 200 and top 25) should be good funds for SIP, I believe.

    As for diversification, you are heavily equity oriented and that’s always a risk. However, if you are in a younger age group (< 35) and your intention is long term, I do not see a problem here. Good luck! Disclaimer: This is only my personal view and do not consider it as an expert advice. It's your money and your responsibility to manage it and invest wisely.

  3. Systematic investment plan is one and major way to create wealth. Equity investment is main for wealth creation. And SIP is a vehicle for this. Here you don’t have to time the market and have an advantage of rupee cost averaging.

  4. Hi Ajit,

    This seems to be an old post but still I would like to ask a basic question as i am new to investing.

    Even if we invest through SIP, it is MF and always linked to market. Hence no guaranteed returns. Isn’t it?

    This may be a broad question but I would like to know- how to ensure i am investing in some MF which is going to be profitable? Is MF are for risk takers only i am a low to medium risk taker i feel i should stick with something which gives guaranteed returns.

    Thank You,

    1. Jane,
      ‘Equity based’ mutual funds are linked to the stock markets and hence there’s definitely an inherent risk. However, if you pick funds managed by good Fund Managers (e.g. Prashant Jain of HDFC), in the long run, SIPs will definitely make money. This is because, the market Index cannot go to zero in a practical sense 🙂 Even if there’s a downtime, it’s likely to be corrected at some point and further during downtime, you are accumulating more units via SIP. By the way, there’s no point in having SIPs for 3 or 6 months but go long on them (e.g. Minimum of 2-3 years or even 5 years)

      If you have a low-to-medium risk profile, you need to invest in debt funds or balanced funds. Regardless of the category of Mutual Funds, you need to pick funds by good fund managers.

      Best regards,

      1. Thank You Ajith for your kind reply.

        It was insightful, for the first i came across investing in funds by good fund managers . I think debt based mutual funds are for me.

        Even in equity i’ll look for long term investment.

        Thank You,

  5. What is meant by “risk” in SIP? The maximum risk is that we get no “return”. Our principal is always safe, is it not? Or can it evaporate?

    1. When you invest in equity linked schemes there’s a chance of losing your principal as well. But when you pick a good mutual fund scheme for long term investment, it’s mostly gain – that’s how equities work, think long term.

        1. You can chose to SIP four to five mutual funds on a monthly basis, to create long term wealth. These funds should be across various categories (ELSS Tax Saving, Diversified/Multicap, Large Cap, Small Cap, Balanced). If you are worried about spreading the categories, two or three Diversified funds will do (plus ELSS if you want to focus on tax saving too).

          The following are the five funds I am SIPing now and working very well for me.

          Axis Long Term Equity Fund
          ICICI Prudential Value Discovery Fund
          Birla Sunlife Frontline Equity Fund
          Franklin India Smaller Companies Fund
          HDFC Balanced Fund

          (In addition, Franklin High Growth Companies fund and HDFC Mid Cap Opportunities fund, at times)

          Hope this info helps you. As always, do your own home work as well as read more about them too before investing. I am not a qualified finance advisor 🙂

  6. I planned to start a SIP…..Rs 1000 per month,,,please guide me which one is better……
    My age 27,investment period 12 yr.

    1. There are so many good mutual funds out there. It’s a good idea to have a basket of diverse funds i.e. say, one large cap fund, one mid/small cap, one diversified (and say an ELSS fund if you want tax benefits too and a balanced fund for derisking the portfolio). However, if you plan 1000 rupees per month, you can buy only one or two funds as the minimum investment is typically 500/- or 1000/- for most funds.

      The following are some of the good funds that may work well.

      ICICI Pru Value Discovery Fund
      Franklin India High Growth Companies Fund
      Birla Sunlife Equity Fund
      Franklin India Prima Plus

      Large Cap
      Birla Sunlife Frontline Equity Fund
      SBI Bluechip Fund
      Mirae Asset India Opportunities Fund

      Midcap/Small cap
      Franklin India Smaller Companies Fund
      HDFC Midcap Opportunities
      Mirae Asset Emerging Bluechip Fund
      DSP BR Microcap Fund

      Balanced Funds
      ICICI Prudential Balanced Fund
      SBI Magnum Balanced Fund

      Axis Long Term Equity Fund
      DSP BlackRock Tax Saver Fund

      Pick one each from the categories above.

      Disclaimer: I have investments in most of the above funds and some are on SIP as well. However, I am not qualified to advise anyone. Hence please take further expert advice before investing.

  7. Hello,

    I’m Planning To Invest 2500 rs Monthly SIP In “SBI Magnum Tax Gain”. and this is my first ever and the only investment in SIP.

    Is it fine to invest 2500 rs monthly in Single SIP or should i go for smaller amount and invest in 2 different SIP or so ..?

    Looking Forward For The Reply.

    Thanks In Advance.

    1. Of course, it’s better to put your money across two or more (up to 5 typically) mutual funds to reduce the risk and diversify. The following may be a good fund combination to SIP (Disclaimer: Consult an expert if you need to, I am not a financial advisor by profession)

      Axis Long Term Equity Fund
      Birla Sunlife Equity Fund
      Franklin India Smaller Companies Fund
      Prudential ICICI Balanced Fund
      HDFC Midcap Opportunities Fund

  8. Hi Ajith, Much appreciate your thoughts and advice on SIP. I am 32 and new to SIP’s .I am planning to invest Rs.2000 on Tax relief ’96 by Birla SL and Rs. 1000 on flexicap by Birla SL to start with. Does this sound like a good start to you having experience in SIP’s. And should i continue with the same (including annual increase whenever possible) for 5 or 10 years for the best results.Finally, how often should one review the growth of these investments..annual basis or should i wait for a few years before switching AMC’s. Hope you can help.. Thanks !! 🙂

    1. These are both good funds (i.e. if you meant Franklin India Flexicap as your second option) for SIPs. A good fund doesn’t need to be tracked on a regular basis as their 5 or 10 year returns speak for themselves. At times you may even see their CRISIL rating dropping to 2 or 3 stars on sites like MoneyControl but usually for good funds, this is temporary (as they take 1 year returns for evaluation). So, as you rightly thought, wait for a few years before switching. Hope you are going with Direct plans on sites like CAMS, to save on the management fees.

  9. Please advice I am new to SIP.. Is there are any option like I can invest a 2 lakh and wait for a long period or its is like monthly we need to invest in SIp

    1. Harish,
      SIP is more like Recurring Deposit, whereby you invest the same amount every month or quarter to build wealth in long term. One time or lump sum investment is never advised as the markets could collapse any time in which case your capital can lose overnight. When you do SIP, your buy price (NAV) of Mutual Funds is averaged out and hence you benefit in long term.

      You can start SIP with your bank, ICICI Direct etc but then they will offer only Regular schemes. Better try with Direct mutual fund schemes (meaning, no commission agents) with portals like CamsOnline

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