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Online SIP investment - A Complete Guide

18 February 2024

7 mins read

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Table of Contents

How to open an SIP online?

You can open a SIP online by just following a few simple steps:

Open a demat account

You can't invest in the stock market until you have a Demat account. Therefore it becomes very important for anyone who wants to buy a SIP online to open a demat account first. If you already have it you can proceed towards the next step. Also if you want to open an account you can get in touch with a stock dealer and get it done within a few minutes. Several banks also offer options to open demat accounts and offer support and services for the same.

Selection of mutual Fund

The next step is to choose a mutual fund in which you want to invest your money in. The best way to do this is to look at the old figures of that particular mutual fund. Although it may not be a correct indication of its future, doing this will help you in making better decisions once you get an idea of how the fund has performed in the past.

Invest in the mutual fund

Once the necessary details have been provided, you can invest in the desired mutual fund and set up SIPs for the same so a part of your salary or earning is automatically invested in the fund.

Once all these steps are completed you are now eligible to start a SIP online. Also, make sure to provide the correct bank details from which the money will be debited for your SIP. You also need to make sure that the bank account has funds at all times.

How does Systematic Investment Plan (SIP) work?

After enlisting yourself in a certain mutual fund scheme for a particular amount that amount will be taken out from your bank account every month. Moreover, it's upon you to choose the date on which you want the deduction to take place. Plus the frequency of SIP can be selected as well. But the most commonly used frequency is monthly.

Net Asset Value (NAV) determines how the value of your mutual fund investment will rise. Just like the stock has a price similarly a mutual fund that we buy has an equivalent unit which is referred to as Net Asset value (NAV). As this Net Asset Value rises your mutual fund investment also rises. Mutual funds usually give you a return of 11-14%. The best thing about SIP is that since you are investing every month in a disciplined manner then you don't have to keep thinking about whether the market is up or down. For laymen, SIP is beneficial as it normalises the losses in the long run so you won’t have to study the market closely to decide if you want to invest when the market goes up or down.

Now that you are familiar with the basic idea of SIP, let’s discuss the two ways in which you can start SIP, Direct Plan and Regular Plan

Regular Plan vs Direct Plan

Any mutual fund that you want to invest in will offer two plans through which you can invest in the fund, regular and direct plan. In case you have sufficient knowledge and want to invest in the fund on your own without any distributor, then you should opt for the direct plan. It allows you to save on the expense ratio (defined below) and offers greater returns as opposed to the regular plan in the long run.

You can also invest through a distributor via the regular plan. In this, you can invest through a middleman like a distributor or a broker who is paid by the AMC (charged to the plan) and helps you by facilitating the transaction.

You can decide which plan to opt for based on your knowledge and another important factor, expense ratio:

The expense ratio is the percentage that will be deducted from the total amount. It will not be invested, which means that if your expense ratio is 1% and you have given Rs.100 to the mutual fund the Rs.99 would go towards investment and the mutual fund will keep 1% which is Rs 1 for its own expense.

Since managing a mutual fund scheme involves various costs like sales, distribution and fund management expenses, all of it is covered under the expense ratio. These expenses are under limits as they are regulated by SEBI.

Conclusion

While SIP does not eliminate the risk involved with investing, it surely reduces it to a great extent and helps grow your money. For example, if you are getting a return of 11% in 8 years it means that your money is becoming two and a half times in just 8 years. Once you are comfortable with SIP, it would have become a normal SIP then it is a great time for you if you have the knowledge to consider other timed instruments.SIPs are a great way for you to continue with very little risk and continue to enjoy a healthy return!

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Frequently Asked Questions (FAQs) on SIP

Why do mutual funds need money for their own expense?

Expenses are involved in managing the mutual fund. Be it the management fee, workers, office space or related operations, all of it required money. When one opts for the regular plan, this fee is paid by the investor so that they can rest while their investment transactions are handled by the distributor.

What is the exit load?

It means if you exit before time then there is a deduction that is made by the mutual fund. Some amount will be deducted and the rest will be returned to you. This is the fee charged by Asset Management Companies (AMCs). Moreover, before pulling out of a mutual fund, you also have to ensure that you don't have a short-term capital gain tax, because if you sell that mutual fund before one year then the short-term capital gain tax will be levied which is around 15%. The long-term capital gains tax is charged at the rate of 10%, on the gains above Rs 1 lakh in a financial year.

How to invest a lump sum amount?

It is advisable to invest your lump sum money in a debt mutual fund. A debt mutual fund is the same as a fixed deposit where you get a set rate of return. And this return is usually more than FD but not very high. So you will retain a typical gain or a steady stake from that. Put that lump sum amount into a debt mutual fund and make a SIP from the amount that it generates. For example, if you have got a lump sum amount of Rs.1 lakh don't invest that Rs.1 lakh in the market instead put it in a debt mutual fund. Then you can start a SIP(of around Rs5000) which you know that you will be able to maintain even after this Rs 1 lakh finishes.

How does investing every month result in compounding?

This is a fundamental question that many people may have. The answer to this is that you have to decide on a date every month when you will invest consistently in the stock, the mutual fund or the small case, no matter what is worth on that date you will still invest. The mindset behind this not following this approach is that today I have bought this share or mutual fund for let's say Rs.100 next month it is for Rs.110 then why should I buy the share at an inflated price? Why I am not waiting for the share to go down from the price of Rs.100 is because then I will get more returns! And this chaos is what puts the fundamental investment idea at stake! On the contrary, opting for SIP reduces losses in the long run due to the normal ups and downs of the market.

If I have a previous investment in equity Mutual Funds without a Demat account can I invest in Rajiv Gandhi Equity Saving Scheme?

No according to the RGESS (Rajiv Gandhi Equity Saving Scheme) that is declared by the central government merely a fresh investor is qualified for investing in it. And any investor who invests in mutual funds or shares without a Demat account isn't said to be a new investor. Hence they are not eligible to invest in Rajiv Gandhi Equity Saving Scheme.

Is it right to say that we should never stop a SIP?

SIP should be stopped only in three situations:

First when you realise you have chosen the wrong fund.
The fund you are investing in is an established underperformer.
Stop your SIP in an equity fund when you are on the verge of your ultimate financial goals.

Is SIP safe or not?

SIP is a zero-risk method of investment in mutual funds. But it is always advisable to invest in mutual funds when the market is not overrated. Moreover, while investing in mutual funds through SIPs you do not need to worry about the market timings and have to invest a very small amount of money every month. The price may be high or low in different months therefore considering the long term the amount that you will pay will be an average of high and low

Are taxes imposed on Systematic Investment Plans (SIPs)?

It depends on the type of mutual funds you are investing your money in. For instance, tax @10% in excess of Rs One Lakh is imposed on the returns from equity mutual funds if it is redeemed after a year but if you do so before a year of investment you will have to pay a tax of 15% on your profits. Also in the case of debt mutual funds, you will be required to pay tax at a rate of 20% if you redeem it before three years.

Can I stop SIP at any instance?

Yes, you can do so. As SIP can be stopped at any time which is opposite to the case of fixed deposits and recurring deposits. After stopping your plan you can either redeem your money or can continue to invest in the mutual fund. But it is usually not recommended to do so. Yes, there is only one reason that God forbid you do not have money but never stop it because the market is low, returns are not good or you don't know whether to do it or not. As the main purpose of SIPs is to give you the average cost which is a good way for you to invest in.

Can the amount that is invested in SIP be reduced or increased?

Although it can be done but is not advisable at all. As it can be a very complicated process. A simple solution to this can be to start a new SIP in the same mutual fund with the increased or the decreased amount.

But one thing to consider here is that although it is not very common, some mutual funds may stop accepting new SIPs due to many reasons. In such a case you will have to cancel your SIP and you will be refrained from starting the new one from the same mutual fund. Therefore it is advisable to not cancel the existing one but start a new one from a different mutual fund.

Do SIPs have a lock-in period?

It depends on the type of mutual fund you are investing in. Some do have a lock-in period. For example ELSS mutual funds have a " lock-in period” of three years.

Should I invest in mutual funds based only on NAV?

No NAV (Net Asset Value) shouldn't be the only criterion for anyone to invest in mutual funds because that is not something that determines the growth or the performance of the mutual fund.NAV is the same value in a mutual fund which is similar to stock price when we purchase a stock. NAV is just a number do not rely on it to invest in mutual funds you analyze their past returns and consistency before investing in it.

Is diversification in choosing mutual funds a good idea?

Diversifying can be a good choice but diversifying a lot is stupidity. Because at the end you have to see in which companies are this mutual fund investing and that is public data.So if you are invested in a mutual fund where that holds stocks of Nykaa and you buy another mutual fund that also holds Nykaa stocks and you buy more of the same stocks. Then you are holding just Nykaa Stocks and that can be done through one mutual fund also. So you do not need more than 3-5 mutual funds.

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