How to Start Systematic Investment Plan (SIP) in Index Funds?

You can start a Systematic Investment Plan (SIP) in index funds by completing the KYC, deciding your SIP amount, finding a fund, and setting up automatic payments. Once registered and approved, your SIP will start. The amount you selected will be debited from your account on the date you selected for every month. 

The process is simple, but choosing the right index and fund requires some comparison.

What Is a SIP in Index Funds?

A SIP in index funds is a method of investing a fixed amount regularly in a mutual fund that tracks a market index. SEBI explains that index mutual funds follow a passive investment strategy. Their objective is to replicate an index rather than actively select stocks to outperform it.

SIP and index fund are therefore two different concepts:

Particular	Meaning
SIP	A method of investing money at regular intervals
Index fund	A mutual fund that tracks a particular market index
Index fund SIP	Regular investments made into an index fund

How Does SIP in Index Funds Work?

An index fund SIP combines passive investing with regular investing. You choose the fund once and continue investing according to the schedule you have selected. Here are the steps to follow:

1. You Select an Index Fund

Select an index fund that matches your goals and needs. These funds track an index that has a different mix. These can be large-cap, mid-cap, small-cap, broad-market, or sector-based indices. Select one that matches your needs well. 

2. You Decide the SIP Amount

Next, you select how much you want to invest regularly. The amount of SIP will be based on the same. You can also select multiple schemes and divide the amount between them, or you can go ahead with one scheme at a time.

Your SIP amount should ideally be based on your financial goal and monthly budget.

3. Money Is Invested at the Applicable NAV

Every SIP instalment purchases units according to the applicable Net Asset Value or NAV.

For example:

Month	SIP Amount	NAV	Approx. Units Purchased
January	₹5,000	₹100	50
February	₹5,000	₹80	62.5
March	₹5,000	₹125	40

This means when the NAV is low, you will get more units. But if the NAV is high, units will be fewer. This is what we call rupee cost averaging. Remember that the risk is still there. 

4. The Investment Continues Automatically

After you register an eligible bank mandate, your SIP amount can be debited automatically on the scheduled date. This reduces the need to make a separate investment manually every month.

How to Start SIP in Index Funds?

To start SIP in index funds, you first need to decide what you are investing for. You can then compare suitable index funds and register your SIP through an AMC or investment platform. Here is the process.

1. Define Your Investment Goal

Start by understanding what your investment goals are, which can be:

• Retirement planning.
• Building long-term wealth.
• Saving for a child’s education.
• Creating funds for a future financial requirement.

Your goal also helps determine how long you may need to remain invested. This will be your baseline for fund selection as well.

2. Choose the Index You Want to Track

Many people elect a fund because it looks attractive. This is the wrong way of selection and can impact your returns too. 

For example, large-cap indices generally contain established companies. Mid-cap and small-cap indices can provide exposure to smaller companies but may experience greater price fluctuations.

Sectoral indices are even more concentrated because they focus on a particular industry or theme. Answer the following questions to start with:

• What companies are included in the index?
• How many stocks does it contain?
• How concentrated is the index?
• Which sectors have the highest weight?
• Does this exposure fit your goal and risk tolerance?

3. Compare Index Funds Tracking the Same Benchmark

Understand that two funds following the same index can still give different returns. So, you must compare the funds based on:

• Expense ratio.
• Tracking differences.
• Tracking error.
• Assets under management.
• Fund history.
• Exit load, if applicable.

Expense ratio represents the recurring expenses charged to the scheme.

Tracking difference shows the difference between the fund’s return and its benchmark return. Tracking error measures the consistency of that difference.

Since an index fund is designed to replicate its benchmark, both are useful measures when comparing similar funds.

AMFI also identifies index funds as passive funds whose holdings closely follow their benchmark.

4. Complete Your KYC

This is an important stage. KYC verifies details such as your identity and address. SEBI states that KYC is mandatory to start and so you cannot move ahead without this. 

Depending on the platform and your KYC status, you may need documents or details such as:

• PAN.
• Aadhaar or another accepted identity document.
• Address details.
• Mobile number and email address.
• Bank account information.

You may also need to complete the applicable verification process.

5. Select the SIP Option

Once your account is ready, search for the chosen index fund and select the SIP investment option rather than lump-sum investment.

Enter:

• SIP amount.
• SIP frequency.
• Preferred SIP date.
• Start date.
• Investment duration, where applicable.

Monthly SIPs are common, although available frequencies can vary between schemes.

6. Register Your Bank Mandate

Once everything is set, you must focus on the automatic payments. You are starting a SIP which means every month a fixed amount will get debited from your account. This will be on a fixed date as well. This set up is easy and will be done with the bank. 

7. Confirm and Start the SIP

Check all the details before confirming the transaction. Review the SIP details, amount, and other details well to move ahead. Once registration is complete, investments can begin according to the selected schedule.

Read Also: Mutual Fund Tips for Beginners in India

What Should You Check Before Starting an Index Fund SIP?

Starting a SIP in an index fund should focus on proper analysis of fund, returns, risk, and the time period. The key things to check are:

1. Investment Horizon

Start by checking when you need the funds. This will give you the actual tenure of your investment. It can be for some months or even for years as you may feel appropriate. 

2. Risk Level

Index funds are sometimes considered simple because they use passive management. Simple does not mean risk-free.

If the underlying index falls by a significant amount, the fund will generally move in the same direction.

Different indices also carry different risk levels. A diversified large-cap index and a sector-specific index should not be viewed as identical investments.

3. Expense Ratio

Index funds generally have lower management costs. This means their expense ratio is low but you should still compare the same between different funds. A small difference in annual costs can become more noticeable over a long investment period.

4. Tracking Difference and Tracking Error

An index fund aims to follow an index, but its returns will not match the benchmark exactly. A minor difference is fine but if the returns have a lot of gap, be mindful before you invest. 

5. Direct and Regular Plans

Mutual fund schemes may offer direct and regular plans. You must select a plan based on the needs and should also consider what kind of returns you wish to see.

6. Do Not Choose Only on Past Returns

A fund showing the highest recent return is not automatically the most suitable choice. You should also see where it invests and what the sector potential is. This will give you an idea on future returns well. 

7. Review the SIP Periodically

Once you start a SIP, you should follow it well. This is where you would be able to see if the fund is actually performing well or not. 

Review it periodically to check whether:

• The fund continues to track its benchmark efficiently.
• Your financial goal remains unchanged.
• Your SIP amount remains adequate.
• Your asset allocation still matches your risk profile.
• You need to increase your SIP as your income changes.

There is generally little need to react to every daily market movement.

Conclusion

Starting a SIP in index funds involves choosing a fund that works well for your needs. The idea is to ensure that the fund matches your needs and there is a proper risk and return ratio as well. But this is only possible when you properly analyse the fund and work to make the right choice.

But tracking an index fund is not easy. This is where you can seek help of Pocketful. Get all the insights and details you need to start investing well. 

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