SIP and Mandates

Different ways of setting up your SIP, and various types of mandates to enable automatic debit from bank account

Most retail investors prefer SIPs over any other mode of investments, reason being it's automated, and drives the whole thing on auto-pilot.

It should be abundantly clear that SIP only automates the process of investing, and keeps investors disciplined. It's a behavioral easing tool.

If you manually purchase (lumpsum first purchase, or additional purchase), for same amount, on SIP date; you'd receive same NAV and units against those NAVs.

There's no difference in return, whether you invest via SIP or invest manually, as long as it's the same amount on same dates as SIP dates, in same set of funds.

SIP puts your investments on auto-pilots. That's all.

Benefits and Downsides

Before we go into how this automation works in SIP, it's better to understand what are benefits and downsides of this automation.

It's certainly helpful for the fund house. Steady cash-inflow commitment means fund management can project their future income with some certainty. There's a reason why SIPs are promoted to investors so much so often in past decade, that it's synonymous with investing and investment assets itself.

Benefits for the investor:

• Can just set it and forget it, then focus on other areas of job, life etc.

• Prevents looking at the market before investing, thereby removes some bias a lot of people might have.

• Helps investor avoid seeing large losses up front.

Potential downsides could be:

• Keeping you out of the market

  SIP is a form of rupee-cost-averaging, but it also keeps your entire principal from getting into market at once.

• False sense of security

  Just because you're averaging purchase price, doesn't mean you would not see losses. If market is trending down, no SIP can prevent you from seeing losses.

  It's possible to get low returns after years of SIP. There are small-cap funds that have had zero or sub-zero returns after certain 5-year periods of SIP.

  Equity is a volatile and risky asset, and it's better to accept that.

• Returns vs Corpus

  People are obsessed with returns, and less focused on final corpus. Say, you did an SIP, which generated 11% p.a. return in a year. Also assume, if you had made a lumpsum investment at the beginning of the year in the same asset, it would've generated 9% p.a. return.

  Even if SIP return is higher here, corpus size would be higher for lumpsum investment.

  It's easy to show this assuming initial investment of 120 INR vs 12 month SIP of 10 INR per month. In SIP, return of 11% would be applicable to each leg of SIP, but for varying duration.

  Investing 120 INR all at once would've taken corpus to 120 * (1 + 9/100) INR = 130.8 INR over a year.

  Investing via 10 INR / month SIP, would've generated 127 INR (refer to any online SIP calculator).

  Despite being able to get higher return, the lumpsum one wins out, because the corpus experienced those returns longer.

  It's possible to get higher return from SIP, and yet lose out in final corpus, compared to a lumpsum with lower return over same period.

What people don't realize, is even if they are doing SIP, they are still investing using lumpsum mode.

When you do a monthly 10k SIP in a bluechip equity fund, you are doing it because that's the most you can afford to invest that month. And if you could invest more, you would've had a bigger SIP amount.

Real question of rupee-cost-averaging arises when you come into huge capital, comparable to your annual income or more, but much higher than your monthly income.

In a situation like this, is it wise to invest all of it at once, or do an STP (Systematic-Transfer-Plan)? That's a topic for a separate discussion, and not within scope of this one.

How SIPs Work?

At the time of writing this, it's to be noted that not all SIPs are real SIP.

A real SIP is one where fund house recognizes it as a systematic purchase. It'd be marked as such, in your account statement from fund house or RTA. Even your CAS (consolidated account statement) would mark it as a systematic purchase.

There are platforms (Coin, Piggy, MFUtility etc.) that offer some form of pseudo-SIP, which would be an SIP from your point of view (money getting automatically debited from bank, and invested into a fund, every month), but the fund house won't record it as an SIP purchase.

This is an important distinction process-wise, i.e., how it works under-the-hood; but as mentioned above, won't make a difference in your corpus size or return.

Going forward, when we use the term SIP, we'd mean to say "real SIP" - one that shows up as systematic purchase in your account statement.

SIP is a contract between three parties:

• You

• Your bank

• Biller Intermediary / Fund house

There are platforms like BSE StAR or MFUtility or even PayTM Money, that can act as biller intermediaries for SIPs. It doesn't necessarily have to be an AMC or fund house.

Biller intermediary sends a bill to your bank in advance (some send in 30 days advance, while some like BSE might send it 9 days in advance), before your SIP date.

Assume you've an SIP 5th of a month. Then, about 10 days before (around 25th of previous month) that your bank would get a bill for SIP amount from the biller intermediary.

Your bank might or might not notify you, depending on what alerts you're supposed to get from bank.

This gets queued in bank's internal bill processing systems, and would be processed on 5th of the month, as that's your SIP date.

Processing of bill means the bank would debit this SIP amount, present on the bill, and send it to biller intermediary.

Biller intermediary would forward that amount to fund house or its RTA, along with details of your SIP purchase (your personal details, folio number, fund name, amount of SIP etc.).

Now comes the question - how can a biller intermediary send bill and take money out from my account, without my consent or explicit intervention? Don't they need a netbanking OTP?

That brings us to the next point - Mandate.

Bank Mandates

A mandate is an authorization from your end, that this certain biller, identified by a specific URN, can approach the bank at any time with a bill and directly debit your bank account without needing any intervention from you.

Mandate creation takes some time - banks wait for a while (cooling-off period, or time-to-set-up), to allow the account holder to come forward, in case this was set up mistakenly or if this was a fraudulent activity.

There are more than one ways to set up a mandate. Note that a mandate is specific to a biller, and linked to URN of the biller.

Generally speaking, these are different types of mandates:

• NACH mandate

  Can be set up via paper-form submission at bank by your biller. Bank verifies it based on your signature matching with the one in bank's record.

  Takes up to 30-45 days to set up.

• e-NACH mandate with Aadhar (deprecated now)

  NPCI had an Aadhar OTP based mandate set-up process, but it was rendered obsolete through judgement of Hon'ble Supreme Court in September 2018.

  Basically, if you had an Aadhar linked to your bank account, you could authorize the mandate with an Aadhar OTP to NPCI.

  Use to take up to 4-5 days to set up.

  This covered most banks in India, except a few PSB ones not under NPCI framework (like, Allahabad bank, for example).

• Billpay Mandate (most common)

  Some billers have special deals and contracts with some of the big banks uin India, that you'd find them listed in bill payment section of the netbanking portal or app from the bank.

  Most fund houses, and biller intermediaries like BSE StAR would be listed as pre-authorized biller in portals / apps of HDFC, SBI, ICICI, IDBI, Kotak, Axis, Yes Bank, Federal Bank etc.

  If this is the case for you, you can simply select the biller of your choice, and enter URN provided by your biller in your netbanking portal / bank app.

  Takes up to 7 days to set-up. And once set up, you can modify the limit amount from your bank portal itself.

So, which one should you use? As always with most things, it depends.

NACH is universal process for mandate creation. It'd work with any biller, any bank. It's time-consuming, but works. However, it's also error-prone, because it's verified based on signature.

Billpay mandate is most convenient and transparent to end users - you can easily delete the biller from netbanking later if you wish to delete the mandate, you can even stop payments on some incoming bills through netbanking (some banks offer this).

Sometimes, biller intermediaries like BSE would allow paying for a lumpsum order with NACH or e-NACH mandate. For you, the end user, the process is one-click. You don't have to wait for any OTP, no need to worry about payment failures. Just place the order in lumpsum mode, and let the biller reach out to your bank to deduct the payment - one-time.

You could think of it as one-click payment.

But BSE as an intermediary don't allow for lumpsum payments with Billpay mandate (the mandate you've set up via netbanking).

There's one process of mandate being tried out by Zerodha and PayTM Money - creation of e-NACH Mandates via digital signing from netbanking. This mandate, once created, might not be visible in your netbanking portal or banking app. However, we haven't included it yet, because it's a new process, and not enough feedback is available on its failure rates, convenience etc.

FAQ

These are some common queries we see in advice threads and other corners of internet, regarding SIPs and mandates.

• My SIP date was today, but no money has been deducted yet. What do I do now?

  This is an aspect of MF you've to learn and remember - unless it's a liquid fund and order amount is above 2L; fund house can process orders without actually receiving the amount.

  It's to account for payment gateway delays, bank bill-processing delays etc.

  All order confirmation emails from fund house or RTAs carry this warning: units allotted are provisional and subject to fund realization.

  Actual bank debit might happen on same day as SIP date, or next business day after SIP date.

  However, you should contact customer support of the intermediary, if the amount hasn't been debited from your bank even after one or two business days from designated SIP date.

  You'll get NAV of the actual SIP date (effective SIP date, if actual SIP date was a holiday that month)

• Today is my SIP date, but it's a Sunday. What do I do now?

  Relax. If SIP date is a holiday or non-trading day in a certain month, it'd be processed on next available trading / business day.

  You'd get NAV of that effective SIP date. It won't cancel or fail your SIP.

• It says first payment can be made now. Would this be lumpsum or SIP? Which NAV would I get?

  Assume you want to start an SIP on 20th of a month, and today is 1st.

  Some platforms and most AMCs would give you an option to make first-purchase on 1st of the month itself, for that installment.

  It'd be a lumpsum payment, with SIP limits applicable - but it doesn't matter, because we've already discussed above that mode of investment has no bearing on your returns or investment corpus.

  You'd get NAV of 1st, and not that of 20th. And your SIP would start next month of 20th (because this month's installment is going in today as first purchase).

• What should be the payment limit of mandate I'm setting up?

  Most likely, your intermediary you're transacting with, would give you a recommended amount. You're better off following that.

  Note that, you cannot edit a NACH or e-NACH mandate, same way you can edit a bill-pay mandate. So, it makes sense to set a high amount as limit for NACH mandates.

  It should be higher than SIP amount you're planning to invest.

  Actual debit from bank would be your SIP amount, not your payment limit.

  Payment limit is a daily limit on how big a bill your biller can send. It's there for security reasons, same way your Debit card has a purchase and withdrawal limit.

• Can I migrate my mandate to another platform?

  In almost all cases, you won't be able to. Mandate is identified by URN, and as you switch platform, your biller's URN would be different.

  You'll have to cancel the existing mandate, set up a new mandate following process & guidelines of new biller / intermediary.

• How do I delete this mandate I have?

  If it's a billpay mandate set up through your netbanking or banking app, you can delete it yourself.

  For other types of mandate, you can approach your bank and the intermediary. Most banks ask you to visit a branch in person to remove mandates, but some banks would also accept it over email.

  If you're having issues with removing a mandate, your bank's relationship team is better suited to handle this query.