SIP or Systematic Investment Plan, is a way of investing in mutual fund schemes. SIP is not an investment option, it is an investment style. Here, one buys mutual fund units gradually.
Some people like to invest their money in lump sum. Some like to invest in small amounts. SIP allows one to invest money in small-small amounts in mutual fund schemes.
Because SIP is the easiest way of wealth building for a common man. Why? Because it puts ones investments on auto-pilot. Every month, the money gets invested automatically without any extra effort/attention required from the investor.
When investment horizon is as long as 20 years, the best SIP plan will be those mutual funds which invests in multi cap stocks. By the way focused investing in value mid-cap stocks can also fetch good returns.
Step-up SIP is also a ‘systematic investment plan’ but with an added feature. This added feature makes it a great tool for common man. How? Because the potential of wealth creation substantially increases when one is investing, for long term, in a step-up SIP.
Try my SIP calculator. Use this SIP calculator to estimate how much wealth can be accumulated by investing systematically in mutual funds through SIP.
Example: Investing Rs.1,000 per month for next 10 years, @15% p.a. return, will build a wealth of Rs.2,78,600. Here the invested amount in these 10 years is Rs.1,20,000.
Check for yourself: How much wealth can be build by starting a monthly SIP of Rs.2,500/month for 15 years, @15% p.a. return.
| Monthly Contribution (Rs.) | |
| Expected Return p.a. (%) | |
| Time (in years) |
| SIP - Appreciated Amount (Rs.) | |
| SIP - Total Investment over Time (Rs.) | |
| SIP - Effective Annualized Return (%) |
[Read more about SIP’s effective annualised returns]
Through SIP, one can accumulate mutual fund units gradually. This gradual accumulation over time, can build a reasonably big corpus.
What makes SIP good?
SIP makes investment affordable and convenient for small investors. One can buy units of mutual funds in small-small quantities each month. As quantities purchased are small, the investors does not feel the burden of investment.
SIP’s (Systematic Investment Plans) have proved to be more sustainable for common men, hence people stay invested longer. Longer investment time horizon means, higher returns (in equity based plans).
Mutual Fund SIP's are like Recurring Deposits, but with higher returns. A Recurring Deposit can yield 6-7% returns per annum. But an equity based SIP can yield returns between 12% to 20% p.a. in long term holding scenario.
One can start investing in mutual funds through SIP with as little as Rs.100 per month. This low cost of investing eliminates any reason for not investing. It is a convenient way to invest money and become richer.
It is the "Power of Compounding" that can make even a common man crorepati. But the problem is lack of enough spare cash for investing. SIP is a best compromise to take advantage of compounding.
SIP facility offered by mutual funds can be used in any way one wants. But for me, one of the best utility of SIP is, accumulation of funds for most critical, long term goals, of life.
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To understand the real advantage of SIP, we cannot miss to take a note of the power of compounding. There is no point in investing even a dime if one is not aware of the “Power of Compounding” of money.
Investing Rs.1 per month @8% p.a for 3 years. Rs.1 per month becoming Rs.40 in 3 years. Using the same multiplying factor of 40, suppose one does a SIP of Rs.500 per month for 3 years. It will generates a corpus of Rs.20,000 (40 x 500)
Investing Rs.1 per month @10% p.a for 6 years. Rs.1 per month becoming Rs.99 in 6 years. Using the same multiplying factor of 99, suppose one does a SIP of Rs.1,000 per month for 6 years. It will generates a corpus of Rs.99,000 (99 x 1000)
Investing Rs.1 per month @12% p.a for 9 years. Rs.1 per month becoming Rs.194 in 9 years. Using the same multiplying factor of 194, suppose one does a SIP of Rs.1,500 per month for 9 years. It will generates a corpus of Rs.2,91,000 (194 x 1500)
Investing Rs.1 per month @14% p.a for 15 years. Rs.1 per month becoming Rs.612 in 15 years. Using the same multiplying factor of 612, suppose one does a SIP of Rs.5,000 per month for 15 years. It will generates a corpus of Rs.30,60,000 (612 x 5000)
This way, each month SIP bought specific number of units for its investor. By the end of the 12th month, total number of all units purchased is 397.989 (see above table). These 397.989 units had a market value of Rs.29,436. Invested value was Rs.24,000.
The gain happened anyhow. Irrespective of the fact that in between months, NAV of mutual fund was very volatile. There is a very important point to note here. “The quantity of units purchased is dependent of the NAV“.
This is what is called as spreading the investment to minimise the risk of loss. Here the invested fund was spread into 12 months.
Not everybody would prefer investing via SIP route. Yes, this is a fact. SIP is not for all type of investors. It is important for us to understand, in which cases SIP will work, and in which cases lump sum investing is better. Let me give you few examples, based on which this difference will become very visible.
NAV of mutual fund is bullish. Price is moving up. During this course of time (say 4 months), the NAV of mutual fund rose from Rs.10 to Rs.28. In this case lets see, which investing style is better: Lump-sum or SIP.
Hence we can conclude that, in bullish market lump sum investing will be more profitable.
NAV of mutual fund is Volatile. Price falls, then recovers. During this course of time (say 4 months), the NAV of mutual fund first fell from Rs.23 to Rs.12. Then it rose to Rs.30 levels. In this case lets see, which investing style is better: Lump-sum or SIP.
Hence we can conclude that, in volatile market, SIP will be more profitable. How does this information helps us?
In real life scenario Condition 2 is more prevalent. Market remains generally volatile. Condition 1 is a rare phenomenon. Hence, we can safely conclude that, SIP plans will prove better in normal market scenarios.
What is the difference between ‘direct plans’ and ‘regular plans’? Direct plans have smaller expense ratio than regular plans, hence their returns are also higher. For the same mutual fund, direct plans gives higher returns.
One of the better ways to start a SIP is through mobile app. One such reliable mobile app is offered by “Funds India”. Using this mobile app, one can buy mutual funds units with click of a button. This mobile can also be used to buy stocks, savings plans, etc.
By merely investing Rs 1,000/month one can build lakhs. See the below examples:
From these figures we can understand that, the more time we give to SIP, the bigger will be the corpus. Why? Because in later years the corpus multiplies faster. Let’s understand this with an example.
Jack and Peter are two friends. Both are 22 years of age. They will retire at 60 years of age (after 38 years from today).
Jack decided to start a SIP to fund his retirement plan. He started with a decent sum of Rs 2,500/month in a diversified equity fund. The fund generated an average return of 15% p.a. Investment time span was 38 years.
By investing Rs.2,500 / month, Jack built a corpus of Rs.5.8 Crore in 38 years. Peter realised the importance of SIP later. Hence he started the SIP after 5 years from Jack. He also began investing with the objective of accumulating Rs 5.8 crore by the time he is 60 years of age.
But in order to do it, he has only 33 years in hand (Jack had 38). By investing Rs.5,300 / month, Peter built a corpus of Rs.5.8 Crore in 33 years
Peter regretted and cursed himself for starting to invest late. Why? Because to build the same retirement corpus (Rs.5.8 Crore), Peter had to spend Rs.5,300 per month compared to Jack who was investing only Rs.2,500 per month.
Why this happened? Because Peter started 5 years later than Jack.
So if you also want to become a crorepati by the time you retire, start investing in SIP Plan from today.
