SIP - Invest in Best Systematic Investment Plans

Unlike a lump sum investment, you spread your investment over time with an SIP. Therefore, you don’t need to have a large amount of money to get started with your mutual fund investment through SIPs. By investing via an SIP, you are forced to set aside a sum at regular intervals, which help you instil a sense of financial discipline in the long run.

How Do SIPs Work?

Every time you invest in a mutual fund scheme through an SIP, you purchase a certain number of fund units corresponding to the amount you invested. You don’t need to time the markets when investing through an SIP as you benefit from both bullish and bearish market trends.

When the markets are down, you purchase more fund units while you purchase fewer units when the markets are surging. Since NAV of all mutual funds are updated on a daily basis, the cost of purchase may vary from one SIP instalment to another. Over time, the cost of purchase averages out and turns out to be on the lower side. This is known as rupee cost averaging. This benefit is not available when you invest a lump sum.

Benefits of investing in mutual funds via SIP

With an SIP, you can get started with your investment with a small amount and reap significant returns in the long run. It’s simple and the most convenient way of investing in mutual funds. It also brings financial discipline.

Convenience

You can invest in a disciplined and phased manner through an SIP. It gives you the convenience of starting your investment with as low as Rs 100 a month.

Rupee Cost Averaging

SIP helps you invest in equity funds without having to time the stock market. You invest a fixed amount regularly across stock market levels when you invest in equity funds through the SIP. It helps you buy more equity fund units when the stock markets are crashing and lesser units when markets rise. You will be averaging out the purchase price of equity fund units over time thereby lessening the impact of short term market fluctuations on your investment.

Lets understand Rupee Cost Averaging with an Example: Suppose you invest Rs 1000 every month in an equity fund through an SIP. Stock markets are highly volatile and the Net Asset Value (NAV) of the equity fund keeps changing. It means you will not be able to invest at the same NAV every month. If you invest Rs 10,000 every month from January to June in a particular year your SIP investment could look like this.

From the above example, the average purchase price for units of equity funds was Rs 96 (576/6) over 6 months and you purchased a total of 625 units. If you had invested a lump sum amount in January, your purchase price would have been higher at an NAV of Rs 100 and you would have bought 600 units. (Rs 60,000/100). Therefore, Rupee cost averaging has helped you average out the purchase price of units over time.

Power of Compounding

Power of Compounding helps you magnify your returns over time. It is basically a return on your returns from equity mutual funds. For example, suppose you invest Rs 100 in an equity fund which fetches you returns of 10% per annum. You do not take out your profit from equity funds which is effectively reinvested in the mutual fund and your total corpus is Rs 110. The returns you now earn from the equity fund are on Rs 110 and not Rs 100 which is return on your returns.

You can invest in equity funds through the SIP to enjoy the power of compounding. It helps if you start your SIP as early as possible and stay with your investment for the long run to enjoy the power of compounding benefit.

Lets understand the power of compounding with an example. Suppose four people, Ramesh, Suresh, Mahesh and Uday who are 30, 35, 40 and 45 years old have invested Rs 5,000 per month in equity funds through the SIP. Let's assume equity funds offer an annual return of 12%.

The table below shows their accumulated corpus at retirement at the age of 60 years.

You can use ClearTax SIP Calculator to calculate the investment amount and the final corpus.

Inference: As you see from the table, Ramesh has accumulated a corpus of over Rs 1.5 crore. It is way above the accumulated corpus of Suresh, Mahesh and Uday. The primary reason for this is Ramesh has invested for a longer period of time. Moreover, the power of compounding benefit has propelled Ramesh’s investment to a massive portfolio.

Low Initial Investment: You can invest as low as Rs 500 per SIP instalment in equity funds. It helps you start investing for your financial goals without having to wait until you accumulate a lump sum amount. However, it helps if you invest a higher amount through SIP if you want to attain your long term financial goals faster.

2x Higher returns than RD

ELSS mutual funds have the potential to provide much higher returns than bank FDs, PPF and other traditional investment options.

Ease of Investing

Investing in equity funds through SIP is a convenient way of building wealth over time. It is pocket friendly as you can invest a minimum of Rs 500 per SIP installment.SIP gives standing instructions to your bank to deduct the requisite amount every month and this amount gets invested in the equity fund.

Why should you invest in SIP Mutual funds?

Poeple should invest in SIP mutual funds because The concept of SIPs is focused on the philosophy of “Save First, Spend Next”.

With an SIP, you can invest small amounts at fixed intervals (weekly, monthly or quarterly) instead of making a one-time investment.