What is SIP (Systematic Investment Plan)
Key takeaways
- SIP enables the investors to invest a fixed amount of money in a mutual fund periodically.
- SIP is an attractive investment option for those who have limited investment capital and seek to develop a disciplined approach to investing.
- One of the biggest benefits of SIP is its flexibility. You can start small, increase your contribution as your income grows, and adjust the plan when life changes.
- The real strength of rupee cost averaging is that it helps reduce the impact of market ups and downs by buying more units when prices are low and fewer when prices are high.
With a Systematic Investment Plan (SIP), you can invest a predetermined sum of money in a mutual fund on a monthly, quarterly, or any other frequency that suits your needs. Investing becomes accessible with this consistent approach, which also helps you progressively reach your financial goals.
SIPs help you stay consistent and disciplined rather than worrying about when to invest. This makes them perfect for both investors who want to achieve long-term objectives like funding their education or purchasing a home, and seasoned investors who want to expand their portfolio with manageable risk.
SIPs make mutual funds accessible to people without extensive financial knowledge by facilitating the development of consistent saving habits through automatic bank deductions. SIPs are also accessible to low-income investors due to the option to begin with modest sums, occasionally as little as ₹100.
How Do SIPs Work?
Let’s understand with an example.
SIP Details:Monthly Investment: 3,000Duration: 6 Months
Total Investment: ₹18,000Total Units Purchased: 25 + 33.33 + 40 + 50 + 30 + 20 = 198.33 units
Average Cost per Unit: ₹18,000 ÷ 198.33 ≈ ₹90.76
This illustrates the concept of rupee-cost averaging with SIPs. Inversely, a lower NAV means that the investor will get more units for the same funds and vice versa. This can help smooth out the total purchase price and minimise the impact of market fluctuations over time.
SIP vs Lumpsum - What suits you?
Let’s understand between SIP and lumpsum, what suits your requirements better.
SIPs are suitable for investors who wish to build long-term wealth and do not want their stress levels to fluctuate, whereas lump-sum investments are suitable for those with substantial capital and confidence in the market.
Understanding SIP with formula & examples
A Systematic Investment Plan is one of the easiest methods to invest in mutual funds regularly over time. SIP lets investors make small investments at regular intervals, for instance, monthly or quarterly, instead of investing a large sum. It's an investment technique that can be beneficial in creating an effective investment portfolio and in reducing market timing stress.
The returns from SIPs are mainly due to compounding. As your investments keep on producing returns, the returns that you earn in the long-term begin to earn more returns as time goes on, which means that your fund also grows.
The future value of SIP investments is generally computed by the formula:
FV=P×(1+r)n−1r×(1+r)FV = P \times \frac{(1+r)^n - 1}{r} \times (1+r)FV=P×r(1+r)n−1×(1+r)
Where:
- FV = Future value of investment
- P = Monthly SIP contribution
- r = Monthly rate of return
- n = Total number of monthly investments
For example, an investor invests ₹ 5,000 per month for 15 years at an assumed annual return of 12%; over a long period, compounding can result in a larger corpus. Even small savings can amount to a considerable amount of money over time.
What is the 7-5-3-1 Rule of SIP?
The 7-5-3-1 rule is a simple goal that typically helps to explain how long-term disciplined SIP investing can help create wealth. It focuses on a long-term investment approach, a consistent regimen and the gradual accumulation of wealth, rather than short-term get-rich schemes based on the stock market.
The basic principle is that SIP investing over a longer period can yield greater wealth after the investment period, in each period.
The idea is that SIP investing gets more effective when investors stick to their plan in both bull and bear markets. Temporary fluctuations, as seen in the short term, may impact returns for short durations, but the longer one stays invested, the more likely they are to benefit from compounding and rupee-cost averaging.
The 7-5-3-1 strategy serves as a reminder to many investors that building wealth through SIPs is typically a long-term endeavour that requires patience and discipline.
Tips on increasing corpus by multi-fold
The creation of a huge investment corpus with SIPs should not be limited to starting early, but also to scaling up investments at strategic times. Making small contribution adjustments and being disciplined with investments can make a difference in long-term investment results.
Increase SIP amount periodically
As your life stages increase, such as an increase in salary, the same should reflect in your investments. You can use step-up SIP for this and increase the amount by 5% or 10% every year. Making small contribution adjustments and being disciplined with investments can make a big difference in long-term investment results.
Invest bonuses and surplus funds
In addition to regular SIPs, you can make lump sum investments, which can lead to a further increase in portfolio growth if they are made, for example, in the form of bonuses, incentives, tax refunds or leftover savings. Extra funds invested during market downturns may also increase the number of units purchased at lower NAVs.
Stay invested for the long term
The strength of SIPs lies in compounding, which increases over time. People who invest for longer periods may do better than those who buy and sell in response to short-term volatility.
Avoid interrupting SIPs during market corrections
SIPs are more effective during market downturns, when they buy more shares at lower prices. SIPs during turbulent times offer better averaging returns and could help boost returns in the future when markets improve.
Diversify across suitable mutual funds
Depending on your financial goals and risk appetite, you can invest in equity, hybrid, or debt mutual funds to build a balanced investment portfolio. Diversification can help to enhance stability without sacrificing growth opportunities.
FAQs
What is the minimum amount required for SIPs?
Most mutual funds offer SIPs with a minimum investment of ₹100 or ₹500 per month, which makes them accessible to first-time investors.
Is it possible to pause the SIP or increase the SIP amount?
Yes, most mutual fund platforms enable investors to temporarily suspend SIPs, change SIP amounts, or increase SIP contributions through StepUp SIPs, as and when required.
How safe are SIPs during a market crash?
The advantage of SIPs is their ability to reduce the impact of market volatility through rupee-cost averaging. When markets crash, SIPs buy more units at lower prices, which helps enhance the potential returns when markets bounce back.
Is it possible to withdraw the SIP?
In an open-ended mutual fund, investors can sell their mutual fund units, in whole or in part, at any time, subject to an exit load.
Do SIPs offer any tax benefits?
SIPs investing in Equity Linked Savings Schemes (ELSS) may avail tax benefits of up to Rs. 1.50 lakh as per Section 80C of the Income Tax Act.
Which date can I start my SIP with?
Usually, investors can specify any convenient date for SIP deductions, depending on their cash flow requirements, whether after salary credit or at the start of the month.
