All you need to know about Systematic Investment Plan (SIP)

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Plant a seed today and envision a mature tree in the future, laden with fruits and providing comforting shade when needed. Investments in mutual funds through a Systematic Investment Plan work the same way. SIP is an investment approach that allows you to invest small amounts consistently in a chosen mutual fund scheme at fixed intervals. Off late, Indian investors have increasingly warmed up to the idea of SIP as is evident from the AMFI data. As of December 31, 2023, Indian mutual funds have crossed 75 million SIP accounts and the SIP flows have crossed Rs. 17,000 crore per month. Before we get into the advantages of investing through SIP, let us start by understanding the basics of SIP.

How SIP works?

Investing through SIP is easy and hassle-free. First, complete the KYC process online or offline. Then, sign up for NACH, which lets the SIP amount be automatically deducted from your chosen account. Once the money is deducted, you get Mutual Fund units. The number of units is calculated by dividing your investment amount by the Net Asset Value (NAV) of that day. As the NAV keeps on fluctuating with market movements, you end up buying more units when prices are low and fewer when prices are high. This is called Rupee Cost Averaging!

Further, SIP works on the principle of Power of Compounding. The money you put into SIP does not just earn returns – it gets added to your initial investment. With each round of this process, there is a systematic buildup of money, leading to exponential growth over time. So, by combining Rupee Cost Averaging and the Power of Compounding, SIP helps you steadily grow your wealth in a smart and effective way.

Understanding SIP with an example:

Imagine Peter, a 25-year-old working at a private bank, with aspirations of creating a substantial retirement fund. With his current salary, he decides to invest Rs. 10,000 each month through SIP for a duration of 35 years, anticipating an annual return of 12% p.a. After doing the math, it becomes evident that he will have invested a total of Rs. 42 lakhs. By the time he turns 60, his accumulated corpus is projected to be around Rs. 6.5 crores. Certainly, markets may not offer a consistent annual return; however, Peter’s overall returns will remain unaffected as they will balance out over the years.

Types of SIPs:

There are various variants of SIP such as Top Up SIP, Flexi SIP, Trigger SIP, Goal based SIP to name a few. Investors seeking to reach wealth goals faster generally prefer to use Top Up SIP wherein they increase the SIP amount by a certain amount or percentage every year. Individuals seeking to optimize market opportunities often choose Trigger SIP, a strategy that involves purchasing units based on predetermined market conditions or events, instead of following regular intervals. Similarly, various types of SIPs cater to different purposes for investors.

Other Benefits of SIP:

Low Cost: SIP is accessible for individuals across all income groups, as the minimum investment amount is typically very low. You can initiate a SIP with as little as Rs. 100, excluding ELSS funds.

SIP is for All: Contrary to a common misconception that associates SIP solely with equity investments, investors have the flexibility to choose the type of fund based on the duration of investment and their individual risk appetite. For those considering long-term investments, pure equity funds are suitable, offering potential growth over long term.

On the other hand, individuals looking for short-term and lower-risk options can explore debt funds. Investors seeking the benefits of both debt and equity can opt for Hybrid funds, such as Balanced Advantage Fund, providing a balanced approach to investment.

To sum up, investing small amounts regularly is key to making the most of this disciplined approach. It is advisable to start your SIP early and continue it for a longer duration to leverage compounding benefits. Moreover, using tools like the SIP calculator is useful for effective financial planning. These calculators help estimate potential returns, allowing you to make informed decisions and align your investment strategy with your goals.