Systematic Investment Plan

What is a SIP?

Systematic Investment Plan or SIP is a disciplined way of investing where the investors invest a predetermined fixed amount of money on regular intervals. The frequency of investment may be weekly, monthly or quarterly. The term SIP is generally associated with investing in Equity Oriented Mutual Fund schemes on a monthly basis.

Systematic Investment Plan is a smart financial planning method that allows the investor to invest a certain amount of money on a specified date of each month which automatically generates a substantial yearly saving. The biggest USP of SIP is that it may be started with an amount as meagre as Rs.500 a month. This makes the SIP scheme accessible for all.

How does a SIP work?

SIP is a flexible investment plan that encourages steady wealth building for the investor. When an investor plans to invest through SIP, he has an option to give a mandate to the bank to auto debit the decided amount of money to be invested from his/ her bank account. The amount is invested in a mutual fund scheme as per the pre-determined interval of investment. A certain number of units of the Mutual Fund Scheme, determined by the Net Asset Value (NAV) prevailing on the day of the transaction are allocated to the investor’s account. With each subsequent investment more units are bought and added. Since these are NAV based, the units are bought at varying rates and investors benefit from the Rupee Cost Averaging.

Even though it is advisable to continue the process of investment over a longer period of time to benefit from the power of compounding and avail higher returns, yet SIP had the provision of withdrawal of funds in case it is required by the investor. Moreover, the investor has the flexibility of increasing or decreasing the amount of investment, as per his/ her convenience.

Rupee Cost Averaging

Rupee Cost Averaging is one of the significant reasons why people prefer to invest in SIP. In order to invest in an SIP one does not need to speculate the market trends. Hence, in volatile markets, the investment through SIP covers both the highs and the lows of the market trend, allowing the investor to automatically purchase more units when the price falls. This works in favour of the investor, as the market volatility averages out the cost of purchasing the financial assets over time and he/she is able to gain maximum financial benefit in the long run.

For example, with Rs. 1000 an investor can buy 50 units at Rs. 20 per unit or 100 units at Rs.10 per unit depending upon whether the market is up or down. Thus, more units are purchased when a scheme's NAV is low and fewer units when the NAV is high. Finally, when the two cases are taken together, cost is averaged out. The longer the time frame, the larger are the benefits of averaging.

Power of Compounding

Power of Compounding: The mantra for any successful investment is to start early. This provides for a longer investment period to reap greater benefits. Longer investment time periods increase the principal amount in geometric proportions.

For example, if an investor has started investing Rs. 10000 a month on his/ her 40th birthday, in 20 year's time he/ she would have put aside Rs. 24 lakh. If that investment grew by an average of 12% pa, it would be worth Rs. 9919479 when he/ she reach 60.

However, if he/ she had started investing 10 years earlier, his/ her Rs. 10000 each month would add up to Rs. 36 lakh over 30 years. Assuming the same average annual growth of 12% pa, it would be worth Rs. 28746952 on his/ her 60th birthday - around triple the amount he/ she would have received if he/ she had started ten years later.

Advantages of a SIP

  • It is a hassle free investment as the amount may be auto debited from the investor’s bank account
  • Small investment amounts make it a pocket friendly procedure
  • Regular investment makes it a disciplined process
  • It is free from the need of “timing” the market
  • Rupee Cost Averaging provides benefit from volatility
  • Power of compounding gives the provision to amass a substantial amount of wealth from small investments over time
  • It provides flexibility of investment period and amount of investment

What is the right amount of investing in SIP?

Before starting a SIP, an investor should first plan his/ her financial goals like buying a house, saving for child’s education or planning for retirement, etc. and find out the right amount he/ she should invest periodically (monthly) to achieve those financial goals. Once he/ she is aware of the amount then only he/ she should start the systematic investment with that particular amount. Various studies and researches have shown that when an investor links his/ her financial goals with the investments, he/she continues to hold his/ her investments for a longer period of time and reaps greater benefits.

Find out the amount needed to achieve your financial goals