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What is an SIP (Systematic Investment Plan)?
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A Systematic Investment Plan (SIP) is a way to invest in mutual funds by contributing small amounts at regular intervals. In fact, you can start with as little as Rs. 500 and choose how often you'd like to invest – monthly, quarterly, and so on. Once you set up your SIP, your investments become automated. Your chosen amount will be automatically transferred to your selected mutual fund on the specified date. Systematic Investment Plans (SIPs) are a good way to build wealth over time using this ‘consistency is key’ approach. It's important to note that the earlier you begin saving and investing, the better your financial prospects will be when you reach retirement age. So, starting a timely SIP investment can help you achieve your long-term financial goals while managing associated risks effectively.
Benefits of investing through SIP
A Systematic Investment Plan (SIP) allows you to invest an amount of your choice at regular intervals. Daily, weekly, fortnightly, monthly, or quarterly – choose the frequency that’s right for you!
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Affordable: Start with as little as Rs 100 or Rs 500.
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Flexible: Choose how often you want to invest.
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Growth potential:Build wealth over time with small instalments.
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Beginner-friendly: Invest in the financial market without worrying about timing it.
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Discipline: Inculcate an investing habit
Returns
Returns
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The power of Rs 1,000 monthly SIP
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With SIPs, an investment of even Rs 1,000 a month can potentially grow to almost Rs 10 lakh in the long term.
For example, let’s assume you start a monthly SIP of Rs 1,000 in an equity scheme and where you expect to earn a return of 12% per annum. This table below shows how your wealth can potentially grow with time*.
| No. of years | Invested Amount (in Rs.) | Corpus Size (in Rs.) |
|---|---|---|
| 1 | 12,000 | 12,809 |
| 5 | 60,000 | 82,486 |
| 10 | 1,20,000 | 2,32,339 |
| 15 | 1,80,000 | 5,04,576 |
| 20 | 2,40,000 | 9,99,148 |
*This is for illustration purposes only. This example assumes a fixed and consistent rate of return. Mutual fund returns are not guaranteed and can fluctuate based on market trends. Past performance may or may not be sustained in future and is not a guarantee of any future returns.
This growth is thanks to the power of compounding. When you invest in a mutual fund scheme, you potentially earn returns. If these returns are reinvested, you can potentially generate further returns on these. This phenomenon of earning returns on returns is known as compounding. As your investment base keeps growing each time you reinvest your returns, the potential growth of your investments can accelerate, creating a snowball effect.
As you can see, with SIPs, even small but steady investments have the potential to build wealth over time. And the earlier you start, the better it is.
Why opt for an SIP to invest in mutual funds?
Investing in mutual funds is not difficult or expensive. SIPs give you the freedom to invest as much as you like at a frequency that suits you.
Disciplined investing: Once you set up an SIP, the instalment is debited from your bank account at your chosen frequency – daily, weekly, monthly etc. It’s a one-time process that can help you reap lifelong growth opportunities.
Professional management: Once you invest, investment experts do the rest. Each scheme is overseen by a fund manager, who designs and manages your portfolio based on their expertise.
Rupee-cost averaging: With rupee-cost averaging in SIPs, you can focus on your long-term goals without having to time the market. SIPs do the work for you.
In an SIP, a fixed amount is invested at regular intervals. So, you purchase more units when markets are down and fewer when they are up. Over time, this typically reduces your per-unit price – which means you earn more if the market goes up. This is known as rupee-cost averaging.
Flexibility: You can start a new SIP with an increased amount when your income increases. You can also decrease the amount, stop your SIP, or pause it if unexpected expenses come up.
How does SIP investment work?
Here’s how SIP works
Each time you invest through an SIP plan, your money is used to purchase mutual fund units at the current Net Asset Value (NAV). This means your holdings grow incrementally with each contribution, steadily building your mutual fund portfolio.
For instance, let’s consider monthly investments of Rs. 1000. If the NAV is Rs. 10 per unit, your first instalment buys you 100 units. If the NAV increases to Rs. 20 later, your next instalment purchases 50 units. Conversely, if the NAV drops to Rs. 5 subsequently, you acquire 200 units with your third instalment. By the end of these transactions, you’ll own a total of 350 units. This strategy, known as ‘rupee-cost averaging,’ helps investors navigate market fluctuations effectively.
Features of an SIP investment
Mentioned below are some of the important features of SIP investment:
Flexibility: SIPs cater to your financial needs. Unlike traditional investments, you can adjust the investment amount easily based on your financial situation and goals. You can also opt for SIP step-up to get closer to your investment objectives.
Convenience: SIPs automate the investment process. A fixed amount is automatically deducted from your bank account each month and invested in your chosen mutual fund scheme. No manual transactions are needed.
Pause or stop option: Life can be unpredictable, and there may be times when you would need to temporarily stop your SIP due to financial constraints. SIPs allow you to do this without significant penalties.
Avoiding Market Timing: SIPs don't require you to predict market movements. Instead, they promote regular and disciplined investing at fixed intervals, reducing stress and encouraging a long-term perspective.
How to invest in SIP?
Here’s a step-by-step guide to initiate SIP investments:
Research: Identify a mutual fund scheme that aligns with your investment objectives, risk tolerance, and time horizon. Compare different schemes based on asset allocation, expense ratios, and the experience of fund managers.
Registration: Sign up with your chosen mutual fund house. Complete the registration process by submitting your KYC documents (e.g., Aadhaar Card, PAN Card) and bank information. You can also seek the help of a distributor to invest in mutual funds.
Select amount/frequency: Choose the investment amount for your SIP and the frequency of contributions (monthly, quarterly, etc.). Note that minimum investment requirements can vary between funds.
Set up bank mandate: Establish a bank mandate for your SIP to automate contributions. This authorization enables the mutual fund provider to deduct SIP payments directly from your bank account on schedule.
Things to consider before investing in SIPs
While investing in SIP can help you build long-term wealth, it is essential that you consider the below-mentioned things before starting your SIP investments:
Financial goals Before you start an SIP, define your financial goal, whether it's a vacation, a big purchase, or a retirement corpus. Set a clear timeline.
Investment amount Determine how much you need to invest each month to reach that goal. You can use the SIP calculator above for help.
Risk appetite Make sure your SIP investment aligns with your risk-appetite. Also, once you invest, make sure you regularly review and adjust your plan if your financial goals or circumstances evolve.
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Frequently Asked Questions (FAQs)
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The minimum SIP investment amount can be as low as Rs. 500, but it varies depending on the mutual fund scheme.
Compounding means your money earns returns on both the initial investment and the returns already earned, accelerating wealth growth.
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Disclaimer: The calculator alone is not sufficient and shouldn't be used for the development or implementation of an investment strategy. This tool is created to explain basic financial / investment related concepts to investors. The tool is created for helping the investor take an informed investment decision and is not an investment process in itself. Mutual Fund does not provide guaranteed returns. Past performance may or may not be sustained in future and the same may not provide a basis for comparison with other investments. Investors are advised to seek professional advice from financial, tax and legal advisor before investing in mutual funds.
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- Bajaj Finserv Asset Management Limited has been referred to as Bajaj Finserv AMC.
Copyright: All Rights reserved at Bajaj Finserv Asset Management Limited
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