In a Systematic Investment Plan (SIP) an investor chooses a mutual fund scheme and invests a fixed amount of his/her choice at fixed intervals. SIP is about investing a small amount over a period of time resulting in a higher return. SIP’s are a very popular method of investing and building wealth.
Let us understand this concept with the help of an example. Suppose Neha wants to save Rs 500,000 to buy a car 3 years later. She can start a SIP of Rs 15,000 per month and reach the goal comfortably in the given time frame.
How does SIP work?
SIP works on two basic principles – Rupee Cost Averaging and Compounding
- Rupee Cost Averaging – When you invest in mutual funds through SIP you don’t need to time your investments. Investing regularly ensures that the average purchase cost is evened out in the long run. Let us understand this with an example. Suppose Hari is investing in SIP of Rs 10,000 each month. The below table shows the amount invested, units purchased and price per unit.
| Date | Amount Invested | Units purchased | Price per unit |
| Aug’22 | 10,000 | 200 | 50 |
| Sep’22 | 10,000 | 250 | 40 |
| Oct’22 | 10,000 | 100 | 100 |
| Nov’22 | 10,000 | 200 | 50 |
| Dec’22 | 10,000 | 300 | 33 |
| Jan’23 | 10,000 | 400 | 25 |
| TOTAL | 60,000 | 1,450 | 41 |
From the above table it is clear that Hari purchased the mutual fund units each month at prices ranging from Rs 25 to Rs 100 per unit. However, when you look at the total investment after 6 months the average purchase cost is only Rs 41 per unit. The phenomenon above is ‘rupee cost averaging’.
When markets rise, you receive less number of units. When markets fall, you receive more number of units. In this way the total average investment cost gets evened out.
- Compounding – When you save money consistently for a long period of time it grows exponentially due to the effect of compounding. Let us understand this with an example. Suppose Jenny starts investing for her 60th birthday at age 40. Assuming returns of 7% and a monthly investment of Rs 2,000 the total corpus at the end of 20 years will be Rs 10,48,000.
Suppose David starts investing for his 60th birthday at age 20. Assuming returns of 7% and a monthly investment of Rs 2,000 the total corpus at the end of 40 years will be a mammoth Rs 52,80,000 – which is almost 5 times the corpus accumulated by Jenny.
Types of SIP
- Regular SIP – this is the most simple SIP where the investor invests a fixed amount at fixed intervals in a mutual fund scheme. In this type of SIP, once you have chosen the contribution amount you cannot change it at a later point in time.
- Top up SIP – allows you to increase your investment amount periodically giving you the flexibility to invest higher when you have a higher income or available amount to be invested.
- Flexible SIP – this is similar to regular SIP. The only difference is that you are allowed to change the contribution amount at any point in time.
- Perpetual SIP – The SIP continues till the the individual keeps contributing at regular intervals. It only ceases when the investor provides a stop instruction to the fund house.
- Multi SIP – you can invest in multiple schemes of a fund house through a single instrument by using the multi SIP. It reduces paperwork and investors can give a single payment instruction to start the SIP.
- SIP with insurance – this SIP provides life insurance cover to investors undertaking a SIP. In case of demise of the investor during the SIP term, the nominee gets the sum assured.
- Trigger SIP – this SIP will invest in a mutual fund only if a designated event occurs. The investor needs to have market expertise to invest in such SIP’s.
Benefits of SIP
Apart from Rupee cost averaging and compounding, investing in mutual funds offers many benefits.
- Disciplined investment – SIP investing brings more discipline to your efforts towards wealth creation and corpus building. You develop the habit of keeping aside a set amount of money every month which is critical for long term wealth creation.
- Start with small amounts – SIP is meant for all people irrespective of the income earned each month. You can start a SIP investment with a minimum amount of Rs 500. Even if your income is low, you can take advantage of the Indian stock market growth by investing in SIP.
- Better returns – SIP investments generally provide better returns than investment in traditional products like fixed deposits, recurring deposits, gold, public provident fund etc. As SIP is generally done in equities, you can beat inflation costs.
- Knowledge of markets not required – SIP investments suit everyone. Even if you have no knowledge of equity markets, you can invest in a SIP and not worry about your investments.
- Convenience – SIP can be started online anytime and from anywhere. The monthly SIP instructions can be added to the bank account. The statements are available online on mutual fund mobile apps. Also the SIP can be paused and started again as and when needed (though it is not recommended to pause SIP).
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