Systematic Investment Plan (SIP)

Systematic Investment Plan (SIP) in mutual funds would help investors to save small money at regular intervals and provide good returns over a period of time. As we just celebrated independence day, I would provide some insights about how mutual funds SIP is a good investment option and how SIP is a ticket to the world of financial freedom.

What is SIP?

The Systematic investment plan in a mutual fund is where an investor makes regular equal investments in mutual fund schemes every month or every quarter. Since the investment is done regularly, all market fluctuations would be taken care of and investments would grow over a period of time. Investors can invest as low as Rs 500 per mutual fund scheme through SIP. Equity funds gave 13% annualized returns in the last 10 years. Hence mutual funds through SIP is popular investment option especially for middle-class and low income class investors.

4 Benefits of investing in mutual funds through SIP

1) Investment discipline: Investments through SIP can be done as low as Rs 500 per month. One can opt for SIP in the prescribed format and such SIP amount would be deducted every month from investor bank account. This would create discipline of saving money every month. Let me explain with example. Ms.Maithili invests Rs 500 per month for 20 years. The invested amount would be Rs 120,000 (Rs 500 x 20 years) before considering any returns. Though it looks small amount being saved, but it is big saving if you do it for long time.

2) Rupee Cost-Averaging: When you invest every month through SIP, you would get specific number of mutual fund units. Due to market fluctations, markets can go up or down. When market goes down, you still invest fixed amount, however you would get higher units as price of stocks which mutual fund holds may go down. Means you would be buying high number of units when market is down. Similarly when market is going up, price of stocks go up and NAV of mutual fund also goes up. You would get less mutual fund units. This way you are doing rupee cost averaging and you are not paying the high price for the stocks which mutual fund scheme is holding.

3) Power of Compounding: Another major benefit of investing in mutual funds through SIP is power of compounding. Investors who start early can gain more compared to investor who are starting at later point. Let me explain this with an example. Mr.Akhil started SIP every month for Rs 1,000 at the age of 30 for 20 years. His investment amount is Rs 2.4 Lakhs and his mutual fund investment would have grown to Rs 11.5 Lakhs considering 13% annualized returns of equity funds. Ms.Apoorva started SIP every month for Rs 1,000 at the age of 25 for 25 years period. Her investment amount is Rs 3 Lakhs and her mutual fund investment would have grown to Rs 22.7 Lakhs considering 13% annualized returns of equity funds. Both invested Rs 1,000 SIP only, however Apoorva started investing earlier, hence benefitted more. That is the power of compounding.

4) Attaining your financial goals: One of the best way to achieve financial goals is investing in mutual funds through SIP. First you decide your financial goal, tenure and expected returns. Based on this you can easily plan and invest through SIP every month. Let me explain with an example. Mr.Kishore has a 1 year daughter. He want to provide for his daughter’s marriage in next 25 years for approx Rs 50 Lakhs based on current expenses. If one can consider an approx inflation of 7% per annum and 13% returns from equity mutual funds, he need to invest Rs 8,400 per month through SIP to get Rs 50 Lakhs in 25 years from now. Mr.Kishore can start investing this amount or he can invest smaller amount than this and increase his investment every year based on the salary increments he would be getting. This way Mr.Kishore can attain his goal or come closer to his financial goal. You can set-up several such goals and start investing through SIP.

Concluding remarks: Investment in mutual funds through SIP is best option to save even small amount of money. If one can invest through SIP for long term and increase the SIP amount every year, investors can create good wealth. One can come closure to their financial goals if they can plan and invest in MF through SIP.