Systematic Investment Plan (SIP) is a way to invest your money in mutual funds. It enables you to invest money in fixed amounts in a mutual fund periodically. SIP allows you to invest money in mutual funds over a period in a disciplined manner.
You can invest amounts as low as INR500 per instalment in a systematic investment plan (SIP). You can choose the frequency of investment according to your convenience. It can be daily, weekly, or monthly.
Consider you have INR 1,000 to spare every month. You can start a monthly SIP with that amount. You have to keep investing INR 1,000 every month on a specified date. This small amount of money will keep growing without affecting your monthly expenses much. If you remain invested long enough, your fixed instalments will grow into a large maturity amount that will come in handy in the future.
Why Invest in SIP?
SIP has some advantages making it an attractive choice for investors. They are:
You Can Start Investing With A Small Amount
You can start small with SIPs. This makes them more accessible to individuals, even with low incomes. You can invest small, affordable amounts regularly over a period of time. Some SIPs even allow you to initiate a SIP with amounts as small as INR 100 per month. These small savings accumulate value over a period, without exerting much pressure on your pocket. Even a small amount of INR 500 can bring you significant returns. Consider that you invest INR 500 every month for 10 years in a SIP with an interest rate of 10%. After 10 years, the interest earnings on your investment will be INR 43,276. Your total invested principal amount will be INR 60,000 and the maturity amount will be INR 1,03,276.
SIP Encourages Disciplined Investment
A systematic investment plan gives you investment discipline over time. It encourages you to set aside money for investment before you spend your money. It helps you in attaining your long-term financial goals. You can give auto-pay instructions to your bank to automatically debit the amount on the due date for the SIP. It is advisable to choose this date close to your payday if you are a salaried individual. This ensures that you have enough balance in your account for the SIP payment.
The Benefit of Rupee Cost Averaging
The money you invest in mutual funds purchases mutual fund units at their present net asset value (NAV). In the case of a SIP, you invest a fixed amount in each instalment. When markets fall and the fund’s NAV is low, your investment brings you more units. When the market rises and the NAV increases, your money buys fewer units. Over a significantly long period, this averages out the mutual fund units’ cost. As a result, investors do not have to time the market.
For instance, a mutual fund’s NAV is INR 50. You have invested INR 5,000 and purchased 100 units. The markets fall in the next month, bringing down the fund’s NAV to INR 40. With your investment of INR 5,000, you can now buy 125 units. Now, if you calculate the cost of each unit, you will notice that it has come down to INR 44.44. This is because of the cost averaging.
SIP Gives You the Benefit of Compounding
Your SIP investment brings interest in two ways:
- On your principal (the total amount invested)
- On your interest income (which gets added to your principal)
In mutual funds, compounding indicates the interest on your investment’s returns. In the long term, when your investment’s returns increase, compounding allows your money to increase exponentially. You can calculate the maturity amount for different periods by using an online SIP calculator and see for yourself how your money grows over time.
Consider an example. You have decided to invest INR 3,000 every month in a systematic investment plan with an interest rate of 10% annually. At the end of the first year, your accrued interest will be just above INR 2,000. At the end of the first year, your maturity amount will become ~INR38,000. If you choose to continue investing INR 3,000 per month for another year, your annual investment amount remains the same at INR 36,000. But, the interest earned increases. The accrued interest amount at the end of the second year will be INR 8,002. The total maturity amount will be (72,000 + 8,002) = INR 80,002 at the end of the second year.
If you continue investing, the interest amount at the end of five years will be INR 54,247. It will be ly INR 2.6 lakhs at the end of ten years. From being a small proportion of the principal amount in value at the end of the first year, your interest earnings will have grown to more than 70% of your total investment amount at the end of ten years; the total investment amount will be INR 3.6 lakhs at the end of 10 years.
Now imagine you have decided to invest a higher amount in a SIP with a higher interest rate and for a longer duration. If you invest INR 10,000 per month in a plan with an average return of 12% the following table will show how much your money will grow over different periods.
| SIP Amount (INR) | Years | Invested amount (INR) | Average Returns (%) | Total Maturity Amount (INR) |
| 10,000 | 10 | 12,00,000 | 12% | 23,23,391 |
| 10,000 | 15 | 18,00,000 | 12% | 50,45,760 |
| 10,000 | 20 | 24,00,000 | 12% | 99,91,479 |
| 10,000 | 25 | 30,00,000 | 12% | 1,89,76,351 |
| 10,000 | 30 | 36,00,000 | 12% | 3,52,99,138 |
Your final maturity amount at the end of 30 years will be just below ten times your principal investment over this period. Setting aside INR 10,000 per month can bring you INR 3.53 crore in 30 years. Now, that’s tremendous growth from being just a small proportion of the principal amount. Such is the power of compounding!
When Is The Right Time for Initiating a SIP?
We have seen how your money grows over time. The longer you remain invested, the higher your returns will be. So, it is advisable to start investing early. In this way, your money will get more time to grow. When you invest early, you get the dual advantage of rupee cost averaging and compounding.
Rules You Must Follow to Improve Your Returns
- Develop a disciplined approach.
- Be patient with a long-term approach.
- Do not stop your investments mid-way.
P2P Lending – An Alternative Investment Opportunity
You should diversify your investments across different instruments and asset classes. Doing so increases your returns and reduces risk. If you have a low-risk appetite, you can invest in safer instruments such as bank fixed deposits and sovereign gold bonds. You can invest in equities if your risk appetite is high. One of the rapidly growing investment opportunities in India, enabled by technology, is P2P lending. LenDenClub offers a flexible maturity peer-to-peer investment plan (FMPP®). By investing in FMPP®, you can expect returns of up to 10–12%* per annum. The platform’s AI-based mechanism hyper-diversifies your investment into small amounts, some as small as INR 1. This reduces your risk. You can start your investment journey with even INR 10,000.
Conclusion
A systematic investment plan can be a valuable addition to your investment portfolio. Along with significant returns, investment in a SIP also enhances your financial discipline. This discipline will prove to be useful for you while making other investments as well. But, one must remember that risk is inevitable. Similar to other investment opportunities, SIPs also carry risks. SIP investments’ trajectories are dependent on market behaviour. Hence, it is advisable to limit your monthly SIP payments to curtail your risk exposure and reduce the burden on your monthly expenses.