Thinking of starting an SIP? Here are some fundamentals to get you started

Systematic Investment Plans (SIPs) are a powerful investment tool that combines the dual advantage of disciplined savings while harnessing the power of compounding. The key, however, is to invest consistently.

Written by Adhil Shetty
Updated: December 5, 2023 02:08 PM IST

The vast variety of mutual funds now available for investment helps ensure there is something for every investor. (Photo: Unsplash)

Ease of investing and promising returns make mutual funds a preferred investment option for many. The widespread popularity of mutual funds has most recently been highlighted in BankBazaar’s annual survey titled the ‘Savings Quotient’ which aims to understand saving and investment patterns across India. This year’s survey, which included 1675 men and women aged between 22 and 45 years, notes that that mutual funds are among the top three investments chosen by Indians. Closely followed by fixed deposits.

The vast variety of mutual funds now available for investment helps ensure there is something for every investor. The most common method to invest in mutual funds is via SIP or a Systematic investment plan. If you are planning to begin investing in mutual funds, here is a short guide on SIP to help you begin your investment.

What is an SIP?

An SIP is one of the modes of investing in mutual funds. This systematic and disciplined approach allows investors to invest a fixed sum of money on a regular basis, typically monthly, in a mutual fund scheme of their choice. This can foster the habit of regular saving and investing irrespective of market conditions.

Features of SIP

SIPs are widely popular among retail investors for the many advantages they offer. However, like all investments, they do have risks, which investors must be aware of before investing. Let’s take a look at some notable features of SIPs.

Regular contributions: One of the biggest benefits offered by SIP is that it makes mutual funds accessible for many investors. You can begin an SIP investment with a sum as low as Rs.500 per month. As your income increases, you can up your regular investment amount to fulfill your financial goals.
Rupee cost averaging: Mutual fund performance is influenced by market conditions. When the markets are down, investors can purchase more units of mutual funds with their fixed monthly contribution versus when markets are rallying, and fewer units can be purchased owing to higher prices. This reduces the average cost of investment over time.
Compounding benefits: By investing regularly over the long term, investors benefit from the power of compounding. The returns earned on the investment are reinvested and can boost your investment significantly over time. Let’s understand this with an example: If you invest Rs 10,000/month at an average return rate of 12% for 10 years, your total principal investment at the end of 10 years would be Rs.12 lakh, while your returns will be Rs.23.23 lakh. With compounding, after 20 years, the same investment amount could generate Rs.99.91 lakh. In the first year, investing Rs.1.2 lakh produces returns of Rs.8,093, resulting in a sum of Rs.1.28 lakh. The subsequent year’s investment of Rs.1.2 lakh, coupled with the previous year’s sum at 12% generates Rs.15,371 in returns. Compounding intensifies over time, and after 20 years, staying invested for an additional five years could nearly double the sum to Rs.1.89 crore, doubling again to Rs.3.52 crore in the next five years.
Flexibility: Investors can choose the frequency of their SIPs (weekly, monthly, or quarterly) and can also adjust their investment amount as per their financial goals and circumstances.
Diversification: SIPs are an easy way of diversifying your portfolio. Via SIP, you can invest in a variety of mutual funds across asset classes that suit your financial goals and help you build wealth.
Ideal for long-term goals: For the power of compounding to work, it is often advised to stay invested in mutual funds for the long run. SIPs facilitate that by helping you invest in mutual funds to fulfill long-term goals, such as retirement planning, children’s education, or wealth creation, as they allow investors to ride out market volatility over time.

How to Maximise Returns

Starting a SIP is a great way to plan for future financial goals such as children’s education or retirement planning. SIPs can help you generate long-term wealth by allowing you to invest regularly. However, you can maximise your SIP returns by increasing your investment amount as your income increases or whenever you have surplus funds at your disposal. Let’s understand this with an example. You start an SIP of Rs.1000 in 2024 with a 10% yearly top-up, your SIP instalment will increase to Rs.1100 in 2025 and Rs.1210 in 2026. Assuming a CAGR of 15%, in 20 years you would have created wealth worth Rs.1.33 crore. Your deposit during this period would be Rs.24 lakh. By topping this SIP annually by 10%, you will be able to create a corpus of approximately Rs. 2.5 crore, with an approximate total deposit of Rs. 68.7 lakh.

Systematic Investment Plans (SIPs) are a powerful investment tool that combines the dual advantage of disciplined savings while harnessing the power of compounding. The key, however, is to invest consistently. Doing so will help you achieve your long-term financial goals with ease.

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