The term SIP has been made so popular these days that it’s synonyms with Mutual funds (it’s not the same, actually). Maybe this confusion has something to do with the universal “Mutual Fund Sahi Hai” campaign, which has put the term “SIP” on everyone’s tongue.
A SIP or Systematic Investment Planning is a mere tool that helps you to invest regularly in mutual fund schemes. It helps you to spread out your investments in the mutual fund schemes over a period of time. Although there are other ways of investing a sum in the market, most mutual fund advisors recommend investing through the SIP route in mutual funds rather than lumpsum investments, if you are a novice investor. And the reason for that shall be seen in today’s lesson. So, let’s get started!
The subjects covered in this chapter:
- What is a SIP?
- Why should you go for the SIP?
- What are the benefits of SIP?
- How much money do you need to start a SIP?
- Can you customize your SIP?
- SIP calculator & itS working
1) What is a SIP?
A SIP or a Systematic Investment Plan allows an investor to invest a fixed amount regularly, staggered over a period of time, in a mutual fund scheme. This investment methodology is typically staged for an equity mutual fund scheme.
2) Why should you go for the SIP?
Since your investment is dispersed regularly without relying on the market swings or the index movement, it inspires for the financial discipline to your way of life. For instance, if the market conditions aren’t favorable for investment at a particular period, you are left standing at the figurative crossroads thinking about the next step. But this predicament gets a clear direction with the money automatically getting invested at regular intervals. This technique, bags the instrument of trade at every spectrum available, thereby averaging out your investment substantially to generate a hefty kitty for yourself & your family in the future.
3) What are the benefits of SIP?
There are numerous benefits to SIP. Some of them are as follows.
If you’re a small-time investor and do not possess the resources to play with the big league players, this method empowers you with one of the most precious resources, time. With SIP, even the retail investors, like yourself, can earn above-average returns than investing in traditional instruments like Recurring deposits, Fixed deposits, and PPFs, and play with moderate risk exposure. The risks component is averted due to the diversified portfolio of the scheme, with only a fraction of your earnings dipped into the market.
SIP looks out for your convenience and even authorizes your banks to make hassle-free payment without your involvement every single time. This is made possible with a little piece of paper called the Mandate. This paper needs your authorization in the form of signature. Nowadays, the fund house and AMCs got electronic means to get this accomplished. Basically, this mandate grants the necessary permission for the funds houses to make the necessary deductions at the time of fund accumulations.
If you’re thinking about short-term gains, then SIP is definitely not the way for you. If you wish to build good wealth with the minimum amount invested in a staggered manner, then you need to wait and wait long. Patience bears the best fruit. The amount generated over a span of 20 years would be much higher than the total garnered over 5 years.
There is no lock-in period under SIP in open ended funds. You can jump ship anytime with this plan, and you are even entitled to increase or decrease the investment amount, as per your convenience. Of course, later into the chapter, we shall look into this strategy with some examples.
SIP help you mix up your price exposure in the mutual fund scheme of your choosing. The average price of the accrued units slides either way across the scale with the market whipsaws. You get more units when the markets are lagging, and fewer units with markets are booming. But you, as an investor, are bound to the regiment of saving in a regular manner through SIP. This style of investing, balloons your units in the scheme at a lower average purchasing cost. Thus, when redeeming the units at the higher NAV, you end up with lakhs or crores in your balance.
But to get from here to there, to the land of riches, you need to start early in life to avail the maximum benefit of SIP strategy.
There’s another ingredient to sweeten your corpus pot and it’s probably the main bit; it’s the compounding effect. Your investment starts compounding from the time of your first investment until the very last. This little formula helps you meet your long-term financial goals.
Here’s an example of the power of compounding.
Let’s say you’ve kept aside Rs. 10000 each month as an investment. You’ve begun your investment today and you’ve decided to break it after 25 years. So, for the next 25 years. that amount would pool up to Rs. 30 lakhs. But wait, is 30 lakhs enough to sustain your current lifestyle in the future? Is it enough to live well into your retirement?
To answer these questions, let’s approach this in another manner.
Now, let’s look at another example where you decided to park your money into the SIP scheme. Again, let’s keep the parameters of investment the same as in the previous example. You put up Rs.10000 per month for a period of 25 years and if your wealth grew by an average of 10% per annum, the magic of compounding takes hold and widens your money bag to hold a value of Rs. 1.24 crore! So you tell me, which value rings a louder bell in your mind right now? The 30 lakh corpus or 1.24 crore corpus?
These are the given luxuries of investing in SIP schemes. And if you’re wiser to the market tantrums, you’ll definitely glance over these points to make a strategic play.
4) How much money do you need to start a SIP?
Using the SIP model of investing, you can start with a minimum of Rs. 100, depending on the scheme policies and conditions put up by the AMC/ fund houses. This amount can be adjusted to your wish to achieve your financial demands in the future.
5) Can you customize your SIP?
Yes, you can customize your SIP. Though the most popular SIP way is investing a fixed amount every month, you can customize the way your money is positioned into the SIP schemes. Many fund houses allow investments in weekly, monthly, quarterly, fortnightly, half-yearly or annually terms.
- Top-up/ Step-up SIP allow you to increase the SIP amount periodically as time progresses.
- ‘Alert SIP’ is another form of the investment plan which sends you an alert when the markets are down, so you may decide whether to purchase some more units of the same scheme.
- You may set up a maturity date for the scheme you’ve invested in, as per your goal requirement. And in case you’ve opted for the ‘Perpetual SIPs’, you don’t have to choose the end date. Once the goal is met, you can discontinue the SIP by sending the required documents, either offline or online, to fund houses to halt your investments and redeem the units at the NAV presented.
- Some fund houses even offer you the option to trigger the SIP funding at the predetermined NAV, index level, etc. It’s termed as ‘Trigger SIP’.
6) SIP calculator & its working:
Every fund house furnishes their fund’s scheme with SIP calculators. This special calculator helps you get a rough estimate of the capital you would’ve made and the expected returns for your monthly SIP investment, based on a projected annual rate of return.
You need to input your monthly SIP amount, set the investment period, the Expected Annual Returns (%) and adjust the same for future inflation.
Here’s how a SIP calculator looks. Over here, we’ve considered the scheme SIP calculator of Axis Focused 25 Fund. This shows the returns compiled if the monthly amount of Rs.1000 was invested for 5 years, from 25th Sept. 2013 to 25th Sep 2018.
The blue line is your returns, ballooned over the years, and the green line is the amount you’ve invested in the 5-year period.
You may even get the generic SIP calculator, where you’re allowed to adjust the SIP amount, period and even the expected yearly return. In the example below, we’ve considered Rs.1000 invested for the same 5 years, at an average yearly return of 10%.
So, how does it actually compound the principal amount?
Let’s understand this with some simple examples to calculate the wealth gains made over a period.
If you invest Rs.1000 per month and keep investing the same amount for a period of 20 years, the amount deposited in the scheme would amount to Rs. 2.4 lakhs. This amount gets compounded (as seen in the image below), and finally, at the end of the 20 Year span, you’re left with a kitty of Rs.7.24 lakhs, assuming a compounded annual growth rate of 10%.
If you invest Rs.1000 per month and keep increasing the investment by Rs. 5000 per year, and keep up the routine for 20 years, the amount deposited in the scheme would amount to Rs. 17 lakhs. This amount gets compounded (as seen in the image below), and finally, at the end of the 20 year time, you’re left with a bulk sum of Rs. 30.8 lakhs, assuming a compounded annual interest rate of 10%.
As you see from the 2 basic examples, in case 1, you’re making a return of +201.88%, with +66.87% in profit margin/return margin.
In case 2, you end up lowering your returns. Here your returns are +123.34%, with +55.22% in returns margin
Of course, your corpus increases considerably in case 2, and in case 1, you’re making good returns margins. So, it’s important to define your own investment choices and financial goals beforehand.
That covers the topic of SIP & the workings of SIP calculator. For more useful articles on Mutual Funds, trading, investing and market knowledge, visit our Investor Education section.
(Note: This content is for information purpose only. Avoid trading and investing based on the information given above. Before investing in stocks or mutual funds, please conduct proper due diligence)