What is SIP? – Basics, Benefits & Returns of Systematic Investment Plans

Investors today often get confused regarding, ‘What is SIP?’. Whenever they hear the term ‘systematic investment plan, or SIP’, they immediately think of mutual funds. But what if I told you that we have all been doing SIPs since our childhood?

what is SIP

Surprised? Remember the piggy bank you had growing up? Every time you got money, whether from relatives or as a birthday gift, or even spare change lying around the house, it would go straight to the piggy bank.

The goal of the piggy bank was to save little by little so that you could buy your favorite doll or cricket bat.

In this example, your piggy bank is a mutual fund scheme and your regular investment is your Systematic Investment Plan. The doll or cricket bat refers to your financial goal.

So, there you go. While unknowingly, we have all done SIPs our entire lives.

what is SIP

But sadly, investors are still confused about the meaning of the Systematic Investment Plan (SIP) and how it works. With this article, our goal is to simplify mutual fund SIPs for you.

In this article we cover:

What is SIP?
What are the benefits of Systematic investment plans (SIPs)?
What is the best way of investing in mutual funds? – SIP vs Lumpsum
How Power of Compounding Works in Mutual Fund SIPs

What is SIP
You can invest in mutual funds in two ways:

  • Invest via SIP
  • Invest via Lumpsum

What is SIP (Systematic Investment Plan)? 

SIP means a Systematic Investment Plan. It is a mutual fund investment option where you invest a fixed amount at regular intervals. It is perfect for common investors who cannot invest large amounts at one go. SIP helps you invest regularly to achieve long term financial goals.For example: Let’s say you wanted to buy a scooter for Rs. 1 Lakh in the next 12 months. Using a SIP calculator, you found out that to achieve this goal, you will have to make a lumpsum investment of Rs. 90,909. But sadly, you do not have such a huge amount. So, will you give up on your financial goal? Fortunately, you don’t have to. Instead of lumpsum investing, you can start a monthly investment of Rs. 7,893 for the next 12 months. After 12 months, you would have accumulated Rs. 1 Lakh!

what is SIP

Now that you understand the meaning of an SIP, let’s look at the 5 important benefits of Systematic Investment Plans.

Watch this video to understand how to pick stocks for long term

What are the benefits of Systematic Investment Plans (SIPs)?

1. SIP creates investment discipline: In an SIP, a fixed amount is invested regularly. Once you register a Systematic  vestment Plan, the amount gets automatically debited from your bank account on a particular date. This makes you set aside a fixed sum for SIPs every month and spend the balance, creating a disciplined savings habit.
2. SIPs are affordable: When you start saving, you do not have huge cash to invest. SIPs are perfect in such situations, as they can be started with as little as Rs 500.

what is SIP

3. SIPs help you ‘not’ time the market: The basic aim of an SIP is to avoid timing the market. They automatically invest a fixed amount on a particular date without considering the market. With SIPs, investors do not have to spend their time tracking or timing the market.

4. SIPs help in rupee cost averaging: The biggest benefit of Systematic Investment Plan is that it helps in long term Rupee Cost Averaging. Rupee cost averaging is when you reduce the overall cost by buying units at different prices.

5. In rupee-cost-averaging:Units accumulated increases when the stock market falls & Units accumulated decreases when the stock market rises.
So, when you invest in a systematic investment plan, you get more units when the markets fall. And less units when the markets rise. Through this, your overall cost price averages out in the long term.

what is SIP

6. SIP promotes wealth creation through the power of compounding: With an SIP, you keep adding new units to your existing unit balance. This means that you generate returns on old units as well as new units. Since the gains are reinvested in the fund, you earn interest on principal amount as well as interest amount.

While talking about systematic investment plans, we also need to discuss about lumpsum investing.

what is SIP

Lumpsum investing is when you invest your entire capital at one go. The minimum amount required for lumpsum investing is Rs 5,000. In lumpsum investing, investors try to time the market. Hence it is recommended for individuals who have the time, resources and interest in tracking the markets.

What is the best way of investing in mutual funds? – SIP vs Lumpsum

What is SIP
The SIP vs lumpsum debate has been going on since ages. Some advisors recommend lump sum investment while majority support SIPs.
So, let’s finally answer the SIP vs Lumpsum debate with this simple example:The SIP vs lumpsum debate has been going on since ages. Some advisors recommend lump sum investment while majority support SIPs.

Ram & Shyam both wanted to invest in mutual funds. Ram had Rs 1 Lakh lumpsum available but Shyam could only invest Rs 8,333 per month. Since he had the capital, Ram invested Rs 1 lakh on 1st January 2020 in UTI Equity Fund – Regular – Growth.

what is SIP

Here’s Ram’s Lumpsum investment journey


Investment Amount NAV Units recieved
1st January 2020 100,000 152.327 656.48
Value of 656.48 Units at different points throughout the year
Date NAV Current Value Profit/Loss
1/1/2020 152.327 100,000 0
3/2/2020 155.944 102,374 2,374
2/3/2020 152.341 100,009 9
1/4/2020 112.979 74,169 -25,831
4/5/2020 124.372 81,648 -18,352
1/6/2020 130.611 85,744 -14,256
1/7/2020 137.193 90,065 -9,935
3/8/2020 146.715 96,315 -3,685
1/9/2020 154.657 101,530 1,530
1/10/2020 158.007 103,729 3,729
2/11/2020 163.412 107,277 7,277
1/12/2020 185.614 121,853 21,853
Total Investment 100,000
Total Current Value 121,853
Total Gain 21,853
Absolute Return 21.85%

As you can see, by investing a lumpsum amount, Ram’s rate of return was 21.85%.

Sounds great right? But wait, here’s Shyam’s Systematic Investment Journey:

Since Shyam could only invest a small amount every month, he started investing in the same fund, UTI Equity Fund – Regular – Growth through a 12-month SIP.


NAV Units
1/1/2020 152.327 54.7
3/2/2020 155.944 53.44
2/3/2020 152.341 54.7
1/4/2020 112.979 73.76
4/5/2020 124.372 67
1/6/2020 130.611 63.8
1/7/2020 137.193 60.74
3/8/2020 146.715 56.8
1/9/2020 154.657 53.88
1/10/2020 158.007 52.74
2/11/2020 163.412 50.99
1/12/2020 185.614 44.89
Total Investment 100,000
Total Units 687.44
Total Current Value 127,599
Total Gain 27,599
Absolute Return 27.60%

By investing in the same fund but via a Systematic Investment Plan, Shyam earned a return of 27.60%!

Summary of the Systematic Investment Plan vs Lumpsum Debate


Systematic Investment Plan Lumpsum
Units accumulated 687.44 656.48
Cost per unit 145.46 152.327
Returns Earned 27.60% 21.85%

As you can see, SIP wins in all parameters against Lump sum investing. The only disadvantage of SIPs is the exit load period.

In an SIP, each instalment must complete 12 months. For example, in the case of Ram, he could redeem his entire investment on 1st January 2021 without any exit loads.

But Shyam will only be able to redeem (without exit load implications) post 1st December 2021.
In an SIP, each instalment must complete 12 months. For example, in the case of Ram, he could redeem his entire investment on 1st January 2021 without any exit loads.

So, the rule is pretty simple. If you actively monitor the stock market, then you can opt for lumpsum investing. But if you have a full time job and do not have time to track the markets, then SIP is better for you.

Let us now understand how you can take advantage of the power of compounding via SIP.

How Power of Compounding Works in Mutual Fund SIPs

What is SIP


Opening Balance SIP Amount Annual Investment Returns Returns after 1 year – Power of Compounding Simple Interest
1 0 5,000 60,000 12% 64,047 67,200
2 64,047 5,000 60,000 12% 136,216 67,200
3 136,216 5,000 60,000 12% 217,538 67,200
4 217,538 5,000 60,000 12% 309,174 67,200
5 309,174 5,000 60,000 12% 412,432 67,200
6 412,432 5,000 60,000 12% 528,785 67,200
7 528,785 5,000 60,000 12% 659,895 67,200
8 659,895 5,000 60,000 12% 807,633 67,200
9 807,633 5,000 60,000 12% 974,108 67,200
10 974,108 5,000 60,000 12% 1,161,695 67,200
Total Invested Amount 600,000 Total Current Value 1,161,695 6,72,000

As you can see, the total portfolio value with power of compounding is Rs 11,61,695. But without the power of compounding, it was only Rs 6,72,000. There’s a massive difference of 72.87% in overall returns when you apply the power of compounding.

Final Thoughts:

With campaigns like ‘Mutual Fund Sahi Hai’ retail investors now realise the importance of SIPs. As an investor, with limited time and knowledge, Systematic Investment Plan is the better investment approach.

But it’s not the best investment option.

Confused? Let me explain.

what is SIP

A systematic investment plan is simply mechanical investing. It’s not smart investing. It buy units even when the markets are extremely expensive.

This is where RankMF’s SmartSIP excels over regular SIPs. As the name suggests, SmartSIP invests as per the market valuations.

  • If the markets are expensive – SmartSIP skips your equity SIP & invests in liquid funds.
  • If the markets are fairly priced – SmartSIP will double your SIP.

SmartSIP has a proven track record of generating superior returns than a regular systematic investment plan.

Systematic Investment Plans are better than lumpsum investing, But, SmartSIP is superior to regular SIP.

But only SmartSIP will not help you create wealth. You also need to invest in best mutual fund schemes.

Don’t worry. You don’t have to visit 10 different websites to get investment advice. RankMF – India’s best mutual fund research and investment platform, provides real-time ratings of more than 3000 mutual fund schemes.

RankMF also provides the SmartSIP facility absolutely FREE! So, open a Free RankMF account today & get instant FREE access to the best mutual fund SIPs in India!
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