SIP – it’s the word you come across every day, in newspapers, online, hoardings, pamphlets, conversations with friends, colleagues or even neighbours. It seems like the word of the season, and for good reason.
What is a SIP and why is everyone talking about it?
A SIP is a small step to your bigger dreams. It is a smart way to invest in mutual funds, by investing a small amount every month, which gradually becomes a big corpus, helping you achieve your financial goals. Simply put, a SIP is a periodic investment in a mutual fund for a fixed time frame, which has the potential to earn higher returns.
SIPs have recently gained popularity owing to AMFIs Mutual Funds Sahi Hai campaign to promote mutual funds as great investment tools to build wealth.
Why Mutual Funds Sahi Hai? Read 7 reasons why you should invest in mutual funds.
Why start a SIP?
SIPs are lighter on your wallet – You don’t need a lot of money to start a SIP, you can start with as little as Rs. 1,000 a month (or in some cases, even Rs. 500 depending on the fund). It’s not much, is it? That’s probably how much you might spend on a movie or dinner date. It’s easy to invest Rs. 1,000 a month, and the best way to do it is to invest it before you spend on leisure. When you get your paycheck, set aside what you need for routine expenses, invest, even save some, and then splurge to your heart’s content.
SIPs give you flexibility – With SIPs, you can choose your investment amount, the number of months you want to invest, the frequency of your investments, and the date you’d like to invest. You can even pause your SIP if required, or cancel it (however, we wouldn’t recommend this until you reach your goal).
SIPs inculcate investing discipline – With a SIP, your investments take place regularly, irrespective of how the markets are doing. With your SIPs on autopilot, you not only make sure you don’t let fear and greed rule your decisions, but also make sure you’re investing for your goals with discipline. There’s also no need to time markets.
SIPs allow you to average out investment costs – Mutual funds invest in the markets, and the markets are a volatile place to be in. However, by investing regularly through a SIP, you can average out the costs of investing, buying more units when the NAV of your fund is low and fewer units when the NAV of the fund is high. This is known as rupee cost averaging, and this makes any time a good time to invest as it minimizes your exposure to market fluctuation.
Here’s how it works:
SIP Date SIP Amount (Rs.) NAV (Rs.) Number of Units
(SIP Amount/ NAV)*
(Total cost/ number of units)
07/07/2017 5000 12.0000 416.667 12.0000 07/08/2017 5000 13.0000 384.615 07/09/2017 5000 11.0000 454.545 Total 15,000 1255.827
Notice how you got more units when the NAV was 11, and fewer at 13? That’s how SIPs help and allow you to average out investment costs.
SIPs help grow wealth with the power of compounding – Remember compound interest from school? You earn interest on not just the principal amount, but also on any other interest earned i.e. interest on interest too! What’s more, the longer your money stays invested, the more it can multiply, and with returns from mutual funds, your money gets opportunities to multiply at even higher rates. Check out the illustration below: SIP Amount: Rs. 5,000
SIP Duration (Years) Total Invested Returns 4% 8% 12%* 15% 3 ₹1,80,000 ₹1,91,544 ₹2,04,029 ₹2,17,538 ₹2,28,397 5 ₹3,00,000 ₹3,32,600 ₹3,69,834 ₹4,12,432 ₹4,48,408 7 ₹4,20,000 ₹4,85,383 ₹5,64,304 ₹6,59,895 ₹7,44,841 10 ₹6,00,000 ₹7,38,703 ₹9,20,828 ₹11,61,695 ₹13,93,286
Look at that growth over time, and all with just Rs. 5,000 a month – a massive difference between what you’ve invested and what you could earn.
SIPs help you reach your goal systematically – You’ve seen what regularly investing pocket-friendly sums in mutual funds coupled with compounding can do. Use that knowledge to set a goal, for example, earn Rs. 5,00,000 in 5 years to buy a car, calculate your SIP amount, and start a SIP to reach that goal. Repeat the exercise for multiple goals. This way, you know how much you need to invest for each goal, and can plan for it systematically. What’s more, when you know you’re investing regularly for your goals through a SIP, you can still do other things you’d like to, without it burning a hole in your pocket. Read about goal-based investing here.
SIP variants give seasoned investors more investing power – SIP variants like Flexi-SIPs and Step-up SIPs give seasoned investors more ways to invest. When income increases, your spending, saving and investing capacity does too. With a Step-up SIP, you can steadily choose to increase your SIP amount, in line with an increase in your income and with a Flexi-SIP, you can choose to invest your regular SIP amount (by default) or increase / decrease (upto minimum investment amount) depending on your or your advisor’s take on the markets.
Don’t you now think SIPs are fantastic?
Start one today!
Just sign up with FundsIndia at www.fundsindia.com and start your SIP easily! If you already have a FundsIndia account, login here to start a new SIP or step-up an existing one. Get custom recommendations or talk to your FundsIndia advisor here.
Other articles you may like:
- How to go from Rs. 35 to Rs. 35,00,000
- 7 reasons why you should invest in mutual funds
- SIP – the winning recipe to build wealth
- The easy way to pick-up a good financial habit