SIP Blog

Introduction:
Investing generally seems daunting. But everyone wants to grow their wealth over a period of
time, isn’t it? That’s where Systematic Investment Plan (commonly known as SIPs) helps us.
This guide will explain what SIP is, how it works, its advantages, with a focus on the Indian
Market.
A systematic investment plan is a scheme where a person can invest small amount of money
at regular intervals over a long period of time in a mutual fund scheme. The amount chosen
by the investor is automatically deducted from their bank account and invested in a selected
mutual fund. This method is helpful in building disciplined investment habit and is beneficial
for individuals with limited investable surplus.
How does an SIP Work?

SIP automates the investment process. It doesn’t require decision making each and every time
a person invests. When you start a SIP, a fixed amount is directly deducted from your bank
account at regular intervals (typically monthly) and invested in your chosen mutual fund.
Key Principles on which SIP operate:

1. Rupee Cost Averaging
Rupee cost averaging helps to manage the ups and downs of the market. For example, you
decide to invest Rs. 1000 every month in a mutual fund. When the market prices are high,
your Rs. 1000 buys fewer units of the mutual fund. When the prices are low, your Rs. 1000
buys fewer units of the mutual fund. When the prices are low, the same Rs. 1000 buys more
units. Over a period of time, this method averages out the cost of the units you buy, so you
don’t have to worry about trying to “time the market” – buying low and selling high – which
is very difficult to do consistently.
Example:
- January: Rs. 1000 buys 10 units at Rs. 100 each.
- February: Rs. 1000 buys 12 units at Rs. 83 each.
- March: Rs. 1000 buys 8 units at Rs. 125 each.
So, by the end of three months, you have invested Rs. 3000 and own 30 units. The average
cost per unit is Rs. 100, even though the market prices fluctuated.
2. Power of Compounding
Compounding is like earning interest on your interest. When you invest money, you earn
returns on it. If you further invest those returns, they start earning returns too. Over a period
of time, this can significantly affect the value of your investment. For example – You invest
Rs. 1000 every month that gives an annual return of 12%. In the first month, you invest Rs.
1000. In the second month, you invest another Rs. 1000, but now the first month’s investment
has also grown by 1% (approximately Rs. 10). This process keeps repeating, and over many
years, these returns start generating their own returns, significantly increasing your
investment.
Imagine two friends, Ramesh and Suresh, who both decide to start investing Rs. 1,000 per
month in a SIP at an annual return rate of 7%. Ramesh starts at age 40, while Suresh starts at
age 20. By the time they both reach 60, Ramesh will have accumulated around Rs. 5.28 lakh
over 20 years, while Suresh, who invested for 40 years, will have around Rs. 26.56 lakh. The
earlier you start, the more your money grows exponentially over time.
Benefits of SIP Investment
1. Financial Discipline
SIP instills a disciplined approach to investing. The regularity of contributions ensures that
you save and invest consistently, which can be particularly beneficial for achieveing long
term financial goals such as retirement or children’s higher education.
2. Flexibility and Convenience
SIPs are highly flexible. You can start with an amount as low as Rs. 500 per month and
increase it as your income grows. Moreover, you can choose the frequency of your
investment-monthly, quarterly etc. Many mutual funds also offer the option to pause or stop
SIPs without any penalties.
3. Affordable Investing
For many investors, making a large one-time investment is challenging. SIP allows you to
start with a small amount, making it easier to begin investing and build a steady portfolio
over time.
4. Low Minimum Investment
Most SIPs in India allow you to start with a minimum investment of Rs. 500 per month. This
low entry point makes it accessible for a wide range of investors.
5. Compounding Investments
The returns generated from SIP investments are reinvested, leading to the compounding
effect. Over a long period, this can significantly increase the value of your investment.
Types of SIP:
1. Fixed SIP
In a fixed SIP, the investment amount will be constant throughout the duration of SIP. It is the
most common type and it is suitable for investors with a steady income and want a simple,
disciplined way to invest regularly without changing the amount.
2. Top-Up SIP
A Top-Up SIP allows you to increase your investment amount periodically. For instance, you
might start with Rs. 1000 per month, and decide to increase it by Rs. 500 every year. This
helps you to invest more as your income grows.
3. Flexible SIP
A flexible SIP as the name suggests has no fixed amount or strict schedule. You can change
the amount and frequency based on your financial situation. If you have extra money, you
can invest more; if you’re short on cash, you can invest less or even skip a payment.
4. Perpetual SIP
A perpetual SIP does not have a fixed end date. It keeps investing your money regularly for a
long term goal such as a retirement plan or wealth creation, and there is no predetermined
date to stop the SIP unless you choose to end it.
Factors to consider before starting a SIP
1. Investment Goals
Identify your financial goals and determine a time frame to achieve them. Whether it’s for
retirement, child’s education or for buying a house, knowing your objectives will help you
the choose the right SIP.
2. Risk Appetite
Understand your risk appetite. Generally, equity mutual funds offer higher returns but come
with greater risk, while debt funds are safer but provide comparatively lower returns. Choose
a SIP that aligns with your risk profile.
3. Fund Performance
Before selecting a mutual fund scheme for SIP, look at its historical performance, fund
manager’s track record, and the scheme’s investment plan. A consistent performer over a
period of time is usually a safer bet.
4. Expenses
Be aware of the associates costs, such as expense ratios, transaction fees, and exit loads.
These expenses can impact your overall returns, so choose funds with lower fees.
Common Misconceptions about SIP
1. SIP Guarantees High Returns
While SIPs are designed to reduce risk and potentially offer better returns over time, they do
not guarantee high returns. The returns of your SIP depends on the underlying mutual fund’s
performance, which is subject to market risks.
2. SIP Is Only For Small Investors
SIPs are suitable for all types of investors, irrespective of the investment amount. Whether
you invest Rs. 500 or Rs. 50,000 monthly, the benefits of SIP remain the same.
3. Stopping SIP During Market Downturns
Many investors panic and stop their SIPs during market downturns. However, this is the time
when you can buy more units at a lower price, which can be beneficial in the long run due to
rupee cost averaging.
Conclusion:
Investing in a Systematic Investment Plan (SIP) is an effective and disciplined way to build
wealth over time, making it accessible even to those with modest financial resources. By
understanding and leveraging the principles of rupee cost averaging and the power of
compounding, investors can navigate market volatility and maximize their returns. It is
accessible to investors of all types having different risk tolerance and can be tailored to meet
individual financial goals. By understanding how SIP works and its advantages, you can
make informed decisions to achieve your long-term financial objectives.

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Introduction:

How does an SIP Work?

Key Principles on which SIP operate:

2. Flexibility and Convenience

4. Low Minimum Investment

Factors to consider before starting a SIP

Common Misconceptions about SIP

1. SIP Guarantees High Returns

2. SIP Is Only For Small Investors

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