In India, investors are increasingly using Systematic Investment Plans (SIPs). Many individuals are now considering SIPs as they usually have the potential to yield higher returns than traditional saving options like fixed or recurring deposits. The shift towards SIPs can be attributed to their simplicity, adaptability, and the financial discipline they promote, making them appealing to beginner and experienced investors.
The Association of Mutual Funds in India (AMFI) data highlights the growing reliance on SIPs. Inflows from SIPs stood at Rs. 17,610 crore in December 2023, rising steadily to Rs. 25,320 crore by November 2024. For the 11 months of 2024, the total SIP inflows reached an impressive Rs. 2.4 trillion. These numbers show how more investors are choosing SIPs to grow their savings.
In this blog, we will understand what SIP is, how it works, and its advantages.
What is an SIP?
A Systematic Investment Plan (SIP) is a method of investing in mutual funds that allows you to invest in the stock market indirectly when investing in equity mutual funds. It involves allocating a predetermined amount of money into the market at regular intervals, typically monthly.
SIPs are widely used for mutual fund investments. They promote financial discipline and help accumulate wealth over time. With SIPs, you can start small and steadily systematically grow your investments, tracking your progress easily through a demat app.
How Do SIPs Work?
A Systematic Investment Plan (SIP) is a way to invest a fixed amount of money at regular intervals into a mutual fund. Here’s how it works:
You can set up an automatic deduction from your bank account, which is then invested in your chosen mutual fund. The amount you invest buys you units of the fund, and the number of units you receive depends on the fund’s Net Asset Value (NAV) on the day of the investment.
Over time, each instalment buys you more units when the NAV is low and fewer units when the NAV is high. This process, known as rupee cost averaging, may help reduce the impact of market fluctuations on your investment by spreading the purchase cost across different market conditions.
SIPs may also benefit from the power of compounding. As your investment grows, the returns generated may also earn returns, making SIPs a valuable tool for long-term financial planning.
Why is SIP Considered an Ideal Investment Option?
To understand how SIPs might work for you, let’s break it down into two key ideas that can make SIPs attractive to many investors.
Learn SIP Through an Example
Suppose you start an SIP with a monthly investment of Rs. 6,000 in a mutual fund called ABC Growth Fund. If the fund’s NAV is Rs. 60 per unit, your investment for the first month will buy you 100 units.
Here’s how the investment would look over the next few months:
Month | Investment Amount | NAV of the Fund | Units Allocated | Total Units in Portfolio |
1 | Rs. 6,000 | Rs. 60 | 100 | 100 |
2 | Rs. 6,000 | Rs. 65 | 92 | 192 |
3 | Rs. 6,000 | Rs. 70 | 86 | 278 |
4 | Rs. 6,000 | Rs. 55 | 109 | 387 |
As you can see, the number of units you receive each month depends on the mutual fund’s NAV. In the second month, with an NAV of Rs. 65, your Rs. 6,000 buys you 92 units, while in the third month, with an NAV of Rs. 70, your Rs. 6,000 buys you 86 units.
The Role of NAV Fluctuations
The fluctuation in the NAV helps reduce the impact of market volatility, as the units purchased at different NAVs average the overall cost per unit over time. So, when the market is down, you tend to get more units; when the market is up, you get fewer units.
This approach can help smooth out the market’s highs and lows as you invest regularly and consistently, irrespective of market conditions. Notably, these fluctuations in NAV can reduce the impact of short-term market movements and may help create long-term wealth.
In conclusion, SIP can be an approach that allows you to continue investing regularly without having to time the market. This simple, disciplined investment process helps build a portfolio over time with the potential benefit of long-term growth.
How to Calculate SIP investment?
You can easily calculate your SIP investment using an SIP calculator. This online tool estimates the returns on your regular investments in Mutual Funds. You just have to provide details such as the amount you plan to invest, the investment duration, and the expected annual return rate. The calculator then calculates your total investment, projected returns, and potential future wealth.
SIPs involve investing a fixed amount regularly, which may become a convenient way to grow wealth steadily. Although manual calculations are an option, SIP calculators might save you time and offer quick, accurate results, enabling you to make informed financial decisions efficiently.
Advantages of Investing in SIPs
Financial Discipline
SIPs help develop financial discipline by promoting consistent savings. They can enable you to accumulate wealth without significantly changing your lifestyle.
Flexibility
SIPs usually allow you to change the size of your investment as necessary, and contributions can always be adjusted.
Convenience
Investing with SIPs can be simple and hassle-free. A single command establishes the process online, and your investments are managed automatically.
Reduced Risk
SIPs may spread out your investments over time, which lowers capital risk. They can also help you manage market volatility more effectively than lump-sum investments, which may expose you to more significant risks.
Conclusion
Overall, SIPs may suit anyone looking to invest systematically and disciplinedly. They encourage sound saving practices and offer the potential to achieve long-term financial goals.
However, before making any investment decision, it is advisable to research and select investment options that align with your specific needs. Relying solely on external information could lead to unnecessary risks.
Open Demat account with HDFC SKY and start your SIP journey today!