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What is Systematic Investment Plan (SIP)?
A Systematic Investment Plan is a mode of investment which allows you to invest a fixed amount of money in any mutual fund scheme at regular intervals — for example, on a monthly or quarterly basis. It is similar to a Recurring Deposit (RD) in a bank, but the difference is that your money will be invested in a mutual fund scheme, which may mean it is headed for the equity markets or debt instruments. SIPs are offered by most mutual fund houses in India and all over the world. SIPs have proven to be a reliable wealth creation tool for those who invest. They bring financial balance and discipline to your investment and assist you in achieving your long-term goals - such as retirement planning, children’s education, buying a house, etc.
Benefits of SIP
- No big investment: You can invest small amounts of money in SIPs at regular intervals — even as low as ₹100 per month. On the contrary, minimum amount for lump sum investment in a mutual fund is typically ₹5,000.
- No worries about market timing or market crash: SIP investments are a good option for eliminating the worries of entering the market at the right time. You don’t have to worry about the highs and lows of the market. Staying invested for a long time using SIPs can even-out the volatility of the stock market.
- Rupee-cost averaging effect: The rupee-cost averaging reduces the factor of volatility. It helps you buy more units when the price is lower and fewer units when the price is higher. Rupee-cost averaging nullifies the effect of short-term market fluctuation on your investments and hence, is considered to be one of the major factors for SIPs to be favourable for long-term investments.
- Power of compounding: The money that gets invested regularly and systematically through SIPs is compounded over time through regular investments. The quicker you start, the more compounding impact you can see.
For example, If you started saving ₹1,000 a month on your 30th birthday, in 30 years time you would have put aside ₹3.6 lakhs. If that investment grew by an average of 10% a year, it would be worth around ₹22.8 lakhs when you reach the age of 60. However, if you started investing on your 20th birthday, the ₹1,000 a month corpus would be worth ₹4.8 lakh over 40 years. Assuming that the growth rate is 10% annually, your investment will be worth ₹ 63.8 lakhs on your 60th birthday. Isn’t that amazing? The amount you end up with can increase exponentially if you start investing a few years earlier.
- Convenience: It is fairly convenient to start a SIP investment. You can choose the interval as per your financial ability. You also have the option of skipping a SIP if you have insufficient funds.
- Future goal planning: We’ve all got future goals — buying a house, a dream car, children’s education, retirement, etc. If you don’t have a lot of knowledge about the stock market, SIPs can be low-risk best alternative for all your future goals.
- Disciplined investing: SIP investments encourage discipline and regularity in investments. They are a time-tested method for disciplined investing that yielded great results.
How does the SIP calculator work?
A SIP calculator is an automated tool that does all your investment math for you.
This SIP Calculator helps you compute how much returns you would have made between two specific dates investing the same amount on the same date every month.
Instead of painstakingly doing all the calculations manually, all that you have to do with a SIP calculator is enter the amount you would have been able to invest every month, the period for which you would have wanted to invest, and it instantaneously gives you the returns you would have made during that period.
Not only does it instantaneously tell you the gains you’d have generated, but it also allows you to modify any of the variables to effortless see how they impact your overall returns. As a result, you’re able to quickly compare returns between SIPs and other investment options as well - such as an FD.
Why should one invest in SIP?
- A SIP more natural for people with income. You can set up your SIP so that you can treat it like one of your monthly utility bills or an EMI. Most investment advisors will tell you the importance of paying yourself first every month. Automatic investments in a SIP are a great tool to use to help to do this.
- You don’t need to look at the index levels and worry. A SIP automatically protects you from wild market swings – so you end up buying more when prices are low, and less when prices are high. That’s why even High Net Worth Individuals (HNWs or HNIs) use SIPs to invest.
- A SIP is psychological. By making an investment every month, you spend more time in the market, rather than worry about timing the market!