The mutual funds collected under SIP have increased steadily over the years. From Rs 43,921 crore collected in 2016-17, Rs 67,190 crore in 2017-18, Rs 92,693 crore in 2018-19, the SIP contribution hit the Rs 1 lakh crore mark in 2019-20.
Every person develops some goals and dreams and tries hard to achieve them. Achieving dreams have never been easy for anyone but investing in mutual funds through a Systematic Investment Plan can help in achieving them. Fortunately, SIP plans are liked by everyone because as the term suggests, it’s a systematic plan. It is an investment mode through which one can invest in mutual funds in a disciplined manner. A SIP investment plan allows an investor to invest a fixed amount of money regularly in a selected mutual fund scheme.
HOW DOES SIP WORK?
Before investing through a SIP, one needs to understand how this plan actually works. Under a Systematic Investment Plan, you invest a fixed amount of money in a given period. The fixed amount can be as low as Rs. 500. Pre-defined intervals can be on a weekly/quarterly/semi-annually or even annual basis. By investing through SIP, you invest in a time-bound manner without worrying about the market highs and lows. In other words, there is no need to time the market to make the investments.
WHY INVEST THROUGH A SIP?
1. Power of Compounding
If you invest through SIP for a long period of time, the benefits are magnified by the compounding effect. Under the compounding effect, you not only earn returns on your principal amount (actual investment) but also on the gains on the principal amount. In simple terms, your returns get reinvested. Your money now grows over time as the money you invest earns returns. And the returns also earn returns.
You can maximize gains by investing for an extended period. This can be illustrated by an example:
Imagine there are four investors, Sunil, Mohit, Somya, and Anita
Sunil’s Age- 30 Years
Mohit’s Age- 40 Years
Somya’s Age- 50 Years
Anita’s Age- 60 Years
All of them plan to invest Rs. 1000 per-month.
Assuming the equity fund offers an annual return of 10%, the table shows how each one can earn when they turn 70.
| Investors | Monthly SIP (Rs.) | No. of years | Investment Amount (Rs.) | Wealth Gain (Rs.) | Expected Amount (Rs.) |
| Sunil | 1000 | 40 | 4. 8 lakhs | 59 lakhs | 63. 8 lakhs |
| Mohit | 1000 | 30 | 3. 6 lakhs | 19. 2 lakhs | 22. 8 lakhs |
| Somya | 1000 | 20 | 2.4 lakhs | 5. 3 lakhs | 7. 7 lakhs |
| Anita | 1000 | 10 | 1.2 lakhs | 0.9 lakhs | 2.1 lakhs |
The table clearly shows the exponential nature of the plan returns. In the table shown, Somya’s investment is half of Sunil’s investment. That is why her wealth gain would be very less in comparison to Sunil’s wealth creation. Therefore, if you wish to invest in mutual funds through SIP starting investing early because the earlier you start investing, the higher are the chances of getting sky-high returns.
2. No Charges Involved
In order to start a Systematic Investment Plan, there are no additional charges involved. The cost of starting such an investment plan is nil, but the benefits it reaps are sky-high.
3. Simple Process
There are no difficulties associated with starting and using a Systematic Investment Plan. Investors just need to sign up for the plan online.
4. Low initial investment
You can invest in mutual funds through a SIP with just Rs. 500 on a monthly basis. You can do a low initial investment without even hurting your wallet. You can think of investing more through a SIP Step-up feature after your income rises. Mutual fund houses give this amazing feature of topping up the SIPs on a regular basis. So, even if you start investing in small amounts, you can invest more over the years.
SYSTEMATIC INVESTMENT OR ONE-TIME INVESTMENT?
Many people often get confused between systematic investment and one-time investment plan but there are many differences:
| Basis | SIP Investment | One-time Investment |
| Tenure | SIP can be withdrawn at any time you want without any monetary loss. | Withdrawing a one-time investment might lead to penalties, charges, or might not be allowed. |
| Returns | This Investment yields higher returns because of the power of compounding. | This investment yields fixed returns, which is lower than SIP. |
| Safety | Investing in SIP is safer as it protects your money from any potential market crash. | If the market crashes, this investment can be a major loss. |
| Market Knowledge | You don’t need to gain thorough knowledge about the market as SIP is a simple plan. | Investing here is not easy. You sometimes need to talk to an expert to gain a thorough knowledge of the market. |
Summing up, it can be said that SIP is one of the safest investment plans which stands for minimum investments but maximum returns. You can invest in a SIP now and reap its sky-high returns later.
