Systematic Investment Plan (SIP) – Secret to Creating Wealth

Numerous times, we tend to think that building wealth is stocking up cash inside a locker or trying to manage a positive balance in a savings account. While unquestionably prudent saving is the first step to building wealth, it remains just that – the first step. Building wealth, however, is more about the cleverer process of multiplying your savings by investing in the right avenues for a protect future with reasonable goals. So is there a way to make investing a habit? Could you do it in auto mode without having to memorize it every time? Is it important to have a significant amount to invest?. Systematic investment plan enters here to help you.

Systematic Investment Plan (SIP)

Systematic Investment Plan (SIP) – Image courtesy Moneycontrol.com

What if we told you that an amount as small as Rs 1,000 a month could get you a long way in building wealth? What if we said there was an investment opportunity that can get you excellent returns despite market ambiguities?

Well, you only have one answer to all of the above questions – Meet the Systematic Investment Plan (SIP)!

Systematic Investment Plan (SIP)

A SIP will help you develop the habit of investing regularly and wisely. It is the act of investing a fixed amount periodically (typically every month) in mutual funds that are appropriate for you and will help you reach your goals.

Here are some of the biggest advantages of Systematic Investment Plan’s (SIP’s):

Invest on auto mode –

A SIP is an excellent way to inculcate the habit of disciplined investing as it is a pledge made by you to invest a certain amount regularly consciously. Once you set up your Systematic Investment Plan, the amount is automatically debited to your bank account every month, making sure that a structured investment is made consistently. Simply putting, you simply set it up and allow it to run on an auto pilot mode. You do not need to worry about missing your installment.

Small sums, Big money –

SIP’s allow you to invest small sums regularly. Contrary a fixed deposit where you need a lot of money, you can begin investing with as low as Rs. 1,000 each month in mutual funds and permit it to increase over a period. This means you do not have to get rich to start investing. You must start investing very early in your career.

The advantages of early investing are as high as, if not more than, those of disciplined investing. Say, Investor A (aged 30) invests Rs 5,000 per month regularly for 20 years with a 10% annual return. He will be able to gain Rs 37 lakhs. However, if he had started investing 10 years beforehand, he would have gained Rs. 1.13 cr. at the end of 30 years, given that the same base amount and average annual growth of 10%. In SIP’s you have very limited excuses for not investing!

See:- How to Invest in SIP through FundsIndia

Magic of rupee-cost averaging –

SIP’s allow you to invest in the ups and downs of the market. Since you get to invest across different market phases, you buy more units when the market is down and fewer units when the market’s peak. And you do this without the risk of having to time the market. You need not know when the market is going up or when it is going down. Your SIP’s do the job for you. So how does this help? This averaging effectively decreases your cost (as you buy when the market is low as well) and therefore raises your returns. However remember, for averaging to work, you will need to invest over long periods of time. Only then will you buy on dips.

Flexibility –

In the Systematic investment plan, an amount that you choose to invest regularly can be changed at any time. The key advantage here is that as you progress in your career and your income grows, you can increase your investment amount and therefore increase the value of your increasing returns. This way, you ensure that your corpus grows as your income grows. Also, there is no lock-in period in SIP, unlike a recurring deposit scheme in the banks.

Here’s an example that speaks about the benefit of consistently increasing the value of your SIP and how that affects the final returns. As seen in the graph, Rs. 1,000 SIP over 10 years, will give you with just Rs. 2.33 lakh. However, had you increased it by Rs. 1,000 every year over these 10 years, you will have a handsome Rs. 10.3 lakh.

Systematic Investment Plan

SIP Vs Step SIP (Image Courtesy – FundsIndia)

Power of compounding-

One of the greatest benefits of a SIP is the impact of compounding it gives, which is much higher than a Recurring Deposit (RD). Let’s take an example; Investors A invests Rs.1000 a month in an RD for 120 months at the rate of 7.5%; his investment would return him Rs. 1,76,114 at the end of the term. However, if he invests the identical in a well-performing equity mutual fund through the SIP, say with SBI Blue Chip (which has given an average return of 13%), the same amount will yield him a return of Rs. 2,42,961 at the end of the same 120 months. With mutual funds, compounding works each single day, unlike your bank deposits, where interest is compounded monthly (RDs) or quarterly (FDs). That is the reason you get good returns in mutual funds.

If you invest 5,000/- per month for 15 years and expected returns on an average is 12%, you could end up with 25.22 lakhs, and if returns are 14%, this figure could be 30.64 lakhs. Well, this is the magic of SIP with the magic of compounding. You can play with per month amount, years of investment and expected returns by using various SIP calculators online.

Systematic Investment Plan

SIP with Compounding

Secret to achieving Much More with Systematic Investment Plan (SIP)

– List down your goals and work out a plan to reach them through SIP

– Ascertain the monthly/quarterly SIP required to achieve your goals

– Identify the scheme in which you would like to invest and complete the formalities for SIP investment including forms and cheques.

– Invest for the long term as the double benefits of power of compounding and rupee-cost averaging work through different market cycles

– Diversify your investments for your goals through multiple systematic investment plans in various schemes to optimize returns as per your needs

Conclusion –

Start investing now with the SIP; you can stay invested in the markets for the longer periods without having to bother about fluctuations. If you are patient and disciplined, your investments will steadily grow over a period of time, and you will be able to reach your financial goals. The earlier you start, the better it will be for your finances. So start your SIP now.

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3 Replies

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  1. Arvind dagadiya says:

    Nice example. Your posts are really very informative.

    Keep doing great work.

  2. Santhosh Katariya says:

    Hi,
    I have an ongoing monthly SIP of 1000 in Axis long term equity fund which is an elss category fund since a year, now my question is till date there is a return of 500 odd showing in my FundsIndia account portfolio, what will happen to the accumulated return i.e. 500 rs approx? will that be reinvested? or it would be idle? can i get clarity on the same in detail

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