Understanding ‘Systematic Investment Plan’ (SIP)!

By | September 6, 2016

Understanding `Systematic Investment Plan’ (SIP)!

Benjamin Graham, the father of value investing, has termed Rupee Cost Averaging as one of the top 3 tenets of investments for a defensive investor. Rupee Cost Averaging is nothing but the Systematic Investment Plans that are part of Mutual Funds. SIP is a scheme which allows investors to invest a certain amount of money in a Mutual Fund over a period of time. For example, investors can invest anything as low as Rs. 500 in a Mutual Fund every month.

Additional Reading: What To Remember When Investing In Mutual Funds

Advantages of SIP
A Systematic Investment Plan has many advantages over a one-time investment. Some of the advantages are mentioned below.

Price averaging: SIP allows you to average out the price over a long period so that the impact of fluctuating prices of Mutual Funds is minimised. You can buy more units when the prices drop and buy less when the prices go up. The advantage is that you do not have to worry about market fluctuations. You needn’t time the market either. Just like you would want, SIP buys more when prices are down so your cost of investing will go down.

Discipline: SIP instils in you a sense of discipline towards investment and savings. If you set up an auto-debit for your SIP investment, you can be sure that you never miss a single SIP.

Low initial requirement: You can start an SIP with a much lower amount when compared to other investments. Most Mutual Fund houses allow investment via SIP for as low as Rs. 500 a month. You can even consider daily SIP for as low as Rs. 100.

Let’s see how SIP works.  If you invest Rs. 2000 in a Mutual Fund through SIP for 4 years, you will get Rs. 1.2 lakh. This is assuming you make a 10% return on your investment. You would have gained Rs. 22,424 in a year. See the below table for more.

Expected Amount Rs. 118424 (1.2 Lakh)
Amount Invested Rs. 96000 (1 Lakh)
Wealth Gain Rs. 22424 (0.2 Lakh)

Want to know how much you can make many years down the line? Check out the below table.

Duration SIP Amount (₹) Future Value (₹)
4 years 2,000 1.2 Lakh
5 years 2,000 1.6 Lakh
8 years 2,000 2.9 Lakh
10 years 2,000 4.1 Lakh
12 years 2,000 5.6 Lakh
15 years 2,000 8.4 Lakh
18 years 2,000 12.1 Lakh
20 years 2,000 15.3 Lakh
22 years 2,000 19.2 Lakh
25 years 2,000 26.8 Lakh
28 years 2,000 36.9 Lakh
30 years 2,000 45.6 Lakh
35 years 2,000 76.6 Lakh

You can actually make as much as Rs. 76 lakh in 35 years if the Mutual Funds give you a return of 10% per annum. Note that equity markets have given an average of over 15% per annum for the last 10 years. So, you will actually be making a lot more. And you would have purchased more units whenever prices would have gone down.

Want to know how you will be purchasing more Mutual Fund units when prices fall? Here’s an example. Suppose you invest Rs. 2,000 every month in the DSP Blackrock Equity Fund, which is currently one of the top performing funds in the equity segment. Assuming you have invested over the past year, here’s how your investment will be.

Investment Period Aug 29, 2015 to Aug 29, 2016
No of Investments 13
Total Amount Invested (Rs) 26,000.00
Total Units Purchased 975.07
Investment Value as on Aug 29, 2016 29,386.60

You have purchased a total of 975 units of this Mutual Fund. Now, at what price were these units purchased? Look at the table below.

Investment Date Investment Amount (Rs) Purchase Price (Rs) Units Purchased
Aug 31, 2015 2,000 26.867 74.441
Sep 29, 2015 2,000 26.477 75.537
Oct 29, 2015 2,000 27.065 73.896
Nov 30, 2015 2,000 27.265 73.354
Dec 29, 2015 2,000 27.146 73.676
Jan 29, 2016 2,000 25.326 78.97
Feb 29, 2016 2,000 23.009 86.923
Mar 29, 2016 2,000 25.175 79.444
Apr 29, 2016 2,000 26.095 76.643
May 30, 2016 2,000 26.651 75.044
Jun 29, 2016 2,000 27.308 73.239
Jul 29, 2016 2,000 29.612 67.54
Aug 29, 2016 2,000 30.138 66.361

From the table, you can clearly see that more units are bought when prices fall. For instance, when prices fell to Rs. 23 on Feb 26, 2016, you purchased almost 87 units. And when prices rose, you purchased a lower number of units. This way, you don’t invest more when the markets are high. Take August 29, 2016. Prices have risen to Rs. 30, so, you have purchased just 66 units of the Mutual Fund. This way you can average out your cost of investment using SIP. That adds to the gains that you can make apart from the gains due to the rise in the markets. Note that just like stock prices, prices of Mutual Funds keep fluctuating and you can be assured that through SIP, you are protected against the vagaries of the market. You needn’t time the market. Through SIP, you actually moderate the impact of the ups and downs of the Mutual Fund prices.

How to proceed with SIP:
You can ask your bank to debit a certain amount towards your Mutual Fund investment every month. You can do this through a form or through your online banking account. You will need to specify the amount, date of the month when money will have to be debited, and duration of the investment. For example, if you choose to invest Rs. 3,000 on the 6th of every month, for 3 years, the bank will keep debiting Rs. 3,000 from your account towards investment in the fund for the whole period or until you revoke the instruction.

You can, of course, do this on your own manually by investing Rs. 3,000 every month in the Mutual Fund of your choice. However, there are chances that you might miss one or two investments or even refrain from investing for a month and use the money elsewhere. So, if you are opting to invest manually, ensure that you remain disciplined.

Variants of SIP:  Daily, Weekly, Monthly
A daily SIP scheme requires investors to invest in the Mutual Fund every business or trading day. A monthly SIP is where you invest a fixed amount every month and a quarterly SIP is where you invest every quarter. At first glance, a daily SIP might seem to take care of volatility better than a monthly SIP because you invest every day. But that is not always the case. Only for highly volatile funds such as small-cap funds, daily SIPs will be better than monthly SIPs. Most of the time, it is best to go for monthly SIPs, which are convenient to make, as soon as your monthly salary is in. It is also easy to manage investments on a monthly basis.

Why must you consider monthly SIPs?

  1. A daily SIP may be not allowed by all Mutual Funds and hence your options might be limited. Monthly SIP options are available with almost all Mutual Funds. The same goes for quarterly SIPs.
  2. If you want to maximise returns over the long run, you need to be disciplined with your SIPs. Plan for your SIPs before you start them. Since we are used to planning on a monthly basis, monthly SIPs will allow you to plan your expenses such that your investments are not compromised.
  3. The final aspect is the calculation of taxes. Daily SIPs will make tax calculations more difficult if you plan to remain invested for a short period of time. Also, you will have more entries in your account statement making it very difficult to track your investments.

Now that you know how useful an SIP would be, start one to see how it works for you. But remember that you must remain invested in them for 3 or more years to get good returns. This is true for equity funds. You can consider investing in debt funds through SIP but the returns might get hit in the long run. This is because debt funds do not fluctuate significantly on a daily basis or even month on month. So, you will be better off investing lump sums in debt funds.

The best way to get the maximum out of your SIPs is to link it to your goals. This way you will remain disciplined and will not use the money for anything other than the goal that it is linked to. SIPs are ideal for goals such as saving for the down-payment of your house or your kid’s education. You can invest in up to 4 funds. If you are a novice investor, stick to 2 funds. When you have got the hang of how to invest, you can scale up your funds. It is best to avoid investing in more than 4 funds because it will be tough for you to manage the monthly outflows.

Also, choose the Mutual Fund carefully as stopping an SIP will lower your returns. If you are unsure about your investments, take the help of a financial expert. Remember, basic knowledge of Mutual Funds is an absolute necessity if you want to make the most of your SIP investments.

All information including news articles and blogs published on this website are strictly for general information purpose only. BankBazaar does not provide any warranty about the authenticity and accuracy of such information. BankBazaar will not be held responsible for any loss and/or damage that arises or is incurred by use of such information. Rates and offers as may be applicable at the time of applying for a product may vary from that mentioned above. Please visit www.bankbazaar.com for the latest rates/offers.

3 thoughts on “Understanding ‘Systematic Investment Plan’ (SIP)!

  1. rubal

    nice to learn about sip. but the knowledge imparted is limited . I wish it to be more elaborate.

  2. Ashish

    Is the rate of SIP varies from Bank to Bank? Or it remains the same for all banks.

    1. Team BankBazaar

      Hi Ashish,

      You can choose the amount of your SIP and there is no fixed rate given by the bank or fund house. Pick an amount that suits your needs. All the best!

      Team BankBazaar


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