Investment plan

How does the systematic investment plan work over a longer period? | India is blooming

A Systematic Investment Plan or SIP stands for investing in mutual funds – for the uninitiated. Over the past 10 years, the SIP has become so popular that even seasoned investors don’t see it as just a tool for investing in mutual funds.

Simply put, SIP allows people to invest at regular intervals, in amounts they are comfortable with, and create or accumulate their wealth over a period of time. As the saying goes, “consistency is the key to success”, so it is with investing. In this way, you can help save at regular intervals as per your convenience to build up a financial corpus.

SIP in detail

With an SIP, you invest a predefined amount at regular intervals. The flexibility of investing a small amount of INR 500 or INR 1000 per month makes SIP quite affordable for any individual. Along with the convenience factor, it offers investors insight into how the mutual fund works and how it works.

A disciplined approach could help it become a habit and even part of your household budget. The convenience of transferring funds from a bank account to SIP; and allocating share units based on price – known as NAV or net asset value – on the day the money is credited to the SIP account, is not complicated at all once you have started.

With the help of capitalization and expense benefit ratio, SIPs can help fuel the growth of your investment over the years.

To get started, you need to have your KYC verified. After filling in your KYC information and submitting it online, either through an asset management company or using verified SIP applications. Next, you need to select the SIPs you want to invest in as well as the amount and frequency of investment – weekly, monthly, semi-annually, etc.

Let’s say your monthly SIP is INR 10,000. This amount would essentially create units in your mutual fund shares based on the net asset value at which the units are allocated. To illustrate further, when NAV is INR 20, the total number of units would be 500, and so on. Therefore, NAV reflects the movement of the market.

So, when the NAV is high, the number of units awarded is lower for the same investment amount of INR 10,000 (as shown above). In this way, with the ups and downs of market cycles, the unit cost of your total investment is average – known as the average cost in rupees. Now, if you continue to invest the amount of INR 500 for a decade, at 10%, the SIP return value would be 10.24225 with the capital invested at INR 6,000.

The same amount at a return of 15% would yield INR 13,76,085. Compounding plays an important role here as it reinvests capital gains into the funds which help create accumulated income. It is the impact of compounding that has made SIPs popular.

SIPs have helped many people achieve their financial goals. So it is always better to start planning and investing in SIP at an early age. Even if you’re in your 30s or 40s and just discovered SIP, it’s never too late to get started with all the knowledge you now have!