What is SIP?

A systematic Investment Plan (SIP) is a disciplined way of investing in mutual funds, where a fixed amount is invested at a pre-defined interval (weekly, monthly, or quarterly) for a certain duration. For example, you can invest Rs. 500 every month on the 1st of that month, for the next 10 years in a mutual fund. You can think of SIPs as the RDs (Regular deposits) for mutual funds. This type of regular investing helps in handling the volatility (ups and downs) in the stock market.

How is SIP different from mutual funds?

SIP and mutual funds are entirely 2 different things. A mutual fund is a professionally managed investment scheme, where money is collected from people and the collected money is invested in different asset classes like stocks (shares of companies), bonds, debentures, gold, etc. Whereas, SIP is just a systematic way of investing in mutual funds. In simple terms, we can use SIPs to regularly invest in mutual funds.

What are the benefits of SIP?

Overcoming market volatility

The stock market moves every day. It crashes one and rallies another day. When you do SIPs every month (or at a fixed interval), for a long term (min 5-7 years), you don't need to worry about these daily movements and think about when to invest.

Consider the following example:

In the above table, you can see the price movement of an instrument throughout the year. At the start of the year, you wouldn't know that the price will move as low as 62 in May and as high as 130 in December. You had 2 options to invest your money. One is to invest them all at once (lump sum) at a price of ₹100 at the start of the year and another is to invest your money every month equally throughout the year (SIP). As you can see, SIP is a clear winner with an average price of about ₹90. This phenomenon is called dollar (or rupee) cost averaging.

Automating the investment process

SIPs are automatic. That means you don't need to move a finger once you start the SIP. Every month (or at pre-defined intervals), the specified amount will be deducted from your bank account on the specified day. It is as passive as that. All you need to ensure is that you have the SIP amount in your bank account.

Long term wealth creation

When you invest through SIPs for a long term (min 5-7 years) in a mutual fund (say an equity mutual fund) it helps you create enormous wealth.

Consider the following examples:

1. A monthly investment of ₹1000 for a period of 5 years with an expected annual return of 12% would create a wealth of ₹82,486 (Investment: ₹60,000, Returns: ₹22,486).
2. A monthly investment of ₹1000 for a period of 10 years with an expected annual return of 12% would create a wealth of ₹2,32,339 (Investment: ₹1,20,000, Returns: ₹1,12,339).

In the above example, the only thing that changed is the duration of the investment. In 5 years the investment grew by 37% and in 10 years the investment almost doubled! (93.6%). This is called the power of compounding.

Flexibility

The best thing about SIP is flexibility. That means you can increase the amount, decrease the amount, skip a month, or cancel the SIP at any time without incurring any penalty on your already made investments. However, we recommend you stay invested for the long term to reap the benefits like rupee cost averaging and power of compounding.

No entry barriers

You don't need lakhs or crores of rupees to start a SIP. You can start a SIP in most mutual fund schemes with a monthly investment amount as low as ₹500. So anyone with ₹500 to spare every month can start a SIP and SIPs have no (or very low) entry barriers.

What is SIP Calculator?

SIP calculator is a tool that can be used to calculate the expected wealth generated for a given SIP amount, duration, and rate of returns.

How can the SIP calculator help you?

SIP calculator can help you in 2 ways

1. To estimate the corpus that can be accumulated when you know the investment amount, duration, and expected rate of returns. This can help you in accessing how much money you will have when you hit a certain age.
2. To calculate the SIP amount required to achieve a certain target amount. When you have different financial goals in life, you can enter the amount of wealth needed for each of them to calculate the monthly SIP amount needed to achieve them.

How to use the FinanceDeft SIP calculator?

You can use the FinanceDeft SIP calculator in the following different ways:

• Returns calculator: When you know the monthly SIP amount, you can use it to calculate the wealth accumulated at the end of certain years. You will also need to input the expected return rate.
• SIP amount calculator: When you have a certain amount to achieve in mind, you can click on the Target Amount tab to input it to calculate the monthly SIP amount. You will also need to input the duration and expected rate of returns.
• Periodically increase SIP amount: If you wish to increase your SIP amount every year by a certain percentage or a fixed amount, you can use the calculator to estimate the returns in this case as well.
• Graphical and tabular representation: The calculator gives you both the graph and table which shows how your wealth grows year after year.

What is the formula used for calculating SIP?

The following formula is used to calculate SIP returns:

M - Total accumulated wealth you will receive at the end of the investment

P - Recurring SIP investment amount

i - The expected annual rate of returns in decimal.

n - duration of the investment or number of recurring intervals

For example, if you invest ₹1000 every month for 5 years with an expected return rate of 12% (which would be entered as 0.01 since investment is made every month and 0.12/12 = 0.01) the formula would be:

That is, 100 x 81.66967 x 1.01 = ₹82,486.

What is the minimum amount needed to invest using SIP?

You can start SIP in most mutual funds for as low as ₹500.

What is the maximum amount one can invest using SIP?

There is no upper limit on the amount you can invest through SIP as long as you have that amount in your bank account 🙂. However, few mutual funds may have some restrictions in place to cap the maximum amount.

What are the minimum and maximum tenure of a SIP?

There is no timeframe as such on the minimum and maximum duration of a SIP. You can keep investing as long as you wish. We always suggest you stay invested for the long term (min 5-7 years), especially when investing in equity mutual funds.

Can I stop SIP anytime?

Yes, you can stop the SIP at any point in time and there will not be any penalty levied on the investment. Even if you have given a longer duration while starting the SIP, you will be able to cancel the SIP anytime. It may take up to a week depending on the fund house, and if you plan ahead you should be able to cancel the SIPs from next month. You should always invest through SIP for the long term (min 5-7 years) to reap its benefits.

Can I withdraw my investments anytime?

You are allowed to withdraw your mutual fund investments at any time, except for the funds which have lock-ins. Eg: Equity Linked Savings Scheme (ELSS) funds, which are primarily used to save tax (80c), have a lock-in period of 3 years from the date of investment. Eg: The mutual fund purchase made on 1 Apr 2022 can be sold only after 1 Apr 2025.

Also, note that most equity mutual funds have an exit load when the withdrawal is made within 1 year of investment. Exit loads vary between funds and can be thought of as a penalty for withdrawing the investments early.

Can I change the SIP amount?

You cannot change the amount of an ongoing SIP. You can always start a new SIP to increase the investment amount in a mutual fund or cancel a SIP and start a new one with a lower amount to reduce the investment amount.

What happens if I miss my SIP?

Nothing! No one will come knocking on your door if you miss one or two installments of SIP. Yea, the only thing that will affect if you miss your SIP is rupee cost averaging, which in turn may affect your final returns. So we suggest you try not to miss a SIP.

Will I lose my investment if I stop SIP?

No, you will not lose any investment you made if you stop your SIP. You have the complete freedom of when to start and when to stop a SIP.

Which is the best mutual fund for SIP?

There are none! Yea, you read that right. Hope you may have already heard this before: Past returns are not an indicator of future returns. The future is unpredictable, and so are the mutual fund's returns. If you are new to investing in equity mutual funds, the best way is to start with an index mutual fund or to consult a financial advisor.

How to invest using SIP?

You can use sites like Value Research Online to analyze the mutual funds and start SIPs directly from the websites of mutual fund houses. Alternatively, you can use apps like Coin by Zerodha, Upstox, etc, to start a SIP.