We earn.
We spend.
But do we save?

People seek ways to invest their hard-earned money in order to build a fortune out of it.

One of the most reliable and trustworthy ways which has been in demand lately is investment through the channel of Systematic Investment Plan (SIP).

An SIP is a hassle-free way to invest money in mutual funds. It allows customers to invest a certain amount at regular intervals of time and thereby, helps in rupee-cost averaging.
It is considered to be a systematic approach towards investing and helps subscribers to save and build wealth for the future.

What is a Systematic Investment Plan (SIP)?

An SIP is a flexible, quick and easy investment plan. The money is auto-debited from one’s bank account as on a particular date and invested into a specific mutual fund scheme.

Units are allocated based on the ongoing market rate (called NAV or net asset value) for that particular day.

Every time one invests money, additional units of the scheme are purchased at the prevailing market rate and added to the number of units already present in the account.

Hence, units are bought at different rates and investors benefit from rupee-cost averaging and compounding.

Benefits of Systematic Investment Plan (SIP)

1. Rupee-Cost Averaging

Equity markets are inherently volatile.

A stock index never moves in a straight line, so investors need to be ready for volatility.

In fact, it is the volatility that allows one to pick up more units when prices are low. You, as an investor, must always look at the long-term performance across market cycles to see the complete picture of returns for a mutual fund.

Therefore, in SIPs, investors need not worry about the right time to enter the market. Rupee-cost averaging allows a customer to opt out of this stage.

When he/she becomes a regular investor, their money fetches more units when the price is low and lesser when the price is high. During the volatile period, it may allow one to achieve a lower average cost per unit.

2. The Power of Compounding

As is the case with compounding, one’s returns themselves start earning and the profit starts piling up at an enormous pace.

In layman terms, the earning from investments that are not spent but reinvested over a period of time can generate greater returns.

3. Disciplined Investing

If you want to be a successful investor, you need to be disciplined. Period.

SIPs make you invest fixed amounts at regular intervals, thereby committing to regular saving. Every investment is a step towards attaining one’s financial objectives.

In equity markets, large caps are considered to be a safer option as compared to mid and small caps.
If we were to look at the SIP returns generated by top large-cap funds at various time intervals, it can be seen that the below-mentioned funds have generated handsome returns over a period of time and beaten the benchmark as well.

A salaried person, whose main avenue for investing is mostly fixed deposits, recurring deposits, Public Provident Fund (PPF) etc. can switch to these funds.

Though the investment entails an amount of risk, over a long period of time, these funds have generated alpha as compared to other debt instruments.

                  SIP Returns   SIP Returns   SIP Returns
Fund Name 3-Year Return (%) 5-Year Return (%) 10-Year Return (%)
SBI Bluechip Fund 10.86 14.05 15.22
Mirae Asset India Equity Fund 15.21 16.96 18.30
Reliance Large Cap Fund 12.79 14.44 14.83
ICICI Prudential Bluechip Fund 13.30 13.68 15.29
Axis Bluechip Fund 19.22 16.15

The Returns from Various Debt Instruments are Highlighted Below:

Debt Instrument Current Percentage Return (%)
Fixed Deposits                         6.7%
Recurring Deposits-Post Office (5-Year returns)                        7.4%
Public Provident Fund (PPF)                        7.6%
Sukanya Samriddhi Yojana                        8.1%
National Savings Certificate (5-Year)                        7.6%
Monthly Income Scheme (5-Year)                        7.3%
Kisan Vikas Patra                        7.7%

Therefore, we can see that over a longer term (5 years or more), mutual funds through SIPs continue to provide higher returns than several debt instruments which still today is the go-to investment option for Indian households.

4. Flexibility

Although it is advisable to continue SIP investment with a long-term perspective, a subscriber can discontinue it at any time (advisable to consider this option in times of necessity).

A customer can also increase or decrease the amount being invested.

5. Convenience

SIP is a hassle-free mode of investment. One can issue a standing instruction to the bank to facilitate auto-debits from an individual’s bank account.
These debits can be weekly, fortnightly, monthly and bi-monthly, depending on the choice of the investor.

SIPs vs. Lump Sum Investment

Also, some people might be in a tussle as to whether they should invest through lump-sum or SIP. Let’s see why an SIP is a more convenient option:

1. Constant Cash Flow

Since there is a small amount of money flowing out at regular intervals, the SIPs deduction every month does not significantl disturb other financial commitment

2. Starting of Career

If someone is starting his/her career, they would want to enjoy their financial independence and they would spend a lot.

But as savings is important and that discipline is often hard to come by, an SIP is a good way to start investing. They encourage saving a decent sum of money every month

3. Rupee Cost Averaging

As explained above, an SIP can add up to give substantial returns. For example, a monthly SIP of Rs. 5000 at the rate of 12.5 percent would grow to Rs.12 lakhs in 10 years, Rs. 26.5 lakhs in 15 years and Rs. 2 crores in 30 years.

Therefore, an SIP is a powerful tool to fight market volatility and benefit from the enormous potential of compounding over time.

Happy Investing!

Disclaimer: The views expressed in this post are that of the author and not those of Groww