Investing in SIP: A Smart Way to Grow Your Money

Investing in SIP

Systematic Investment Plans (SIPs) have become increasingly popular among investors looking to grow their wealth systematically. Investor adoption of SIPs continues to rise, with monthly net inflows reaching approximately ₹19,300 crore in March 2024.  

Given this growing trend, understanding SIPs is crucial for making informed investment decisions. This blog will guide you through the benefits and strategies of using SIPs to invest effectively.

What is SIP and How Does It Work?

Imagine you’re planning to buy a house and need a substantial amount for the down payment in five years. You have time on your side, which means you don’t need the money immediately and can wait a few years for it to grow. This allows you to take risks in your investments to generate higher returns.

Fixed Deposits (FDs) offer 6-7% returns at best, which might not be enough to reach your goal quickly. On the other hand, mutual funds can generate 12-14% returns, which can help your money grow faster. You can take advantage of these higher returns by investing regularly in mutual funds through a Systematic Investment Plan (SIP).

Breaking Down the Concept

Time on Your Side: Having time on your side means you can invest your money and let it grow over several years. The longer you can leave your money invested, the more time it has to grow through compounding. Compounding is when the returns you earn on your investments start earning returns themselves.

Taking Higher Risk: Taking higher risk means investing in assets that fluctuate in value, like mutual funds. These investments can go up and down in the short term, but they have the potential to grow more over the long term compared to safer investments like FDs.

Also Read: SIP vs Mutual Funds: Understanding the Key Differences

Example: Using SIP to Invest

Let's say you need ₹10 lakh for a house down payment in five years. You decide to invest in a mutual fund through an SIP because mutual funds can provide higher returns.

Monthly Investment Calculation: To achieve ₹10 lakh in five years (60 months), assuming an average annual return of 12%, you must invest approximately ₹12,850 monthly.

Scenario: You invest ₹12,850 monthly in a mutual fund. Here’s how your investment grows over the first three months:

Month 1:

• NAV (Net Asset Value): ₹50
• Amount Invested: ₹12,850
• Units Purchased: Amount invested / NAV = 12,850 / 50 = 257 units

Month 2:

• NAV Increases to  : ₹5  5   
• Amount Invested  : ₹  12,850   
• Units Purchased  : Amount invested / NAV = 12,850 / 55 = 233 units  

Month 3:

• NAV Drops to  : ₹4  5   
• Amount Invested  : ₹  12,850   
• Units Purchased  : Amount invested / NAV = 12,850 / 45 = 286 units  

After three months, you have invested a total of ₹38,550 and now hold 776 units in total. The value of your investment, considering the latest NAV of ₹55, is approximately ₹42,680.

Now that you have an understanding of SIP as a concept, it is essential for you to know the major benefits.

Use Calculator: SIP We Like

Benefits of Systematic Investment Plans (SIPs)

Disciplined Savings

SIPs help inculcate a disciplined saving habit. By committing to invest a fixed amount regularly, you ensure that you consistently set aside money for your future goals.

Example: In the earlier scenario, by setting up SIP of ₹12,850 per month, you automatically save this amount every month, ensuring consistent progress towards your financial goal of ₹10 lakh. This disciplined approach ensures you stay on track to reach your financial goal.

Rupee Cost Averaging

Rupee cost averaging involves investing a fixed amount regularly, regardless of market conditions. This strategy helps you buy more units when prices are low and fewer units when prices are high, averaging the cost of your investments over time.

Example:  In our scenario:  

• In the first month, the NAV is  ₹  50, and you buy 257 units.  
• In the second month, the NAV rises to  ₹55, and you buy 233 units.
• In the third month, the NAV drops to  ₹  45, and you buy 286 units.  

By investing the same amount each month, you buy more units when the price is lower and fewer units when the price is higher. Over time, this strategy reduces the impact of market volatility on your investment, leading to a more stable growth trajectory.

Power of Compounding

Compounding refers to the process where the returns on your investment generate their returns. The earlier you start investing, the more time your money has to grow exponentially.

Example: If your SIP investments earn an average return of 12% annually, the returns you earn in the first year will start earning returns themselves in subsequent years.

With an investment of ₹12,850 per month over five years, your total investment of ₹7,71,000 grows to approximately ₹10,59,949.81. If the returns increase to 14%, the value of your investment increases even more, reaching approximately ₹11,20,529.44.

Flexibility

SIPs offer flexibility. You can start with a small amount and adjust your investments as needed. Depending on your financial situation, you can increase, decrease, or stop your SIPs.

Example: You start with an SIP of ₹12,850 per month. As your income grows or you receive a bonus, you increase your SIP amount to ₹14,000 per month. Even a small increase can significantly impact your final returns.