The world of investment can be tricky and frankly quite challenging, especially for beginners. However, one of the easiest and most popular ways to invest in the stock market is through a Systematic Investment Plan (SIP).
A SIP will allow you to invest a fixed amount at regular intervals in mutual funds, which can help build wealth over time. In this article, we will discuss the benefits of a SIP and how it can help you generate returns on your investment.
What is a SIP?
A Systematic Investment Plan (SIP) is an investment tool that allows investors to invest a fixed amount at regular intervals in mutual funds. Mutual funds are a pool of money collected from investors, which is invested in stocks, bonds, or other securities. The returns generated by these investments are shared among the investors based on their share in the fund.
How does a SIP work?
A SIP works by investing a fixed amount at regular intervals, usually monthly or quarterly. The amount invested is deducted automatically from the investor’s bank account and invested in the mutual fund of their choice. The investor receives units of the mutual fund based on the prevailing Net Asset Value (NAV). The NAV is the value of each unit of the mutual fund, calculated based on the market value of the securities held by the fund.
Benefits of a SIP:
- Disciplined Investing: An SIP helps investors invest a fixed amount at regular intervals, which encourages disciplined investing. This can help investors develop a saving habit and build wealth over time.
- Rupee Cost Averaging: Rupee Cost Averaging is a strategy used in SIPs to mitigate the impact of market volatility on investments. In this strategy, investors invest a fixed amount at regular intervals, which helps them average out the purchase cost of units over time. This reduces the impact of market fluctuations on their investments.
- Flexibility: An SIP offers flexibility to investors in terms of the amount invested and the frequency of investments. Investors can increase or decrease the amount invested, and choose the frequency of investments based on their financial goals and investment plans.
- Diversification: Investing in mutual funds through a SIP allows investors to diversify their portfolio across various asset classes such as equity, debt, and gold. This helps investors spread their risk across various investments and reduce the impact of market volatility on their investments.
- Long-term Wealth Creation: An SIP is a long-term investment tool that can help investors build wealth over time. By investing a fixed amount at regular intervals, investors can benefit from the power of compounding, which can help them generate higher returns on their investments.
Returns on Investment in a SIP:
The returns generated by SIP depend on various factors such as the fund’s performance, the amount invested, and the investment horizon. Mutual funds are subject to market risks, and the returns generated by them are not guaranteed. However, historical data shows that equity mutual funds have generated higher returns than other investment options, such as fixed deposits or savings accounts over the long term.
The returns generated by a SIP can be calculated using the Compound Annual Growth Rate (CAGR) formula. The CAGR is the average annual rate of return generated by an investment over a specific period. It takes into account the effect of compounding on the investment.
For example, if an investor invests Rs. 10,000 per month in an equity mutual fund through a SIP for 10 years and the CAGR generated by the fund is 12%, the total investment made by the investor would be Rs. 12 lakhs (Rs. 10,000 x 12 x 10). The value of the investment at the end of the investment horizon would be Rs. 26.49 lakhs.
Tips to increase returns on SIPs
Here are some tips to increase returns on SIP investments:
- Start early: Starting your SIP investment early can help you benefit from the power of compounding. Even small investments made consistently over a long period can help you accumulate a significant corpus over time.
- Choose the right mutual fund: It’s essential to choose the right mutual fund to invest in, which aligns with your investment goals, risk tolerance, and investment horizon. Research and analyse the performance of the fund before investing.
- Stay invested for the long term: SIPs are designed for long-term investments, and it’s essential to stay invested for the long term to benefit from the power of compounding. Avoid frequent withdrawals, and continue investing even during market volatility.
- Increase your SIP amount with time: You can increase the SIP amount with time as your income grows. This can help you benefit from the compounding effect and accelerate your wealth creation process.
- Opt for direct plans: Direct plans have lower expense ratios than regular plans, which can result in higher returns over the long term.
- Monitor your investments: Keep track of the performance of your investments regularly. If you find a particular mutual fund is underperforming consistently, it may be time to re-evaluate and switch to a better-performing fund.
- Diversify your portfolio: Diversification is the key to managing risk and maximising returns. Invest in a mix of equity, debt, and hybrid funds to spread your risks and minimise the impact of market volatility.
The returns on SIP investments depend on various factors such as the investment amount, the tenure of investment, the market performance, and the type of mutual fund invested in. However, historical data suggests that SIP investments in mutual funds have delivered an average annual return of around 12-15% over the long term.
It’s important to note that past performance does not guarantee future returns, and investing in mutual funds involves market risks. It’s essential to consult a financial advisor before investing to understand your risk profile, investment horizon, and financial goals and to make informed investment decisions.