Why you should use a Systematic Investment Plan (SIP)

A regular savings habit holds the key to financial security. Yet, many struggle to be disciplined about their savings and investments. If investment discipline is an issue for you, a Systematic Investment Plan (SIP) could help. A SIP makes investing through mutual funds easy. All you have to do is regularly invest small amounts in mutual fund SIPs of your choice. The best mutual funds for SIP harness your small savings to build a substantial corpus and healthy gains over the long term.

What is SIP?

A Systematic Investment Plan, or SIP, is a mode of mutual fund investment that allows you to invest in regular instalments. How does that work? Let’s say you have Rs 1,000 to invest every month. You could start a monthly SIP. This way, you could invest Rs 1,000 in the SIP on the specified due date every month. Stay invested long enough and the fixed instalments will accumulate into a large corpus. You will also earn returns on the total amount invested.

Benefits of investing in SIPs

What makes SIPs in mutual funds a good choice for investors? Let’s explore the advantages.

You can invest a small amount.

The best thing about SIPs is that you can invest small, affordable amounts over a period of time. Some schemes allow you to start a SIP with as little as Rs 100 per month. The small savings keep accumulating over time, but the pressure on your wallet remains low.

You gain from the power of compounding.

Your SIP scheme earns interest in two ways:

1. On the principal (which comprises the total amount invested)
2. On the interest earnings (which get added to the principal)

In mutual funds, compounding refers to the interest earned on returns from the investment. Over the long term, as the returns on your investment increase, compounding will allow your money to grow exponentially. That’s why it is smart to begin investing early on. Then your investment goes through many more cycles of compounding interest.

Here's an example to make things simpler:

Suppose you invest Rs 3,000 every month in a SIP which earns 10% interest annually. In a year’s time, you will have accumulated a principal of Rs 36,000 (i.e. Rs 3,000 x 12 monthly instalments). The returns on your investment by year-end will be Rs 3,600. This amount will get added to your initial principal of Rs 36,000, thus bringing the total to Rs 39,600.

Over the second year, you will add Rs 36,000 more to the SIP, raising the principal to Rs 75,600. Your returns for the second year will be Rs 7,560. This too will get added to your principal, raising it to Rs 83,160.

This process will continue through the term of the investment. In five years’ time, a total SIP investment of Rs 1.8 lakh will have fetched gains of Rs 54,247. And in 10 years, a total investment of Rs 3.6 lakh will have brought returns of nearly Rs 2.6 lakh.

You benefit from rupee cost averaging.

When you invest in mutual funds, your investment buys mutual fund units at the current Net Asset Value (NAV). With a SIP, you invest a fixed amount each time. This fetches you more units when the markets are down, and the NAV is low. It brings fewer units when the markets are up and the NAV is high. Over the long run, this helps average out the cost of the mutual fund units. In doing so, it reduces the need for an investor to ‘time’ the market.

For example, suppose the NAV of a mutual fund is Rs 50. You invest Rs 5,000 and buy 100 units. The next month, the NAV drops to Rs 40. That means your Rs 5,000 will now fetch 125 units. This averages out the cost of the 225 units. Each unit costs you Rs 10,000/225 units—which amounts to just Rs 44.44.

You develop an investment routine.

A SIP ensures investment discipline over time. You could set up auto-pay instructions with your bank to debit the amount automatically on the SIP due date. The small investments may not seem like much, but they add up over time. Even a monthly SIP of Rs 500 results in a principal of Rs 60,000 in 10 years’ time. Assuming annual returns of 10%, the investment will bring you interest earnings of Rs 43,276 over the 10-year period.

What is the right time to start a SIP?

The sooner, the better! When you start investing early, your money gets more time to grow. That gives you a better chance to build a large corpus over time. By investing early, you benefit from the dual advantages of compound interest and rupee cost averaging. It helps you to get the most out of your investments.

Not sure how to start saving? Try using a SIP calculator. Simply enter the monthly investment, the periodic rate of interest, and the investment horizon. The SIP calculator will estimate the final corpus and the estimated returns on your SIP investment. This can help you assess how much to invest to achieve your goals. Once you’ve done the assessment, take some time to look for the best mutual funds to invest in as well.

SIP investment via ICICIdirect

Once you’ve found the best mutual funds for SIP in 2021, starting a SIP is easy. Here's what you need to do:

• Open ICICIdirect.com or the ICICIdirect Money App and enter your login details.
• Under the ‘Investment’ category, select ‘Mutual Funds’ and then ‘Systematic Investment Plan (SIP)’.
• Select the fund you wish to invest in.
• Click on ‘SIP’ near the scheme name.
• Choose ‘Start SIP’. Now enter the investment frequency, duration, and start date.
• Enter your SIP instalment.
• Confirm and review the investment details.
• Finally, accept the terms and conditions and place your order. 

Summing up

A SIP can be your gateway to the world of mutual fund investing. SIPs help balance out the risks of mutual fund investment and teach you to be a disciplined investor. Over time, you can build a substantial corpus to achieve your financial goals.

ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No: 022 - 2288 2460, 022 - 2288 2470. AMFI Regn. No.: ARN-0845.Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. The non-broking products / services like Mutual Funds are not exchange traded products / services and ICICI Securities Ltd. is just acting as a distributor of such products / services and all disputes with respect to the distribution activity would not have access to Exchange investor redressal or Arbitration mechanism.