What is SIP (Systematic Investment Plan)?

A SIP is a vehicle offered by Mutual Funds which help investors invest regularly through a step by step approach to investing. It works just like recurring deposits with the bank or post office where you put in a small amount every month. The only difference is that in case of Mutual Funds it is invested in the market. The minimum amount to be invested can be as small as 100 and the frequency of investment is usually monthly or quarterly.

How Step up SIP helps?

Increasing your investment amount with respect to your income will lead to generate more wealth in the long term.

Benefits of SIP

1. Discipline
The biggest (although somewhat underrated) benefit of SIP is investing discipline. Manually investing every month is next to impossible as sometimes we will forget while at other times we will think to wait for the markets to drop a bit (which doesn’t usually work). Setting up a SIP for a date just after your salary gets credited is the best way to ensure that you are saving every month and to spend the rest of the amount guilt-free.

2. Rupee Cost Averaging
This is the most popular benefit of SIP.

When you invest the same amount every month, you end up investing in both high and low markets thus averaging out the price. Another way to put it is that you buy lesser units when the markets are high and more units when the markets are low because you are investing the same amount every month.

For example If you are investing Rs 5,000 every month, so when the NAV is Rs 25 you end up buying 200 units but next month if the market goes down and NAV becomes Rs 20, then you end up buying 250 units. So overall you bought 450 units for Rs 10,000 in the first two months implying an average price of Rs 22.22

This helps in averaging out the cost of investing over your investment horizon thus preventing you from getting especially unlucky in your timing of the investment.

3. Compounding
With SIPs you can start small and still accumulate a huge corpus over time because all your small investments (with annual increase) and their gains add up due to compounding.

For example using the calculator above you can see the even a SIP of Rs 5000 done for 20 years can result in a projected corpus of close to 50 lakhs.