What is SIP Investment | How It Works – SIP Investment Examples

The full form of SIP is the Systematic Investment Plan. It is generally a scheme offered by the mutual funds in which individuals can regularly invest some amount of money for a pre-defined period in his/her desired mutual fund scheme. In SIP, a predetermined amount is deducted from the investor bank account weekly/monthly/quarterly/semi-annually or annual (as per the plan) for the investment in a mutual fund you desired to invest in. SIP can be started easily by depositing a minimum of five hundred (500) rupees. Individuals will get the basic amount plus return after completion of a certain period.

In the last few years, SIP has developed great popularity in India. As per the data, a large number of Indian individuals have invested in the Systematic Investment Plan in the current years. The main feature of SIP is that individuals can get a great amount by making a regular small investment. Here we will discuss the complete concept of the Systematic Investment Plan. Check How It Works – SIP Investment Examples by going through this page.

What is SIP Investment?

Process To Start SIP Investment

You can simply invest in SIP, just follow the below points.

  • Set Your Financial Goals- Firstly, decide the amount of the investment you want to make, the goal set by you must be specific and achievable.
  • Set a Timeline – Now, there are various options you can invest for the SIP weekly/monthly/quarterly/semi-annually or annually. You have to choose the timeline.
  • Amount To Be Invested- You can invest minimum rupees five hundred rupees, and there is no upper limit. You can invest as per your necessity and budget.
  • Make a choice- At last, you have to meet the professional or the advisers and choose the appropriate mutual funds to plan you want to invest.

How It Works – SIP Investment Examples

SIP works just like mutual funds. The market experts will manage all your investment transactions. Well, you good to know that by investing in SIP, your money will grow if you invest wisely in the long term. Do you know how SIP works? Well, it’s an interesting thing to know; there are two underlying mechanisms behind the SIP working. Here we will discuss the same.

National Savings Certificate

Compounding Effect

The compounding interest is different than the simple interest. As it includes a part of your basic capital and the calculation of the subsequent interest will be done on a new increased capital basis. Therefore, investment in a compounding interest leads to investment tenure increases.

SIP Investment Input (Rs)SIP Investment TenureRate of InterestReturns (at the end of the tenure) (Rs)Total Output (Rs)
Simple Interest1005 years10%50150
Compound Interest1005 years10%61161

You can simply see in the above example that there is a total rise of 07% in the total output while calculating from compound interest in comparison of calculation in simple interest. In simple words, the total output becomes amazing as the period of investment lengthens. Moreover, in the below example, we have calculated for the 20 years you can see the difference will become more than twice in the compounding interest if we calculated for a long period.

SIP Investment Input (Rs)SIP Investment TenureRate of InterestReturns (at the end of the tenure) (Rs)Total Output (Rs)
Simple Interest10020 years10%200300
Compound Interest10020 years10%573673

Rupee Cost Averaging

Instance: Mr. Vicky has planned to make an investment in a SIP, and he has bought the units by just investing Rs. 1000 per month for the 06 months period. So, he will get more units when the NAV (Net asset value) and vice versa. And another person, Aman, has bought units for Rs 6000 at the current NAV. Now check the below table and find who (Aman/Vicky) will go to end up with a lower cost per unit after the completion of the six (06) months period?

MonthNAV (Rs)Monthly Investment made in SIP (Rs)No. of UnitsAverage Cost Per UnitOne Time Investment made in a plain Mutual Fund (Rs)No. of UnitsAverage Cost Per Unit
1st1510006712.42 Rs/Unit600040015 Rs/Unit
2nd12100083  
3rd101000100  
4th12100083  
5th15100067  
6th12100083  
Total 6000483 

From the given instance, you can see that the Vicky earned Rs 2.58 per unit more on comparison of Aman. As Vicky invests smart for a regular period; therefore, ups and downs in the market do not affect his investment as the period will lead to an averaging of the market fluctuations. This investment is known as Rupee Cost Averaging and is primarily responsible for making SIP a worthwhile investment.

Points To Remember

  • Try to start the SIP as soon as possible and get a chance to earn a greater return.
  • Must assure to read all the conditions before investing in any mutual funds.
  • Invest for a longer period and enjoy the compounding effect.
  • Your money will surely grow in the long run, and you just have to be patient.
  • Deposit the SIP amount regularly without skipping.

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