A Systematic investment plan (SIP) is a realistic and long-term option for most retail investors to build a significant corpus in mutual funds. An SIP allows investors to deduct a fixed amount into your preferred mutual fund scheme each month and also helps build financial discipline for the long run.
When you invest in a mutual fund scheme, the returns keep getting added to the corpus, thus letting it grow faster in the later years vis-a-vis initial years. The overall corpus, therefore, jumps at a rate faster than it did in the first few years. The faster pace of growth of a scheme’s AUM in the later years is also known as ”.
Investors can build wealth and a significant corpus by putting ₹5,000, ₹10,000 or ₹15,000 monthly towards a systematic investment plan.
How do SIPs work?
For an SIP, you can put standing instructions in place with your banks and automate monthly or fortnightly (12 or 6) debits towards selected schemes, as per your choice. Investing through an means that your purchase units of a mutual fund each time you invest. For e.g. for each unit costing ₹10, an investment of ₹1,000/month gets you 100 units.
However, since prices fluctuate as per market performance, your units can cost most or less depending on increase or decrease in price per unit. Overall, spreading out of your over a long period of time averages out your cost of purchase, when compared to lumpsum investment.
SIP of ₹5,000, ₹10,000 or ₹15,000 — How much can it yield?
Young investor Sid (26-years-old) is set to retire in 2060. We take a look at how his changes at time of retirement (60 years of age) with allocations of ₹5,000, ₹10,000 or ₹15,000 per month with 12% rate of return.
- If Sid chooses to invest ₹5,000 per month in for a period of 30 years, at 12% rate of return, at end of term, his final corpus will have exceeded ₹1.76 crore. This includes investment of ₹18 lakh (cumulative) and returns of over ₹1.58 crore.
- However, if Sid either moves jobs and earns a little more or decides to cut down on a few subscriptions to allocate another ₹5,000, for SIP of ₹10,000/month his final corpus will be near ₹3.53 crore. For a period of 30 years, at 12% rate of return, at end of term, his cumulative investment stands at ₹36 lakh and returns close to ₹3.17 crore.
- Further, if Sid diverts ₹5,000 each month more from a fixed deposit ( ₹60,000 total), to create of ₹15,000 instead, or a period of 30 years, at 12% rate of return, at end of term, his corpus will be over ₹5.29 crore. This includes investment of ₹54 lakh (cumulative) and returns of over ₹4.75 crore.
Here, it is important to note that bank are a far safer investment, but with lower rate of return. The ₹60,000 FD, at average 6.25% rate of interest for 30 years, will earn your close to ₹3.29 lakh in interest. The payout will be around ₹3.89 lakh.
Who should choose SIP investments?
- Early-stage investors with no large or significant sum of capital to invest upfront.
- Investors with time and patience to stay invested over a longer-term of 10-15 years.
- Salaried with regular pay, who can set up auto-debits and increase their investment in line with salary hike.
- Investors looking for better returns compared to traditional fixed deposits and savings accounts.
- Investors looking to supplement their retirement fund alongside the public provident fund (PPF), employees provident fund (EPF) and / or the national pension scheme (NPS).
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.