SIP (systematic investment plan) in mutual funds is considered the most convenient method to invest in a mutual fund scheme. Commonly termed as the SIP, it permits you to invest a minimal amount of money regularly in the mutual fund scheme of your preference. By a SIP, you can arrange each of your investments with time by laying out a fixed amount at regular intervals. This interval time of your SIP depends on you. It can be every week, monthly basis, quarterly basis, on a bi-annual basis, or whichever frequency you prefer.
As SIPs are open-ended, you can commence or end a certain SIP at any point in time. In case, you wish to pause your SIP, you will have to end it immediately as SIPs don’t have any such option. However, there are zero penalties imposed on the investors for ending or pausing the SIP. When you activate a systematic investment plan, a fixed and certain amount is subtracted from your bank account each month that is added to the specific mutual fund of your preference.
The basic principle of SIP
A systematic investment plan obeys the principle of investments done regularly. Here, investors can invest certain minimal amounts of money each month in any specific mutual fund. SIP in mutual funds usually offer flexibility to fetch more units when the price falls and buy fewer units with the rise. Generally, the concept of SIP works on 2 basic principles. They are,
- Rupee cost averaging: Under this principle, the investors do not require to worry about the time and amount. They can simply invest any fixed amount of money at certain yet regular intervals. With time, the investment averages itself out of the costs. The initial price of a single unit is not considered important as compared to the average price that comes up in the end. These returns are finally calculated on the average cost. Indirectly supporting the idea of selling high and buy low, rupee cost averaging helps the investors to average the cost price of an asset without concentrating on the selling motive.
- Power of compounding: The second principle on which the systematic investment plan works is the power of compounding. To be very precise, compounding is one of the most beneficial things that has taken place in finance. Here, investors can invest a minimal amount of funds and can sit back and enjoy the increased value over time. The best part is, the longer the duration of investment, the bigger the value of an investment becomes. Consequently, the returns gained at regular intervals are again reinvested in the fund. As a result, investors keep gaining returns constantly for years. For gaining the most out of the power of compounding, investors should start saving at a very young and early age.
How money grows over some time when you invest via SIP in mutual funds?
SIP allows the investor to purchase units on a particular date per month. This is because one can execute a saving plan for themselves. One of the major advantages of SIP is that an individual does not require to time the market. Generally, in timing the market, a person misses the bigger rally. This keeps them away from the market when it is performing well. Consequently, they may enter the market at an inaccurate time when the market is about to decline or when the evaluations are at their peaks. Hence, instead of timing the market, investing each month will make sure that an investor is investing at a high and low time so that they can achieve the best out of the SIP.
A particular investor can invest any predetermined amount(fixed) in any scheme of their choice each month or every quarter according to their convenience via cheque facility. Investors require to fill a SIP form and an application form on which they have to select their choice of SIP date. Later, the SIPs will be auto-debited by a standing instruction or cheques. On completion, the cheques and forms can be delivered to the office of Investor Service Centre or Mutual fund or any of the nearest centers of the Transfer agent or registrar.
However, some of the fund houses do not permit any notifications in the SIP. In such cases, you can start a new SIP with any amount according to your wish. If your fund house has any provisions in terms of your top-up in SIP, you can do that by logging in to your investment account. If you wish to automate your increase in the overall SIP amount, you may then invest through step-up SIPs. This type of SIP will elevate and increase the entire amount of your SIP at regular intervals. The only criteria are that you need to have a sufficient amount of balance in your account on the predetermined dates to carry out the investment smoothly and flexibly.
Rupee cost averaging
Rupee cost averaging is one of the most important principles of SIP. bringing you financial discipline, SIP is the most beneficial method of investing in any of the mutual funds. Investing in SIP is simple. You generally start investing with a minimal and less amount but you can earn huge returns in the long run. In this, you don’t have time in the market. As the equity market is quite volatile, when you invest through SIP, for the safe side, you buy more units when the market value is low. In a booming market, you purchase fewer amounts of units. This in turn decreases your entire cost of investment for the future.
Consequently, when you invest via SIP in mutual funds, the entire market volatility is reduced to some extent. As a result, you earn positive and increased gains. The rupee cost averaging works in its most effective manner in the choppy markets. However, when markets are in the bull run, it is useful then as well. It will suggest you purchase less when the market price is high and buy more when the price is less.
Power of compounding
You can only gain the maximum benefit out of the power of compounding in the long run. In rupee cost averaging, you can ensure the state of the market when the price is high and low and then you can invest in it to decrease your cost of investment. Although there are several risks, investing in mutual funds is the most disciplined method of gaining a large amount of wealth in the long run. You can make SIP investments through small periodic payments in place of lump-sum amounts. Mutual funds usually provide two types of earnings, capital gains, and dividend gains. In case, you wish to reap the advantages and know about the power of compounding, you need to choose to reinvest in the very same plan instead of withdrawing it.
How to calculate returns in SIP?
A particular SIP investment takes place on specific dates too at regular intervals. When you opt for an investment, you get a certain number of units that depend on your prevailing NAV of that particular scheme at that time.
Over a long time, you can gain a huge number of units. This is another reason why it is difficult to calculate the total returns that you have earned in a certain period.
To calculate in an excel sheet, follow the steps below:
- Step 1: Type each of your SIP dates in one single column.
- Step 2: Enter your amount of SIP in the next column that corresponds to the SIP dates. Ensure prefixing the minus sign as it plays an essential role in depicting the outflow of cash.
- Step 3: Enter the total market value of each of your units. Next, simply enter those dates on which you wish to check the returns. Next, enter the market value of those units in which you have a scheme in those same columns where you have entered the SIP amount and SIP date.
- Step 4: With the help of the XIRR function, take your cursor to any blank cell and open the XIRR function. The sheet will ask you to fill in 3 parameters that involve date, value, and guess. For dates, select those cells that have the SIP dates along with the date at which you wish to calculate your SIP return. For values, select those cells that have the SIP amount along with the market value. Leave the guess field blank, and click the “OK” button to carry on.
- Step 5: Multiply the displayed decimal number with 100. The result shown will tell you the return that you have gained out of your SIP investments as per the date of your choice.
Check out the second method as well
A second method to calculate the returns is by using the SIP calculator. With the SIP calculator, you can calculate an estimate.
- Log in to the SIP calculator
- Enter the SIP amount according to your choice
- Fill in the overall duration of your SIP investment
- Enter the probable annual rate of return with the help of a sliding bar.
After you enter the details as per listed above, the SIP calculator will show you the returns on your SIP investment.
If you are looking for a professional advice on how to invest through SIP in mutual funds then you can contact at
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