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Fulfil your dreams with SIP

This episode covers the process of Systematic Investment Plan (SIP) with emphasis on portfolio diversity and risk balancing for wealth creation.

10888 views  9 Oct 2017

SIP for wealth creation

Many people want to create wealth by investing in the equity market, but most of them are not able to do so because of shortage of capital and/or time. To overcome this, an investor can opt for Systematic Investment Plan (SIP).

A Systematic Investment Plan allows an investor to invest funds at regular intervals, say each month. In the long run, regular and disciplined investing via SIP can accumulate significant amount of wealth for investor. SIP is the smartest way to invest in the equity market and its advantages are as follows:

SIP reduces portfolio volatility

One of the primary benefits of investing via SIP is that an investor is not required to time the market. If one invests a lump sum amount in an equity fund and the market falls soon after, then the investor's portfolio's value falls significantly. Instead if the investor chose to invest an amount each month, the investor will be able to benefit from lower unit price of the fund when market falls. Thus, the SIP allows the investor to average over time and he can enjoy lower volatility in the value of investment as compared to the lump sum approach.

For example, assume that an investor starts a SIP of Rs. 5,000 per month in an equity mutual fund scheme for a year. The investor made a profit of Rs. 17,090 despite a decline in NAVs for 5 consecutive months because the investor received more units when the NAV was falling. When the NAV retrieved, the investment value surged. In addition, the average NAV was Rs. 10.12 despite the fact that NAV for 6 months was above Rs. 10.12. This phenomenon is called 'Rupee Average Costing'.

Month SIP NAV Units Total Units Amount Invested Value of Investment
1 Rs. 5,000 Rs. 10 500 500 Rs. 5,000 Rs. 5,000
2 Rs. 5,000 Rs. 12 417 917 Rs. 10,000 Rs. 11,000
3 Rs. 5,000 Rs. 13 385 1301 Rs. 15,000 Rs. 16,917
4 Rs. 5,000 Rs. 11 455 1756 Rs. 20,000 Rs. 19,314
5 Rs. 5,000 Rs. 10 500 2256 Rs. 25,000 Rs. 22,558
6 Rs. 5,000 Rs. 9 556 2811 Rs. 30,000 Rs. 25,302
7 Rs. 5,000 Rs. 8 625 3436 Rs. 35,000 Rs. 27,491
8 Rs. 5,000 Rs. 7 714 4151 Rs. 40,000 Rs. 29,055
9 Rs. 5,000 Rs. 9 556 4706 Rs. 45,000 Rs. 42,356
10 Rs. 5,000 Rs. 11 455 5161 Rs. 50,000 Rs. 56,768
11 Rs. 5,000 Rs. 13 385 5545 Rs. 55,000 Rs. 72,090
12 Rs. 5,000 Rs. 13 385 5930 Rs. 60,000 Rs. 77,090

Allows to invest even a small amount

One can start a SIP with a sum as small as Rs. 500 per month. Most of the equity funds have a monthly or quarterly SIP option. There are set dates offered by the AMC – 1st, 7th, 10th, 15th, 20th and 21st day of every month. You can link your bank account to start an automated debit and choose a date and frequency option, as per your convenience.

Long term wealth creation

SIP is one of the best ways to create wealth in the equity market. A person can become a corepati by investing only Rs. 250 per day in mutual funds for 20 years, assuming 15% return per year. The total investment will be Rs. 18.25 lakh and the total gains will be ~Rs. 81.75 lakh over 20 years; this is also the best ways to get the benefit of 'Power of Compounding'.

*Assumed that investment will grow at 15% CAGR

How to Start a SIP?

An investor can start a SIP on a pre-decided date every month using Electronic Clearing Service (ECS) or direct debit facility available with banks. Each month, money will be automatically transferred from the investor's bank account to the Mutual Fund account.