What is SIP? How Systematic Investment Plan Works?

SIP stands for a systematic investment plan. This is a system that allows investors to invest regularly in a scheme automatically or by themselves. This system will enable them to invest small amounts, which eventually add up in the long run and prove to be extremely useful. Another considerable advantage of this system is that it helps reduce the burden of market volatility through dollar-cost averaging. Since you are investing on a particular day each month, you are likely to get an average purchase price for the asset you bought at the end of the year.

Example

Let us suppose that you are in a job and earn a salary of Rs. 50,000/- per month. You are looking to invest in mutual funds and can afford to invest about Rs. 10,000/- every month. In such a scenario, you can opt for a SIP plan in your desired mutual fund. This will do that. Rs. 10,000/- will be invested on a particular day of each month in the mutual fund of your choice at the rate at which it would be trading on that specific day. You can even automate the process so that the amount will get automatically deducted from your account each month and get invested. This method helps many people become consistent with their investments as their savings are supported as soon as their salary arrives in their account.

Also read: Save For All Your Life Goals with Wizely

Types of SIP

There are many investment instruments in which you can opt for a SIP. Here are some of the examples:

1. Recurring Deposits: If you wish to invest in a fixed deposit but do not have enough lump sum amount ready at the moment, then you can opt for a recurring deposit. This will allow you to invest a certain amount every month, and it will get funded like a fixed deposit.
2. Mutual Funds/Index Funds: Almost all fund houses would allow you to invest in their schemes through a SIP. You can even opt for a quarterly or half-yearly SIP. There are many different kinds of systems that are followed, but the basic concepts remain the same.
3. Direct Stocks: If you are investing in stocks directly, you can also choose to invest through a SIP, but in this case, you will have to follow the system yourself. Let us suppose you wish to invest Rs. 5,000 in stocks each month then as soon as your salary comes each month invest Rs. 5,000 in the stocks you want to.

Any investment plan that consists of regular and timed investments in installments at regular intervals can be considered a SIP or Systematic Investment Plan.

Also read: What are Liquid Funds? List of Best 5 Liquid Funds to Invest in 2021

Formula and Calculation of SIPs

The formula to calculate SIP returns is as follows:

FV = P [ (1+i)^n-1 ] * (1+i)/i

In this formula:

• FV = Final Value or the amount you get at maturity.
• P = Amount invested through SIP.
• n = Investment duration in months.
• i = Compounded rate of return.
• r = Expected rate of return.

Take an example where you invest Rs 2,000 per month for a tenure of 24 months. You expect a 12% annual rate of return (r).
You have i = r/100/12 or 0.01.
FV = 2000 * [(1+0.01) ^24 - 1] * (1+0.01)/0.01
You get Rs 54,486 at maturity.

Online SIP Calculators

Manually calculating SIP returns can be difficult and time-consuming. There is an easy solution to this problem since you can easily find multiple SIP calculators online. For basic SIP calculations. If you wish to calculate top-up SIP in which a certain percentage also increments the SIP amount after a specific time interval, then you can find that as well. Biology offers a decent top-up SIP calculator that you can use.

Conclusion

SIP is a great way to begin your investing journey. It gives you the liberty to start with small amounts and takes care of market volatility through dollar-cost averaging.
Source: https://wizely.in/wizeup/sip-definition-formula-calculation.