SIP It, Shut It But Don’t Forget It

SIP It, Shut It But Don’t Forget It

SIP or Systematic Investment Plan is a method of regular investment for wealth creation over a long period of time. Unlike investing all your investible funds in one go, SIP is a process of investing small bits of money regularly for a long period of time so as to reap the benefits of both compounding as well as rupee cost averaging. Hence, SIP is increasingly becoming popular to small and big investors as well. 

SIP Advantages

1. SIP is a process or method of investing, similar to recurring deposits in a bank. It is no asset class in itself

2. Mutual fund SIP installment can be as low as Rs 100 a month

3. It helps in rupee cost averaging in the long-run thereby reducing overall cost of acquisition

4. SIP irons out market volatility by investing through ups and downs of the stock market 

5. You have the flexibility of increasing/decreasing the SIP installment at regular intervals

6. You can skip paying a maximum of four SIP installments and your mutual fund house won’t penalise you for this. But, irregular SIP installments defeat the purpose of investment that is wealth creation 

Small is beautiful 

Rome was not built in a day. Likewise, wealth cannot be created overnight, unless you win a lottery. Great achievements take time and effort. 

Remember the poem ‘Little Things’ by Julia Carney that you have read in your childhood days — ‘little drops of water, little grains of sand make the mighty ocean and the pleasant land…’ 

As a palace is built brick by brick, you can create wealth by investing a small amount of money over a long period of time. 

SIP is a more convenient way to accumulate wealth over time

Investment horizon (in years)A monthly SIP of Rs 5000 becomes at a CAGR of 12%Initial lump-sum investment required to achieve the value at the same rate of CAGR
10 yearsRs 11,61,695Rs 3,74,000
20 yearsRs 49,95,740Rs 5,17,850
30 yearsRs 1,76,49,569Rs 56,82,689

Aap Bhi Baniye Crorepati — the SIP way 

Don’t worry if you don’t have lakhs of rupees to invest in. Even if you diligently invest a few hundreds or thousands of rupees every month, you also can retire rich, provided you start investing at an early age and time is on your side to see your money grow. 

It is like the long meandering path to reach a high mountain peak rather than a very steep short-cut to the mountain-top. If you follow the first path, you can easily scale the mountain without losing your breath. But if you follow the second path, you even risk your life from falling down. 

A SIP not only helps in lowering your average investment cost as you remain invested through the thick and thin of markets over a long period of time, you also reap the benefit of compounding of returns, which even Albert Einstein called the eighth wonder of the world. In Einstein’s words, ‘Compound interest is the eighth wonder of the world. He who understands it, enjoys it and he who doesn’t, pays it.’  

Investing only Rs 5,000 a month for 40 years you can retire rich 

Monthly installment 8%12%15%
Rs 500Rs 17.46 lakhRs 58.82 lakhRs 1.55 crore
Rs 1000Rs 34.91 lakhRs 1.18 croreRs 3.1 crore
Rs 5000Rs 1.75 croreRs 5.88 croreRs 15.51 crore
Rs 10000Rs 3.51 croreRs 11.76 croreRs 31.02 crore

Chhoti Se Mulkat — the growing popularity of SIP

No doubt the SIP route to investment is increasingly gaining popularity among both small and big investors because of its several advantages. Start investing albeit a small amount right away. If you delay your investment pondering over risks and losing your money, you may actually lose many things in the fear of losing it. Think of it. Despite several instances of steep downfalls and times of extreme volatility over the last 42 years, the stock market bellwether Sensex has scaled nearly 53000 points from 100 points since it came into being on April 1, 1979.

Monthly SIP contributions grew almost 3 times since demonetisation

                 (All figures in Rs crore)

Source: Association of Mutual Funds in India

Number of Mutual Fund SIP accounts stood at 4.02 crore as at the end of June 2021

1. Number of SIP accounts opened and closed

MonthAccounts opened (in lakhs)Accounts closed (in lakhs)
April 202114.087.08

Fixed period vs Perpetual SIP

You can open a SIP account with a mutual fund house for a fixed period say, 5 years or 10 years. However, if you intend to close or renew the account post expiry of the fixed period, you’ll have to inform the fund house about your decision at least three weeks before the expiry of the time period initially intended. 

In case of a perpetual SIP, there is no mention of a definite time period for the SIP. The time period of investment is open-ended. 

So, a perpetual SIP is more flexible in the sense that an investor doesn’t have to remind the fund house for renewal of his/her SIP account. 

SIPs also give one the flexibility of increasing or decreasing the investment installment amount.   

SIP withdrawal

There is no penalty for withdrawing from a fund in which one is investing through SIP mode, as SIP and withdrawal (redemption) are two separate mandates. However, exit load may be charged for redeeming before a stipulated period. In case of investment through SIP, every instalment is treated as a fresh purchase. Thus, the exit load charged will depend on the holding period of each instalment. If one is investing an amount of Rs 1,000 through monthly SIP in a fund that charges an exit load of 1% for holding period less than one year and now wants to withdraw towards the end of 2 years, then investments made in the first 12 months will not attract any exit load. Investments made after 12 months will attract the 1% exit load. Withdrawal from a plan does not automatically stop the SIP. Your SIP instalments will continue to purchase fresh units, even as you withdraw from the fund. Hence, if you do not want to continue with the SIP, then you would need to separately request for its cancellation.

Happy investing.

If you have a question, share it in the comments below or DM us or call us – +91 9051052222. We’ll be happy to answer it. 

Parichoy Gupta

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