What is SIP – All about SIP and SIP Calculator

With growing awareness about Mutual Funds, What is SIP is a very common question asked by those who are new to mutual funds. Simply speaking, SIP is a method of investing a fixed amount, regularly – weekly, monthly, quarterly or annually in a mutual fund scheme. SIP allows you to buy the units of your chosen scheme on a date/s chosen by you. You can invest a fixed amount in a chosen scheme every week, month or quarter, depending on your convenience through ECS (auto-debit from your bank account) facility or through post-dated cheques.

With SIPs, you can invest an amount as small as Rs 500 per month for a period chosen by you. Investors need to fill up an Application form and SIP mandate form on which they need to mention the name of the scheme, amount and the SIP date on which the amount will be deducted from their bank account. In case the investor does not opt for auto debit, he can submit post-dated cheques which will be banked by the mutual fund company on the chosen SIP date. If you are a first time investor, you will have to also fulfil KYC formalities by filing up the KYC form and submit along with your PAN Card copy, address proof and a colour photograph.

Benefits of SIP

Mutual funds are market linked investments and offer a variety of choices. You can select schemes based on your risk profile, financial goals and investment objectives. Historical data shows that, equity as an asset class provides higher returns compared to any other asset class over a long investment horizon and therefore if you are investing in equity mutual funds through SIP route then the benefits are unmatched. Let us see what those benefits are –

Inculcates the investing habit – SIPs inculcates the habit of investing as you commit a fixed amount based on surpluses available with your every month and invest it systematically every week, month or quarter.

Disciplined approach to investing – Investing a fixed sum on a fixed frequency brings discipline to your investments as you treat your SIPs like any other fixed expenses in a month, be it paying electricity bill, school fee, buying groceries, paying EMIs or eating out etc.

Flexible investing – Starting a SIP or closing the same is very easy and there is no penalty for foreclosure. You can even increase your SIPs as and when you want. In fact, some AMCs provide you the option to decide by what percentage you want to increase you SIPs annually after a year from the start date.

Wide choice of schemes – You get a wide choice of Mutual Fund schemes belonging to different category of funds like, diversified equity funds, large cap funds, mid & small cap funds and balanced funds or so on. The risk associated with each category of schemes is shown through ‘Riskometer’ and you should choose to invest in one matching your risk profile and investment objective.

Ease of investing – You need not go to the mutual fund office or deposit a cheque every month. The auto debt / ECS form submitted along with the SIP application form ensure that the SIP amount is deducted from your bank account on the date/s chosen by you.

Low investment amount – You can start a SIP with as low as Rs. 500 per month

Diversified investments – Starting a SIP in a diversified equity mutual fund allows you to take advantage of investing in various sectors and sizes of companies and thus spreads your risk across companies, sectors and market capitalization.

Tax Savings – By investing through SIP in ELSS schemes, you can save taxes under Section 80C of The Income Tax Act 1961 upto Rs 150,000 per annum.

Long term gains are tax free – If you are investing through SIP in equity funds or balanced funds, the long term capital gains (if you hold your investments for more than 365 days) are completely tax free.

SIPs help achieve your financial goals – SIPs help you achieve long term financial goals, like – your retirement, higher education and marriage of your children or building your own home and so on. You can set a target amount for each of these goals and invest every month during the goal period in order to achieve the same.

For example – You are aged 25 and want to build a 6 Crores corpus when your age is 55 years. You need to invest only Rs 18,500 per month for next 30 years (assuming return of 12%).

Free life insurance cover – Some mutual fund companies even offer you free life insurance cover (subject to certain limits and conditions) on your SIPs without any extra cost.

Rupee cost averaging – The key to long term investing is discipline and commitment to invest a fixed sum for a long period and sticking to this schedule regardless of the market conditions. This helps you in rupee cost averaging in a way that you automatically buy more units when the NAV is low and fewer units when the NAV is high. Suppose you are investing Rs 10,000 every month. When the NAV is Rs 40, you will get 250 units (10,000/40 = 500). However, if the market dips and the NAV drops to 35, you will get 285.714 units (Rs 10,000/35 = 285.714). As you can see, you have bought more units when the markets are at lower level and your average cost per unit on the total holding is Rs 37.333 (Rs 20,000 / 535.714 units).


How SIP Calculator can help you

If you Google SIP Calculator, you will find many SIP calculators using which you will know how much you need to invest in order to reach a goal and what would be the approximate value of your SIP investments after a period of time and so on. Let us understand this through some examples –

How much to save monthly to reach a future goal – Using the SIP Calculator, you can calculate how much you need to save every month for reaching your various goals.

Example 1 – You want to retire with Rs 5 Crore corpus at age 60 and your current age is 35 years. You expect a return of 12% on your equity SIP investment. What is the monthly SIP amount? You need to save Rs 27,900 per month for next 25 years.   

Example 2 – Your daughter’s age is 3 years now and her higher education cost would be Rs 50 Lakhs when she is age 22. You expect a return of 11% from your SIP in balanced fund. What is the monthly SIP amount? The SIP calculator shows that you need to save Rs 6,600 per month for next 19 years.  

What would be the future value of your SIP – You are currently investing Rs 10,000 in a mid-cap equity fund and your expected return is 13% after 20 years. What would be the final SIP corpus? The SIP calculator shows that you can expect a corpus of Rs 1,14,55,000 (One Crore fourteen lakhs and fifty-five thousand only)

What would be the SIP future value if increased by 10 per cent every year – You are currently investing Rs 5,000 per month and wish to increase the monthly contribution by 10% every year. What would be the SIP corpus after 20 years if expected return is 12%. You can expect Rs 79.25 Lakhs against your total SIP investment of Rs 23.40 Lakhs!

How to decide the monthly SIP amount based on inflation – If you retire now you need a retirement corpus of Rs 2 Crores. But your retirement is 20 years away and you do not know what should be the right corpus and the exact SIP amount to achieve that corpus. You can only assume that the returns on your SIP investment could be around 10% and average inflation 5% . Using the SIP calculator, we find that your inflation adjusted retirement corpus should be Rs 5.31 Crores and to reach the goal you need to save Rs 70,200 per month for next 20 years.

We discussed how mutual fund SIP is the best tool to create your long term wealth and meet your different long term financial goals. By investing a relatively small amount every month through mutual fund SIP, investors can accumulate a sufficiently large corpus in future. However, investors do not know how much they need to invest every month in order to accumulate a large corpus so that they can reach their financial goals. They also do not know what could be the future value of their current monthly SIPs after a certain number of years. SIP Calculator helps you calculate and know the exact SIP amount for meeting different investment needs and also brings discipline in your investments.