What is a Systematic Invest Plan (SIP)? Which is the Best SIP Plan for 20 Years?

Before we see the individual SIP plan, it is essential to get some concepts clear about the SIP itself. Why? Because if we know what is SIP, we will eventually use it more effectively for wealth building.

What is a SIP?

SIP or Systematic Investment Plan, is a way of investing in mutual fund schemes. SIP is not an investment option, it is an investment style. Here, one buys mutual fund units gradually.

Who should Invest in SIP?

Some people like to invest their money in lump sum. Some like to invest in small amounts. SIP allows one to invest money in small-small amounts in mutual fund schemes.

Why SIP is Great?

Because SIP is the easiest way of wealth building for a common man. Why? Because it puts ones investments on auto-pilot. Every month, the money gets invested automatically without any extra effort/attention required from the investor.

Which is the Best SIP?

When investment horizon is as long as 20 years, the best SIP plan will be those mutual funds which invests in multi cap stocks. By the way focused investing in value mid-cap stocks can also fetch good returns.

About Mutual Fund

"Mutual funds have historically offered safety and diversification. And they spare you the responsibility of picking individual stocks."
Ron Chernow
Writer
Mutual funds were created to make investing easy, so consumers wouldn't have to be burdened with picking individual stocks.
Scott D Cook
co-founder of Intuit

Step-Up SIP

Step-up SIP is also a ‘systematic investment plan’ but with an added feature. This added feature makes it a great tool for common man. How? Because the potential of wealth creation substantially increases when one is investing, for long term, in a step-up SIP.

SIP Calculator

Try my SIP calculator. Use this SIP calculator to estimate how much wealth can be accumulated by investing systematically in mutual funds through SIP.

Example: Investing Rs.1,000 per month for next 10 years, @15% p.a. return, will build a wealth of Rs.2,78,600. Here the invested amount in these 10 years is Rs.1,20,000.

Check for yourself: How much wealth can be build by starting a monthly SIP of Rs.2,500/month for 15 years, @15% p.a. return.

Monthly Contribution (Rs.)
Expected Return p.a. (%)
Time (in years)


SIP - Appreciated Amount (Rs.)
SIP - Total Investment over Time (Rs.)
SIP - Effective Annualized Return (%)

Intro...

Through SIP, one can accumulate mutual fund units gradually. This gradual accumulation over time, can build a reasonably big corpus.

What makes SIP good?

SIP makes investment affordable and convenient for small investors. One can buy units of mutual funds in small-small quantities each month. As quantities purchased are small, the investors does not feel the burden of investment.

SIP’s (Systematic Investment Plans) have proved to be more sustainable for common men, hence people stay invested longer. Longer investment time horizon means, higher returns (in equity based plans).

Gradual Investing

Smaller amounts like Rs.500 per month can be invested using SIP. Moreover, it does not stop after one-transaction. Several small-small transaction every month makes a SIP. It is true that in SIP, the accumulation process is slow. But it is a very sure way to gather units (wealth) without fail, every passing month.

Mutual Fund SIP or Direct Stocks

SIP

  • Indirect investing in stocks
  • Ideal for novice & beginners
  • Equity exposure - but less risky
  • Ideal for practicing passive investing
  • People with even zero know-how can invest
  • Self research is minimum
  • Portfolio is Managed by Experts (Fund Manager)

Direct Stocks

  • Direct investing in stocks
  • No suitable for novice & beginners
  • Equity exposure - but high risk
  • Investors full involvement is a must
  • Minimum know-how is essential to invest
  • Detailed self research is essential
  • Portfolio is Managed by Self

Benefits of SIP

Higher Returns

Mutual Fund SIP's are like Recurring Deposits, but with higher returns. A Recurring Deposit can yield 6-7% returns per annum. But an equity based SIP can yield returns between 12% to 20% p.a. in long term holding scenario.

Low Burden

One can start investing in mutual funds through SIP with as little as Rs.100 per month. This low cost of investing eliminates any reason for not investing. It is a convenient way to invest money and become richer.

Compounding

It is the "Power of Compounding" that can make even a common man crorepati. But the problem is lack of enough spare cash for investing. SIP is a best compromise to take advantage of compounding.

Best use of SIP's

SIP facility offered by mutual funds can be used in any way one wants. But for me, one of the best utility of SIP is, accumulation of funds for most critical, long term goals, of life.

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SIP & Compounding

To understand the real advantage of SIP, we cannot miss to take a note of the power of compounding. There is no point in investing even a dime if one is not aware of the “Power of Compounding” of money.  

Magic Table

Best SIP Plan - MagicTable

Examples

Return: 8% p.a, 3 Years

Investing Rs.1 per month @8% p.a for 3 years. Rs.1 per month becoming Rs.40 in 3 years. Using the same multiplying factor of 40, suppose one does a SIP of Rs.500 per month for 3 years. It will generates a corpus of Rs.20,000 (40 x 500)

Return: 10% p.a, 6 Years

Investing Rs.1 per month @10% p.a for 6 years. Rs.1 per month becoming Rs.99 in 6 years. Using the same multiplying factor of 99, suppose one does a SIP of Rs.1,000 per month for 6 years. It will generates a corpus of Rs.99,000 (99 x 1000)

Return: 12% p.a, 9 Years

Investing Rs.1 per month @12% p.a for 9 years. Rs.1 per month becoming Rs.194 in 9 years. Using the same multiplying factor of 194, suppose one does a SIP of Rs.1,500 per month for 9 years. It will generates a corpus of Rs.2,91,000 (194 x 1500)

Return: 14% p.a, 15 Years

Investing Rs.1 per month @14% p.a for 15 years. Rs.1 per month becoming Rs.612 in 15 years. Using the same multiplying factor of 612, suppose one does a SIP of Rs.5,000 per month for 15 years. It will generates a corpus of Rs.30,60,000 (612 x 5000)

Rupee Cost Averaging

Investing in mutual funds through SIP route has a unique advantage. It helps investors to accumulate the units gradually. Lets see more to understand the benefits of gradual accumulation.

Monthly Purchase of Units

Best SIP Plan - Units Accumulation

1st Month (Aug)

  • SIP amount: Rs.2,000
  • NAV: Rs.51.8470
  • Units purchased: 38.575 nos (2000/51.847)

2nd Month (Sep)

  • SIP amount: Rs.2,000
  • NAV: Rs.55.6328
  • Units purchased: 35.95 nos (2000/55.6328)

3rd Month (Oct)

  • SIP amount: Rs.2,000
  • NAV: Rs.55.7839
  • Units purchased: 35.85 nos (2000/55.7839)

This way, each month SIP bought specific number of units for its investor. By the end of the 12th month, total number of all units purchased is 397.989 (see above table). These 397.989 units had a market value of Rs.29,436. Invested value was Rs.24,000.

The gain happened anyhow. Irrespective of the fact that in between months, NAV of mutual fund was very volatile. There is a very important point to note here. “The quantity of units purchased is dependent of the NAV“.

When NAV was higher..

less number of units was purchased. See between starting months Aug (NAV: 51.847, Unit: 38.575 nos) and Sep (NAV: 55.6328, Unit: 35.95 nos).

When NAV was lower..

more number of units was purchased. See between the months Dec (NAV: 60.0082, Unit: 32.29 nos) and Jan (NAV: 58.1113, Unit: 34.417 nos).

Spreading Investment...

This is what is called as spreading the investment to minimise the risk of loss. Here the invested fund was spread into 12 months.

Spreading is an advantage..

When NAV is high (expensive), SIP amount of Rs.2000 is buying less units and vice versa. This is what should be the objective of investment, right?

SIP Vs. Lump-sum Investing

Which is better?

Not everybody would prefer investing via SIP route. Yes, this is a fact. SIP is not for all type of investors. It is important for us to understand, in which cases SIP will work, and in which cases lump sum investing is better. Let me give you few examples, based on which this difference will become very visible.

Case#1 – NAV is only rising

NAV of mutual fund is bullish. Price is moving up. During this course of time (say 4 months), the NAV of mutual fund rose from Rs.10 to Rs.28. In this case lets see, which investing style is better: Lump-sum or SIP.

Lump-Sum

  • Investment amount Rs.8,000.
  • Price: Rs.10/unit.
  • Number of units purchased 800 nos
  • Market value at the end of 4th month Rs.22,400 (28x800)

SIP

  • Investment: Rs.2,000/m (4 months)
  • Total units purchases in 4 months - 452 nos [200 nos (2000/10), 100 nos (2000/20), 80 nos (2000/25), 72.428 nos (2000/28)].
  • Market value at the end of 4th month Rs.12,656 (28x452)

Hence we can conclude that, in bullish market lump sum investing will be more profitable.

Case#2 – NAV falls & then recovers

Best SIP Plan for 20 Years - 1 NAV Falls Recovers

NAV of mutual fund is Volatile. Price falls, then recovers. During this course of time (say 4 months), the NAV of mutual fund first fell from Rs.23 to Rs.12. Then it rose to Rs.30 levels. In this case lets see, which investing style is better: Lump-sum or SIP.

Lump-Sum

  • Investment amount Rs.8,000.
  • Price: Rs.23/unit.
  • Number of units purchased 826 nos (8,000/23)
  • Market value at the end of 4th month Rs.10,434 (30x347.826)

SIP

  • Investment: Rs.2,000/m (4 months)
  • Total units purchases in 4 months - 29 nos [86.96 nos (2000/23), 166.67 nos (2000/12), 100 nos (2000/20), 66.667 nos (2000/30)]
  • Market value at the end of 4th month - Rs.12,608 (30x420.29)

Hence we can conclude that, in volatile market, SIP will be more profitable. How does this information helps us?

In real life scenario Condition 2 is more prevalent. Market remains generally volatile. Condition 1 is a rare phenomenon. Hence, we can safely conclude that, SIP plans will prove better in normal market scenarios.

Direct Plans Vs Regular Plans

What is the difference between ‘direct plans’ and ‘regular plans’? Direct plans have smaller expense ratio than regular plans, hence their returns are also higher. For the same mutual fund, direct plans gives higher returns. 

How to Start a SIP?

One of the better ways to start a SIP is through mobile app. One such reliable mobile app is  offered by “Funds India”. Using this mobile app, one can buy mutual funds units with click of a button. This mobile can also be used to buy stocks, savings plans, etc. 

Starting Early is Beneficial

The longer is the holding time, bigger will be the corpus

By merely investing Rs 1,000/month one can build lakhs. See the below examples:

  • Rs.1,000/m @9.2% p.a. can build Rs.2.0 Lakhs in 10 years
  • Rs.1,000/m @9.2% p.a. can build Rs.6.9 lakhs in 20 years.
  • Rs.1,000/m @9.2% p.a. can build Rs.18.5 lakhs in 30 years.
  • Rs.1,000/m @9.2% p.a. can build Rs.44 lakhs in 40 years.

From these figures we can understand that, the more time we give to SIP, the bigger will be the corpus. Why? Because in later years the corpus multiplies faster. Let’s understand this with an example.

Jack and Peter are two friends. Both are 22 years of age. They will retire at 60 years of age (after 38 years from today).

Jack decided to start a SIP to fund his retirement plan. He started with a decent sum of Rs 2,500/month in a diversified equity fund. The fund generated an average return of 15% p.a. Investment time span was 38 years.

By investing Rs.2,500 / month, Jack built a corpus of Rs.5.8 Crore in 38 years. Peter realised the importance of SIP later. Hence he started the SIP after 5 years from Jack. He also began investing with the objective of accumulating Rs 5.8 crore by the time he is 60 years of age.

But in order to do it, he has only 33 years in hand (Jack had 38). By investing Rs.5,300 / month, Peter built a corpus of Rs.5.8 Crore in 33 years

Best SIP Plan for 20 Years - 5 SIP Start Early

Peter regretted and cursed himself for starting to invest late. Why? Because to build the same retirement corpus (Rs.5.8 Crore), Peter had to spend Rs.5,300 per month compared to Jack who was investing only Rs.2,500 per month.

Why this happened? Because Peter started 5 years later than Jack.

So if you also want to become a crorepati by the time you retire, start investing in SIP Plan from today.

List of Best SIP Plan for 20 Years

  • Invesco India Multicap Fund – Growth
  • Reliance Multi Cap Fund – Growth
  • IDFC Multi Cap Fund Growth
  • BNP Paribas Multi Cap Fund Growth