Building wealth is no child’s play. It is simple but not easy. You need a strategy that delivers. A simple sounding idea- Systematic investment plan (SIP) in mutual fund schemes can help you accumulate wealth over time. With the plethora of benefits it offers, it helps you reach your financial goals seamlessly and in a disciplined manner.

Before getting into the details of the benefits and how it helps you accumulate wealth, lets understand how SIP works. SIP allows for regular investments, daily, weekly or monthly, in a mutual fund scheme. An investor can sign up for an SIP by simply filling out a form or by logging into his i account on an online platform. As per the investor’s instructions, a stipulated sum of money is debited from the investor’s saving bank account and the mutual fund house allots units of the scheme to the investor upon receipt of the funds.

Benefits of SIP

Rupee Cost Averaging: One of the key benefits of SIP is rupee cost averaging. While investing in a volatile asset such as stocks, investing a fixed sum of money, each month allows you to average your purchase. This can be best understood with an example. In the first month, let’s say you invest Rs 10,000 and at the net asset value (NAV) of Rs 10 per unit of an equity mutual fund, you are allotted 1,000 units. In the second month, the NAV of the unit has gone up to Rs 11. At this NAV you will be allotted 909 units for an investment of Rs 10,000. In the third month, if the NAV of the unit falls to Rs 9, then your investment of Rs 10,000 will fetch you 1,111 units.

When the price goes up, you buy less units; and when the price goes down, you get to buy more. This approach helps you to average in a disciplined manner. Over a long period of time, when stock prices go up, the NAV of the unit also goes up rewarding you.

Power of compounding: These regular investments using SIP in mutual fund schemes may help to build a pool of wealth in the long term. For example, an SIP of Rs 10,000 per month over 10 years can accumulate a corpus of Rs 22.42 lakh, if the rate of return is 12% per annum.

Convenience: SIP allows staggered investments. Most of us earn regular income. Monthly salary credits can facilitate monthly investments using SIP. Automated SIP investments are hassle-free, as investors need not place buy orders at regular intervals.

Discipline: Automation helps keep the emotions at bay. Irrespective of the market mood, the investments go through. This disciplined approach can help investors in accumulating large number of units of an equity mutual fund scheme.

Flexibility: Minimum amount of investment in SIP starts from as low as Rs 500 in some schemes. You can choose the tenure of the SIP to match your investment timeframe. You can also modify the SIP amount as well as tenure if needed. This flexibility makes SIP a preferred mode of investing in the equity & debt markets through mutual funds.

Cost-effective: Setting up of an SIP does not incur any extra cost. The expenses charged by mutual fund schemes are relatively low when compared to the benefits they offer, such as professional management and diversification.

Starting an SIP is only half the work done. As you climb the ladder of success in your career, you need to enhance your commitments. The Step-up SIP facility allows you to regularly increase your SIP amount, for instance, by 10% each year. This can materially change the corpus you accumulate at the end of the SIP tenure. This can be best understood with the help of following table.

Step-Up SIP Helps To Build Larger Wealth Pools

Step Up SIP increases SIP amount by 10% at the end of each year

Assumed rate of return is 12%

If Jayesh invests Rs 10,000 per month for 15 years, he will accumulate Rs 47.65 lakh assuming 12% rate of return. But if he opts for a step-up SIP wherein he increases the SIP amount by 10% each year, then it culminates with a sum of Rs 82.83 lakh.

Step up to reach your goals faster

SIPs can help investors reach their goals in a disciplined manner. For example, if Priyanka wants to accumulate Rs 1 crore and starts investing Rs 20,000 per month, then she will reach her goal in 185 months, assuming 12% rate of return. But if she increases her SIP amount each year by 10% then she reaches her target in 147 months.

If the financial goal is due in the near term, , then an SIP in a debt mutual fund makes sense. However, for long-term financial goals, consider SIP in an equity mutual fund. Though stocks are volatile in the short term, they tend to reward investors in the long term. Hence long-term investors can allocate more to equities. As you go closer to the financial goals, gradually move the accumulated investments to less risky debt funds.

Do not forget lumpsum

The wealth creation process for achieving financial goals can be accelerated whenever there is a dip in the equities. A volatile market unnerves first-time investors, but savvy investors use it to their benefit by investing lumpsum in equity mutual funds. This strategy can effectively supplement SIP contributions. This approach helps buy more in bearish phases and whenever the markets bounce back the investor benefits.

If you are keen to create wealth, SIP can be your trusted companion, provided you step it up from time to time and invest for the long term, preferably in diversified equity mutual fund schemes.