A complete guide to systematic investment planning

While saving money is important, investing wisely is even more crucial, as it allows you to maximise your wealth over time.

Investing as early as you can is ideal so that you can save adequately for major expenses later on in life and post-retirement. One smart way of investing is through Systematic Investment Planning, more often referred to as investing in SIPs or Systematic Investment Plans.

As per the Association of Mutual Funds of India, data indicates that SIPs are a sought-after option for most mutual fund investors. Over 9 lakh SIP accounts were created on average in each month in FY 2017-18.

What are SIPs?

As the name suggests, a SIP involves investing a fixed sum of money at regular intervals (usually monthly, though you could invest quarterly too). Then, a money market expert takes this money and buys units of a scheme, usually a mutual fund, at a pre-determined frequency.

SIPs allow you to invest in securities safely and securely. You don’t have to worry about selecting the right securities as your financial advisor will do so on your behalf. Also, since you can invest flexibly, this option is suited to all kinds of investors. It doesn’t matter if you’re an experienced investor or are investing for the first time.

How are SIPs calculated?

SIPs are calculated by taking into account two principles: the power of compounding and rupee cost averaging. Take a look at how these mechanisms work.

Power of compounding

This means that the interest you earn is compounded as opposed to simple interest. For example, if you invest Rs. 5,000 at 10% for 5-years, the interest will be Rs. 2,500. So, your total gain will be Rs. 7,500.

On the other hand, when interest is compounded on Rs. 5,000, your total interest earnings will be Rs. 3,052.55. In turn, your total gain will be Rs. 8,052.55. Here, in the first year, you earn Rs. 500 as interest. This is compounded, which means that it is added to your principal. As a result, the principal for the second year is Rs. 5,500. This method allows the interest to earn returns, too, thereby enriching your benefits.

The difference between the two may seem nominal, but the benefit of compounding is staggering when you invest in a SIP for an extended period. For instance, when you invest for 20 years or more, the total amount is more than double what you would earn if you were to receive simple interest on it.

Rupee cost averaging

Rupee cost averaging is the outcome of how your SIP operates. Your financial expert will buy more securities when prices are low and buy lesser units when the prices are high. Over a long period, this system evens out the impact of market fluctuations, giving you better returns. This is what makes a SIP a winning investment option.

How to use a SIP calculator

Using a calculator is a quick and easy way to find the best SIP. Take a look at how you can use one.

Step 1: Monthly investment amount
Feed-in the amount that you can comfortably invest every month. Don’t worry; you have the option to increase it in the future. Let’s assume that you put in Rs. 2,000 as the investment amount.
Step 2: Tenor
Enter the duration for which you want to stay invested. Remember, the longer you are invested in SIPs, the more your net benefit will be. Here, assume that you enter 15 years.

Step 3: SIP interest rate
Here, enter the SIP interest rate that the scheme is offering, for example, 10%.

View results
Instantly, you will be able to see the total amount that you will invest over the years, the total interest that you will earn on it, as well as the total sum that you will receive on maturity. For this scenario, your total invested amount will be Rs. 3.6 lakh, interest earned will be Rs. 4.68 lakh and the total amount on maturity will be Rs. 8.28 lakh.

4 benefits of using a SIP calculator

Using a SIP calculator is packed with benefits. Here’s a look at four key benefits that this financial tool offers.

1. Decide how much you want to invest

A SIP calculator allows you to see exactly how much money you will make when it matures by showing the maturity sum for various investment amounts, tenors, and rates of interest. This will tell you if it meets your financial targets adequately before you invest.

2. Select a top SIP

Selecting a sound SIP is of equal importance. You can do this with ease as the SIP calculator allows you to vary the interest rate. This way, with the investment amount and tenor being constant, you will see which is the best SIP for you.

3. Get results quickly

Since a SIP calculator is available online, it takes a fraction of a second to see the results. It takes far lesser time to use this calculator than it takes to do the math yourself. Apart from the total interest and maturity amount, some calculators even give you a break-up of the interest earned each year so that you can understand how your money will multiply.

4. Get accurate results

Since the calculator is backed by a formula and is automated, you can expect error-free results every time. The same can’t be said for when you calculate manually.

Bajaj Finance helps you with the best SIPs in India, and gives you access to several SIP calculators. You can use the basic one or use an advanced SIP calculator to see returns that have been adjusted for inflation. Similarly, a need-based SIP calculator allows you to work backwards. Based on the amount that you want to earn, it tells you how much you need to invest.

How to invest in a SIP

Investing in SIPs is extremely simple. Here’s how to go about it.

Step 1: Set a target

The first step that you ought to take is deciding how much you want to earn via SIPs. Once you know the desired amount, move on to step two.

Step 2: Decide the amount

This step involves judging your current income and expenditure and deciding how much you will contribute to SIPs monthly. The best part is that you can increase the amount later on if you wish to. To start with, you can invest as little as Rs. 100 too.

Step 3: Decide the tenor

Based on the amount that you can invest, select an appropriate tenor. Remember that the benefits of rupee cost averaging and compounding interest are highest when you stay invested for a long duration. You can use a SIP calculator to decide this parameter accurately.

Step 4: Select an SIP

This is the most critical consideration. Research your options thoroughly and discuss them with a financial advisor. This way, you will be able to select the best SIP that caters to your financial goals.

What should be the ideal tenor of SIP?

The most beneficial aspect of investing in a SIP is choosing how long you want to stay invested. But here are two things that you should keep in mind.

• The longer you stay invested, the higher are the benefits of rupee cost averaging and compounding interest. In turn, your gains are higher.
• You have to stay invested for at least 3 years if you have chosen an Equity Linked Savings Scheme (ELSS). With a view of saving tax, it makes more sense to choose an ELSS as it has the shortest lock-in period compared to other tax-saving investments.

What makes a SIP an ideal instrument for investment?

A SIP is a superior investment tool. It offers better benefits than other investment options, be it recurring deposits, Unit Linked Insurance Plans (ULIPs), Fixed Deposits (FD) or Public Provident fund (PPF). It gives you several advantages, without requiring you to stretch your budget.

SIP vs ULIPs: Which one should you choose?

While you should base your ultimate decision as per your financial needs and goals, here’s a look at the various ways in which SIPs and Unit Linked Insurance Plans (ULIPs) differ.

1. Key benefit

When you invest in a SIP, the benefit is that you can maximise your wealth exponentially. However, ULIPs offer two benefits: it provides life insurance cover and acts as an investment.

Additional Read: What is the difference between SIP and ULIP

2. Lock-in period

ULIPs have a lock-in period of 5 years, whereas if you choose ELSS-backed mutual funds, the lock-in period is shorter, at 3 years. With other kinds of SIPs, there is no lock-in period.

3. Returns

It is tricky to determine returns for ULIPs as it depends on whether you have chosen to invest in debt funds, equity funds or hybrid funds. You can expect an average SIP interest rate of 12%–15% when you invest in an SIP.

4. Charges and transparency

When you choose a SIP, you usually have to pay a fund management charge and an exit load, and so the process is transparent and straightforward. However, a ULIP has several charges. You have to pay policy administration charges, mortality charges, premium allocation charges, fund management fees, etc. As a result, it is easy to determine exactly how much is being invested in an SIP, but in a ULIP, it is more difficult. With so many changes, it makes for a complicated calculation.

5. Tax benefit

ULIPs allow a deduction of up to Rs. 1.5 lakh under Section 80C. However, when you take an SIP, you can enjoy the EEE (Exempt, Exempt, Exempt) tax benefit. This means that the amount you invest, the amount on accumulation and withdrawal are all tax-free.

SIP vs PPF: Which investment works better?

In the SIP vs PPF debate, as always, your priorities matter most. To make an informed decision, understand what sets the two options apart

1. Investment amount

In SIPs, you can invest any amount equal to or greater than Rs. 100 too; there is no maximum limit. But, when you choose PPF, you can invest up to Rs. 1.5 lakh per year, either in a lump-sum or every month.

2. Rate of returns

SIP interest rates range from 9% to over 20%, with an average of 12%–15%. On the other hand, when you choose PPF, you get around 7.6% only.

3. Financial goals

If you are saving for retirement, creating an emergency reserve, or investing for your child's future, a PPF is a safe option. On the other hand, if you want to take charge of your finances and grow them actively, SIPs are better for you. That being said, you can stay invested in SIPs for a long tenor and finance your retirement or child’s needs too.

4. Tenor

When you choose a SIP, you can invest for a minimum of 6 months and decide to end the investment whenever you deem fit. When you choose PPF, you have to stay invested for at least 15 years. So, while SIPs can be long- and short-term investments, PPF is strictly a long-term investment.

5. Liquidity

If you anticipate needing funds in between the tenor, considering liquidity is essential. In this regard, SIPs offer you funds within 1 – 2 days, giving you better access to your money. On the other hand, a PPF allows you to withdraw a portion of the amount only after the 7th year.

Should you choose a SIP over fixed deposits?

When choosing between a SIP and fixed deposits, don’t rely just on popular opinion. Take these facts into consideration before you make a decision.

1. Investment amount

Both options give you complete control over how much you invest. That being said, when you invest a small amount in a high-cap SIP, you will still be able to earn substantial returns. This isn’t the case with fixed deposits. Here, how much you invest is directly proportional to how much you earn.

2. Rate of interest

SIP interest rate is around 12%–15%, which is better than what most investment instruments offer, including fixed deposits. On the higher end, you can expect around 8.20% interest from a fixed deposit if you choose an NBFC instead of a bank.