SIP works in a systematic way, as the name suggest, allowing you to invest on a monthly basis.
For instance, let’s say your monthly salary is Rs. 60,000/- and you set aside 10% of your monthly salary towards an SIP. A detailed investigation on the largest mutual funds in the country will help you see how a number of funds have consistently outperformed the overall market over a large period of time.
Take for example SBI blue Chip Fund. It is one of the largest mutual funds in India, which was launched in June 2006. The fund has over Rs. 1000 Cr. in assets and this was achieved within a period of 10 years.
If you have started investing in this plan through SIP from June 2006, Rs. 6000 will be automatically taken out from your fund every month. The money will be invested into the fund on a monthly basis. This is exactly how we take care of the two basic tenets of investments as mentioned- consistency and discipline. As SIP automatically takes out Rs. 6000/- every month, the consistency of investment is maintained. This also ensures a disciplined investment as the mutual fund company invests the money on your behalf.
The major advantage of SIP investment is the power of compound interest.
Rs. 6000/- that you keep aside every month, accumulates over the years to turn into a huge amount of money.
For example, if you have started investing from June 2006, then till March 2015, the number of times Rs. 6000 has been auto-deducted from your account is 106. So, total Rs. 636,000/- (Rs. 6000 x 106) has been auto-debited from your account and got invested in the Capital market.
You will get approximately 17% as the overall return (annualized compounded return).1,40,81,09/- So, your investment gets doubled in value. Better yet, the Sensex that gauges the performance of the market goes up in value by 188% during those 104 months of investment. However, this mutual fund goes up in value by more than 300%.
In general, a good mutual fund always and consistently outperforms the market.
A SIP is a flexible and easy investment plan. Your money is auto-debited from your bank account and invested into a specific mutual fund scheme. you are allocated certain number of units based on the ongoing market rate (called NAV or net asset value) for the day. Every time you invest money, additional units of the scheme are purchased at the market rate and added to your account. Hence, units are bought at different rates and investors benefit from Rupee-Cost Averaging and the Power of Compounding.