I recently saw two siblings - a boy and his elder sister boasting about their piggy banks recently when I'd visited their home for a social occasion. The boy had an electronic piggy bank with a passcode to open it. After about 5 minutes of counting the sister said, victoriously "You have only Rs. 620 in your bank, I have a lot more!". She added "620 mei to ek bhi accha toy nahi milega, kuch bhi accha nahi milega".
My mind immediately went to SIPs, I wished I could explain to them just how rewarding a small amount of Rs. 500 can be. One can easily whip up an excel sheet and find out how much a Rs. 500 SIP started in the early 20s will be worth after 15 or 20 years, but returns rarely follow the excel formulae. What is more important is to be aware of the power that an SIP has.
So what exactly is an SIP? How does an SIP work? What is the minimum investment required in an SIP? Let's find out.
What is an SIP?
As the name suggests SIP is a Systematic Investment Plan - which is a fixed value and periodic investment plan. SIPs enable small, regular investments in mutual funds instead of single large lumpsum amounts.
How SIPs Work
An investor selects a particular scheme to invest in and the amount that will be invested in a periodic manner. Most SIPs are done on a monthly basis, but you can do SIPs bi-monthly, weekly, quarterly, etc. In case of a monthly SIP, a particular date of investment is fixed for each month with Asset Management Company (AMC). As the amount is fixed (in most cases, though there are SIP types where the investment value may vary), the number of units gained depends on the Net Asset Value (NAV) on the chosen transaction day. If the NAV is higher, the investor gets fewer units and if the NAV is lower, the units gained is higher. Eg) If I start a SIP of Rs. 1000 in a particular scheme of HDFC Mutual Funds on a monthly basis with transaction date fixed as 5th of each month, let us look at how the units will be allotted. If the NAV in February is 18.4, I will get (1000/18.4) 54.35 units. In March, supposing the NAV decreases to 17.1, i will get 58.48 units. My total units accrued in two months is 112.83. How is this good? Well the NAV of a well performing fund might show some fluctuation, but overtime it should generally grow. Let's assume that i continue my SIP for 4 years and the NAV becomes 32; this means that the 112.83 units (allotted for just two months 4 years ago) have a current valuation of Rs. 3610.5
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| Month | SIP Amount (₹) | NAV (₹) | Units Bought | Cumulative Units | Future NAV in 2029(₹) | Future Value of Units (₹) |
|---|---|---|---|---|---|---|
| Feb 2025 | 1,000 | 18.4 | 54.35 | 54.35 | 32 | 1,739.2 |
| Mar 2025 | 1,000 | 17.1 | 58.48 | 112.83 | 32 | 3,610.5 |
SIP facilitates this growth of investment through small, periodic, planned, fixed value investments over a period of time. Consistency is crucial here and not the daily NAV movements. In fact, when investments is done at a lower NAV, one gets higher number of units which will give more returns when the NAV does go up in future. So volatility in the market is actually beneficial to the investor irrespective of the direction of the movement. Over the long run, a properly selected set of funds by SIP mode will give substantial returns.
Key benefits of an SIP
SIP has many benefits. It automates the investment process, reduces documentation and procedural work. SIPs have the potential to give much higher returns than fixed income, debt or other investment avenues. It helps in building a "investment mindset" due to the periodic nature of the investments.
How to start an SIP?
There are many ways to start an SIP. The first step is always reviewing goals, selecting the right mutual fund scheme or set of schemes. Once this is done, one can directly approach the AMCs of the funds and start an SIP by filling forms or through their respective websites. One can also start SIPs through online portals like Zerodha, Groww, etc. Another way is to approach a certified intermediary who will help with the SIP initiation process.
An investor opting for an SIP has to decide an investment value in the chosen mutual fund scheme and whether the investment has to be done weekly or monthly. Accordingly, the units will be assigned on the selected date. If an individual wants to invest Rs. 2000/- on the 5th of every month, they will be assigned the number of units worth Rs. 2000/- on the basis of the NAV on the 5th of each month.
An investor can also opt to "top up" the SIP as required. So if the Rs. 2000/- SIP has to be increased every year by Rs. 500/- this can be pre-arranged; in which case, after 12 instalments, the 13th investment will be worth Rs. 2500/.
Also, SIPs can be stopped, changed any time as required.
Some of the important things to keep in mind:
1. Keep the required amount in the bank after authorizing the eNACH for the SIP investments. If there are insufficient funds, penalties are charged by the bank.
2. Keep in mind the exit loads in case you stop, switch the SIP before the exit load tenure of the funds.
3. You can have one or any number of SIPs.
4. A good way is the select a single date in the first week of every month for all the SIPs. This is good a good practice for financial discipline, the investment is done right at the start of the month and the budget for spends for balance of the month is clearly known.
5. SIPs can even be started for minors by appointing guardians as the custodians of the investments till the time they become adults.
6. Investors can change the value of their investment by opting for a "flexible SIP". In a flexible SIP, a base minimum investment and tenure is set by the investor. If the NAV of the fund reduces, the AMC triggers a flexible value of the next instalment which will be higher than the base minimum decided amount. This is calculated by a formula set by the AMC. This product is suited to investors who want to take benefit of reduced NAV and accrue more number of units.
7. The periods of an SIP can be daily, weekly, bi-monthly, monthly, etc.
FAQ
Can I start an SIP with less than ₹500?
SEBI mandates a minimum of ₹500 for SIPs, but some platforms let you start with just ₹100.
What happens if NAV falls after I invest?
When NAV falls, your same investment fetches more units—this is the benefit of rupee cost averaging.
Sherpa’s Note: Just like small savings in a piggy bank, a ₹1,000 SIP may seem small—but over time, it grows meaningfully. Want to see how your SIP can grow? Write to us at thoughtcloud09@gmail.com and we will connect you with certified experts.
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