SIP investing means a fixed amount or pre decided amount is invested regularly in any mutual fund scheme, and is similar to Bank’s recurring deposit. Regularly or regular interval means, as per the investor’s preference it could be daily (working days), weekly, monthly, semi annually or annually. One can start with an investment as low as ₹ 500/- each month. By providing bank standing instructions (a standing instruction is a fixed order you give your bank to automatically transfer a set amount of money on a chosen date) to debit the amount on each interval. S-I-P is the way to enter into the world of investment easily with a very small amount for a long term. If the horizon is for long term, by investing regularly investment can grow sue to compound interest as the returns are reinvested. S-I-P are ideal for beginners & seasoned investor and goal based financial planning, it is a smart and hassle free way to invest regularly in mutual funds.

S-I-P Investing offers the advantage of Rupee Cost Averaging, as we all know prices rise, fall and change direction without any intimation or warning, if a fixed amount of money is invested at regular interval through S-I-P regardless of the market conditions. It means that investor buy more units price are low and less unit when price are high. This helps to average the overall cost per unit. This approach was introduced by Benjamin Graham in his book “The Intelligent Investor”, S-I-P works on the foundation of this approach.

Net Asset Value (NAV) –SIP Investing

In SIP InvestingNet Asset Value (NAV) represents the value of each unit. NAV is the price at which you can buy or sell a unit of mutual fund. It is calculated by taking the total value of the entire asset in the fund, subtracting the liabilities and dividing this net value by the number of units outstanding.  The NAV is set at ₹ 10/-at the start of a New Fund Offer (NFO). The NAV of a mutual fund fluctuates daily with the change in the market value of its underlying assets.

When you invest through systematic investment plan (SIP), your fixed installment buys mutual fund units at the prevailing NAV on the SIP date.

Unit Allotted = SIP Amount / NAV on SIP date.

Net Asset Value (NAV) is a foundational concept that helps you understand how mutual funds are priced and how your investments grow over time.

Securities Exchange Board of India (SEBI) has set cut-off times for Mutual fund transactions. These timing determine the NAV applicable to your transaction. If the investment is made before 3:00 PM for equity funds, the same days NAV is applicable. Post 3:00 PM, the next working day NAV is considered.

S-I-P based on two theories: Compounding and Rupee cost averaging.

Power of Compounding – SIP Investing

Compound interest is “interest on interest” in this process interest is earned not only on original money (principal) but also on the accumulated interest from previous periods, since the principal amount keep growing every year so does your return. This is the power of compounding. Lets understand with example, suppose you invest ₹ 5, 00,000/- at a rate of return 10% today, then at the end of 5 years, your maturity amount will be ₹ 8, 05, 255/- . It implies that you have earned ₹3, 05,255/- without putting any hard effort and only thing that works here is power of compounding.

Power of compounding in mutual fund – Suppose you invested ₹ 100/- and the compound interest you have earned is ₹ 5/- on this investment. In the next compounding cycle, the return will be calculated on ₹ 105/- instead of ₹ 100/- thus there is a possibility of growing the corpus exponentially rather than linearly.

Rule of 72 – SIP Investing

It is a formula used to estimate how long it takes for an investment to double in value under a fixed annual rate of return. This concept is not only limited to investment only but it can be utilized in measuring inflation, loan interest, and other area of financial planning. The rule of 72 is laid by Luca Pacioli in 1494, though this rule commonly treated as thumb of rule.

The formula for the rule of 72, divides the number 72 by annualized rate of return (the interest rate)

Number of Years to double = 72 / Interest Rate (%)

The implied number of years for the investment‘s value to double can be approximated by dividing the number 72 by the effective interest rate.

The effective rate of interest rate used in the equation is not in percentage form.

However limitations of Rule of 72 are it assumes fixed rate of return, relies on compounding, and is less accurate with simple interest, irregular compounding, or inconsistent return.

Rupee Cost Averaging – SIP Investing

In SIP Investing regardless of the market is up or down, where a fixed amount or pre decided amount of money is invested at regular interval in a mutual fund is Rupee cost averaging and it is done through systematic investment plan. Since the investment amount remain same, the number of unit to be receive depends on the price at that time i.e. when the price is low, you get more unit and when the price is high, you get less unit. This leads to an average cost per unit instead of a single purchase price and reducing the impact of market fluctuations over time. If you continue your investment for long period say more than 5 years and if the market has gained, the average cost tends be lower than the present NAV and you will gain accordingly i.e. Gain = Present NAV – Average NAV.

Conclusion

S-I-P are ideal for beginners & seasoned investor and goal based financial planning, it is a smart and hassle free way to invest regularly in mutual funds. S-I-P offers the advantage of Rupee Cost Averaging, as we all know prices rise, fall and change direction without any intimation or warning, if a fixed amount of money is invested at regular interval through S-I-P regardless of the market conditions.

Disclaimer

This blog is for general informational and educational purposes only and does not constitute financial, investment, tax, or legal advice. The information is based on publicly available sources and market understanding at the time of writing and may change due to global developments. Past performance of markets during geopolitical events does not guarantee future results. Readers are encouraged to conduct their own research and consult qualified professionals before making investment decisions. Finance with Prakash does not provide any assurance regarding outcomes based on this information.