SIP: What are the benefits of investing in a systematic investment plan? Will you get a good return?

Systematic Investment Plans or SIPs were first introduced to Indian investors in the late 1990s when the Indian markets were beginning to open up. Since then, SIPs have grown in popularity with investors. According to data from the Association of Mutual Funds in India, over 6.8 crore SIP accounts exist across different mutual funds in India. In July 2023,  mutual funds saw gross collections of Rs 15,245 crore from SIP accounts. This translates to an average of just over Rs 2,200 invested per SIP account. 

But while the numbers can help us see the growing popularity of SIPs in India, they don’t answer the question of why investors are choosing to opt for SIPs. 

SIP Benefits 

Every investor’s end goal is to generate returns. No one is investing in the market without the goal of seeing their investment amount grow. While there are many techniques, strategies, ideas, and tools to try and increase these returns, consistently beating the market and generating returns is hard. SIPs help investors to increase their returns through some clever principles. 

One of the biggest correlations between higher returns in the stock market is the time horizon of the investment. Generally, the longer you’re invested in the markets the better you’ll come out to be. SIPs help investors be in the market for longer by encouraging regular investment and financial discipline. Through regular investing, especially during economic downturns, investors are able to consistently make returns. 

Another important principle working at play is the dollar cost average principle. Instead of trying to time the market to buy when prices are low and sell when high, by investing a set amount across multiple regular intervals investors are able to offset the risk of buying high and selling low. 

Finally, SIPs make it easier to invest. It is far easier to invest in a mutual fund and find good returns than it is to find good stock picks and then generate returns through self-research. However, many investors may find that it is harder to cough up the lump sum investment requirements for mutual funds in one go. SIPs solve that problem by breaking up that investment into multiple transactions. 

SIP Returns 

SIPs can generate significant returns for investors. While SIPs in large-cap mutual funds can average between 12-15 per cent in yearly returns, outlier performers in different categories have shown returns of even over 35 per cent in a year. However, as with every investment, higher returns come with higher risks. 

Even assuming a modest SIP contribution of Rs 500 a month for 20 years at 12 per cent returns, an investor’s initially invested Rs 1.2 lakh will grow to nearly Rs 5 lakh. A more aggressive strategy of investing Rs 7,500 a month at 15 per cent interest for the same period will result in a total wealth of Rs 1.13 crore against an investment of Rs 18 lakh. With higher returns through more riskier mutual funds, the returns can be even higher. Similarly, earlier investments can net even greater proceeds.