SIP explained: Rs 5,000 a month at three assumed rates
A SIP, or Systematic Investment Plan, is a way to put a fixed amount into a mutual fund at regular intervals, usually every month. Many salaried people use it because it works like a standing instruction: the money leaves your account on a set date, and you do not need to decide when to invest. This guide explains how it works and shows what different assumed returns would mean, so you can see why the return assumption matters so much.
What the industry body says
The Association of Mutual Funds in India (AMFI) describes a SIP as an investment plan offered by mutual funds where you invest a fixed amount in a scheme at fixed intervals, say once a month, instead of making a lump-sum investment. AMFI says the instalment can be as little as Rs 500 a month, and compares it to a recurring deposit where you deposit a small fixed amount every month.
AMFI also explains rupee cost averaging with an example: a SIP of Rs 1,000 buys 50 units when the NAV is Rs 20 and 100 units when the NAV is Rs 10, so the average cost of those 150 units is Rs 2,000 / 150, about Rs 13.33. It then adds a caution that matters: rupee cost averaging does not assure profit, nor does it protect against investment losses in declining markets.
An example with round numbers
Let us invest Rs 5,000 every month for 10 years. That is 120 instalments and Rs 6,00,000 of your own money. Mutual fund returns are not fixed, so we show three assumed yearly rates. They are illustrations, not forecasts, and a market-linked fund can earn less than any of them, or lose money.
The calculation treats each instalment as paid at the start of the month, with the yearly rate divided by 12, the same method as the Gunaka SIP calculator.
- At an assumed 6% a year: about Rs 8,23,494, so a gain of about Rs 2,23,494.
- At an assumed 9% a year: about Rs 9,74,828, so a gain of about Rs 3,74,828.
- At an assumed 12% a year: about Rs 11,61,695, so a gain of about Rs 5,61,695.
We verified these with two separate calculations. The spread between the lowest and highest case is about Rs 3,38,202 on the same Rs 6,00,000 invested, which shows how sensitive the result is to a number nobody can know in advance.
How to use this sensibly
Plan with the lower case, not the higher one. If a goal needs the 12% result to work, it has little room for error. Check how long you can keep investing, because time does much of the work. Also remember that a SIP is invested in the market, unlike a post office or bank deposit, so the value can be lower than the amount you put in, especially over short periods.
Read the scheme documents of any fund, and check whether it suits your goal and your comfort with ups and downs. If you are unsure, a SEBI-registered adviser can help.
Try the Gunaka SIP calculator with your own amount and period. It gives estimates, not financial advice or a promise of returns.
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