How small can and should your SIP be?

SIPs or Systematic Investment Plans are slowly gaining popularity for people starting out in their investment journeys. For those investing in mutual funds, SIPs provide a simplistic approach allowing people to invest a fixed amount of money at regular intervals.

SIPs come with many advantages, including gaining the advantage of rupee cost averaging, long term wealth generation through the compounding effect, disciplined and consistent investing, access to professionally managed fund, the option to halt investments and an unrestricted ceiling on your investments.

Starting Small: What is the minimum SIP amount for mutual fund investments?

For any beginner, at a certain stage of the research, comes a pivotal point of decision making where they need to determine what their ideal SIP amount is, and what the minimum amount one can invest is. The smallest amount that one can invest mutual fund investments is 10 rupees. This aims to increase the investor pool by reducing the initial hesitations of blocking liquid funds and allowing more people to invest. Starting small also helps lower the average price you pay overtime.

The option to invest as little as ₹100 a month in mutual funds is a key advantage, making it accessible to a broader range of people. By keeping the minimum amount low, it naturally includes a wider range of individuals. This means people with lower incomes, young workers, and even students who get pocket money can choose to invest in mutual funds. Many investors like SIPs of ₹100, ₹500, or ₹1,000 per month.

There are various ways to invest using small payments. You can do daily, weekly, monthly or yearly frequencies under SIPs. While these requirements vary for each Asset Management Company, for Axis Asset Management Company, the daily, weekly and monthly SIPs require a minimum of 6 instalments and can be of Rs.100 and in multiple of Rupee 1. However, the yearly option has a minimum amount of Rs.12,000 and in multiple of Re.1.

How small should your SIP be? Factors to consider before you determine your SIP strategy

Deciding on how small your SIP should be includes a consideration of various factors that could help determine your financial profile and SIP strategy. There is no set single right answer here. The amount should be determined on the basis of your personal financial goals and plans.

Below are a few factors you should keep in mind before you start your SIP:

1. Goal Planning: Think about what you're saving for, like a car, healthcare expenses, education or family planning. Knowing your goals will help you decide how much and for how long to invest. From there do a reverse calculation to determine a bare minimum amount that you should be investing to get to your personal goals and plan upwards from there.

2. Your Personal Finances: Look at how much money you earn and spend each month. You should be in a position where saving x amount every month should not be adding any extra stress but rather it should help you feel more assured about your budgeting and savings.

3. Your Risk Appetite: Check in emotionally and determine how averse you are to risks. Market ups and downs are common, however, SIPs provide a longer term goal based outlook. You can always refer to the risk-o-meter available on our website for the various schemes offered Axis Mutual Funds and choose one that suits you.

4. The Power of Compounding: Think of your investment earnings also earning money over time. For example, to showcase the power of compounding in your investment, for the purposes of illustration, let us take the example of the Nifty 500 equity fund and you invest a lump-sum of ₹100. Assuming a yearly returns of 12.80%:

Year 1: You invest: ₹100, Return (12.80%): ₹12.80, Total: ₹112.80

Year 2: Starting amount: ₹112.80 (your initial ₹100 + ₹12.80 earnings), Return (12.80%): ₹14.44 (12.80% of ₹112.80), Total: ₹127.24

Year 3: Starting amount: ₹127.24 (previous total), Return (12.80%): ₹16.30 (12.80% of ₹127.24), Total: ₹143.54

Year 4: Starting amount: ₹143.54, Return (12.80%): ₹18.38 (12.80% of ₹143.54), Total: ₹161.92

Notice how the return amount increases each year (₹12.80, then ₹14.44, then ₹16.30, then ₹18.38). This is because you're not just earning on your initial ₹100 anymore; you're earning on the accumulated returns as well.

If you had just earned ₹12.80 each year on your initial ₹100 (simple interest), after 4 years you would only have ₹151.20 (₹100 + ₹12.80 + ₹12.80 + ₹12.80 + ₹12.80). However, with compounding, you have ₹161.92.

This difference might seem small over just a few years, but over longer periods, the effect of compounding becomes significantly more powerful, allowing your investments to grow exponentially

Continuing on the example, say you make this a yearly investment and start a SIP. Similarly to the compounding example, we consider the Nifty 500 equity fund but now you invest ₹100 every month for four years. Assuming a CAGR of 12.80%:

Your final invested amount: ₹4,800

Total value of your investments: ₹6,198

Estimated returns: ₹1,398

If you have different amounts in mind, and would like to try out these calculations for yourself, you can try out our SIP Calculator. (/mutual-funds-sip-calculator)

As your income grows over time, you can also consider gradually increasing your SIP amount. Just like adding some fertiliser, increasing your regular investment can significantly accelerate the power of compounding and help you reach your financial goals faster.

5. Rupee Cost Averaging: Rupee cost averaging allows for a smarter way to invest in SIPs. By investing a fixed amount regularly, you buy more units when prices are low and fewer when they are high. This automatically lowers the average price you pay for your investments over time, helping you get more value. It also makes investing simpler as you don't need to constantly watch the market, you can be confident in your steady investments through ups and downs.

6. Investing discipline: One of the key factors that work a benefit when investing using SIPs is the fact that you can build discipline in your investing practices. SIPs help you stick to your investment plan and builds a discipline toward your finances and money management.

Using the right tools for your SIP Investment strategy

To ensure that you’re on the right path with your SIP strategy and make your work easier, you can refer to our SIP Calculator (/sip) to help you build your personalised SIP strategy.

Frequently Asked Questions around SIP

Q: How does SIP work?

A: A Systematic Investment Plan or an SIP is a method that allows you to invest fixed amount of money at regular intervals. This is a disciplined approach that helps you invest consistently without the stress of the market.

Q: How does SIP work with an example?

A: Let’s say you invest Rs. 1000 per month in a mutual fund using SIP. In January, if the Net Asset Value (NAV) of the fund is ₹50, you purchase 20 units (₹1000 / ₹50). In February, suppose NAV is reduced to ₹40, your ₹1,000 gets you 25 units (₹1000 / ₹40). By investing the same amount, you purchase more units when the price is lower and fewer units when the price is higher.

Q: How does SIP give profit?

A: SIP investments generate profit as the Net Asset Value (NAV) of the mutual fund investments you hold changes over time. If the value of the underlying assets in the mutual fund grows, the NAV rises and when you redeem your units, you will receive more money than invested. By investing regularly with SIP, you end up with more units, which can lead to bigger profits as the fund grows.

Q: Do SIPs in mutual funds really work in the long term?

A: Yes, historically, SIPs in well-chosen mutual funds have proven to be an effective strategy for long-term wealth creation by averaging out costs and benefiting from compounding. Using SIPs, when prices are down, your fixed amount will help you buy more. When prices are up, it will buy less. Moreover, compounding will ensure that your money makes you more money over time.

Q: Wealth creation through SIP in Mutual Funds?

A: SIPs in mutual funds can help create wealth over time by allowing regular investments, benefiting from rupee cost averaging and the power of compounding. Instead of trying to save a huge amount all at once, you use a SIP to put aside a smaller, manageable amount every month. Over many years, this regular saving, combined with the benefit of buying more when prices are low and the 'interest on interest' (compounding), can help your small contributions turn into a large sum of money.

Q: SIP vs lump sum investment?

A: SIP involves investing a fixed amount regularly, while a lump sum is a one-time large investment; SIPs are generally considered to help you weather volatility. You can choose either method of investing as per your personal needs. You can think of SIP like taking small steps up a staircase regularly and lump sum as taking a jump to land somewhere on the staircase.

Q: SIP small investment plan?

A: Yes, SIPs are a way to make small, regular investments in mutual funds. It's designed for people who prefer a more disciplined approach. To figure out how much that 'little bit' should be for you to reach your goals, you can use a SIP Calculator.

Q: Is SIP same as mutual fund?

A: Consider a mutual fund like a large bucket of money in which numerous individuals contribute their savings. This bucket is taken care of by an expert who determines where to invest that money (in stocks, bonds, etc.). A SIP is simply the way you invest your money in that bucket – you do it on a periodic basis, in small amounts, rather than contributing all at one time. Therefore, a mutual fund is the investment product, and SIP is how you invest in it.

Q: Can I invest ₹100 in mutual funds SIP?

A: Yes, many mutual fund schemes allow you to start a SIP with as little as ₹100. It makes investing accessible to almost everyone, even if you don't have a lot of money to start with.

Q: Can I invest ₹1000 in SIP?

A: Yes, ₹1000 is a common and easily investable amount for a SIP. It makes investing accessible to almost everyone, even if you don't have a lot of money to start with.

Q: Can I invest Rs.100 Daily in SIP?

A: Yes, some mutual fund houses offer daily SIP options with a minimum amount like ₹100. It makes investing accessible to almost everyone, even if you don't have a lot of money to start with.

Disclaimers:

This document represents the views of Axis Asset Management Co. Ltd. and must not be taken as the basis for an investment decision. Neither Axis Mutual Fund, Axis Mutual Fund Trustee Limited nor Axis Asset Management Company Limited, its Directors or associates, shall be liable for any damages including lost revenue or lost profits that may arise from the use of the information contained herein. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The material is prepared for general communication and should not be treated as a research report. The data used in this material is obtained by Axis AMC from the sources which it considers reliable. While utmost care has been exercised while preparing this document, Axis AMC does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The AMC reserves the right to make modifications and alterations to this statement as may be required from time to time.

Mutual Fund Investments are subject to market risks, read all scheme-related documents carefully.