Best SIP Plan for 20 Years

Before we see the individual SIP plan, it is essential to get some concepts clear about the SIP itself. Why? Because if we know what is SIP, we will eventually use it more effectively for wealth building.

What is a SIP Plan? SIP or Systematic Investment Plan, is a way of investing in mutual fund schemes. SIP is not an investment option, it is an investment style.

Who should Invest in SIP? Some people like to invest their money in lump sum. Some like to invest in small amounts. SIP allows one to invest money in small-small amounts in mutual fund schemes.

Why SIP is Great? Because SIP is the easiest way of wealth building for a common man. How? It puts our investment on auto-pilot. Every month, money gets invested without our intervention.

Which is the Best SIP? When investment horizon is as long as 20 years, the best SIP plan will be one which invests in multi cap mutual funds.

SIP Calculator

Try my SIP calculator. Use this SIP calculator to estimate how much wealth can be accumulated by investing systematically in mutual funds through SIP.

Example: Investing Rs.1,000 per month for next 10 years, @15% p.a. return, will build a wealth of Rs.2,78,600. Here the invested amount in these 10 years is Rs.1,20,000.

Check for yourself: How much wealth can be build by starting a monthly SIP of Rs.2,500/month for 15 years, @15% p.a. return.

Monthly Contribution (Rs.)
Expected Return p.a. (%)
Time (in years)


SIP – Appreciated Amount (Rs.)
SIP – Total Investment over Time (Rs.)
SIP – Effective Annualized Return (%)

[Read more about SIP’s effective annualised returns]

Introduction

Through SIP, one can accumulate mutual fund units gradually. This gradual accumulation over time, can build a reasonably big corpus.

What makes SIP good?

SIP makes investment affordable and convenient for small investors. One can buy units of mutual funds in small-small quantities each month. As quantities purchased are small, the investors does not feel the burden of investment.

SIP’s (Systematic Investment Plans) have proved to be more sustainable for common men, hence people stay invested longer. Longer investment time horizon means, higher returns (in equity based plans).

How SIP is Best?

SIP plans have emerged as a saviour for common man’s investment objective. It has not only allowed us to invest, but also has inculcated a good habit of regular investing within us. Hence, both beginners and experienced investors prefer to invest in mutual funds through SIP route.

SIP invests our money gradually. Coupled with this benefit, the advantage of compounding returns also kicks-in. These reasons make SIP the best wealth creator for common man.

How investment is gradual in SIP?

Big amounts are not used at a time to buy mutual fund units. Instead, smaller amounts like Rs.500 per month can be invested in SIP. Investments are not done in lump-sump. Moreover, it does not stop after one-transaction. Several small-small transaction every month makes a SIP.

It is true that in SIP the accumulation process is slow. But it is a very sure way to gather units (wealth) without fail, every passing month.

When I first started using SIP, I did the following:

  • Invested Rs.500 each month.
  • Continued investing this amount for 5 years.
  • Used SIP to accumulate diversified equity fund units.

SIP or Direct Stocks?

Investing in equity through mutual funds (SIP) is ideal for novice (small investors, beginners etc). Why? Because direct stock investing has its own advantages and disadvantages. But for small investor who lacks expertise, disadvantages are more dominant.

Direct equity investing demands time and knowledge on part of the investor. Generally speaking, small investors does not have the required know-how necessary for practising successful direct stock investing. 

Mutual Fund SIP is indirect investing in stocks. There is a layer of protection in SIP. Even if the person has minimal knowledge of stocks (equity), they can invest in it through mutual fund (SIP) route. Risk of loss will be minimal.

It is best for people who do not have time to research individual stocks before investing. Small investors are more likely to make money in equity by investing through SIP route.

Though I personally love direct investing in stocks, but for passive investing, following a SIP plan is better. I have my stocks analysis worksheet which helps me to perform detailed stock analysis.

But a portion of my equity investment portfolio is still accumulated through SIP route. Why? Because I have felt that it drastically improves my investment efficiency. How?

Because portfolio of good mutual funds are managed by pro fund managers. There are less reasons to doubt their investment knowledge and acumen.

SIP & Compounding of Money

Systematic investment plan (SIP) is an excellent way to build large corpus (gradually). To understand the real advantage of SIP, we cannot miss to take a note of the power of compounding.

Consider this for an example, one can spare just Rs.1 per month for SIP. Let’s use a magic table to evaluate the level of returns.

Best SIP Plan - MagicTable

How to read the above table?

EXAMPLE 1:

– Investing Rs.1 per month,
– ROI @8% p.a.,
– Time horizon: 3 years,
– Size of corpus built: Rs.40.

Rs.1 per month becoming Rs.40 in 3 years. Using the same multiplying factor of 40, suppose one does a SIP of Rs.500 per month. What will be the corpus in next 3 years (@8% p.a.)? It will generates a corpus of Rs.20,000 (40 x 500).

EXAMPLE 2:

– Investing Rs.1 per month,
– ROI @10% p.a.,
– Time horizon: 6 years,
– Size of corpus built: Rs.99.

Rs.1 per month becoming Rs.40 in 3 years. Using the same multiplying factor of 99, suppose one does a SIP of Rs.1,000 per month. What will be the corpus in next 6 years (@10% p.a.)? It will generates a corpus of Rs.99,000 (99 x 1,000).

EXAMPLE 3:

– Investing Rs.1 per month,
– ROI @14% p.a.,
– Time horizon: 15 years,
– Size of corpus built: Rs.612.

Rs.1 per month becoming Rs.612 in 15 years. Using the same multiplying factor of 612, suppose one does a SIP of Rs.5,000 per month. What will be the corpus in next 15 years (@14% p.a.)? It will generates a corpus of Rs.30,60,000 (612 x 5,000)

Gradual Accumulation of ‘Units’ Using SIP Plan

Best SIP Plan - Units Accumulation

Les see how units are accumulated using SIP by means of an example:

First Month – Aug

  • SIP amount: Rs.2000.
  • NAV: Rs.51.8470
  • Units purchased: 38.575 nos (2000/51.847)

First Month – Sept

  • SIP amount: Rs.2000.
  • NAV: Rs.55.6328
  • Units purchased: 35.95 nos (2000/55.6328)

First Month – Oct

  • SIP amount: Rs.2000.
  • NAV: Rs.55.7839
  • Units purchased: 35.853 nos (2000/55.7839)

This way, each month SIP bought specific number of mutual fund units for its investor. By the end of the 12th month, total number of all units purchased in last 1 years is 397.989 (see above table).

  • These 397.989 units had a market value of Rs.29,436.
  • Invested value was Rs.24,000.

The gain happened anyhow. Irrespective of the fact that in between months, NAV of mutual fund was very volatile. There is a very important point to note here:

The quantity of units purchased is dependent of the NAV.

When NAV was higher, less number of units was purchased. See between starting months Aug (NAV: 51.847, Unit: 38.575 nos) and Sep (NAV: 55.6328, Unit: 35.95 nos).

When NAV was lower, more number of units was purchased. See between the months Dec (NAV: 60.0082, Unit: 32.29 nos) and Jan (NAV: 58.1113, Unit: 34.417 nos).

This is what was referred as the advantages of spreading the investment. The invested fund is spread in 12 months.

How this is an advantage? When NAV is high (expensive), SIP amount of Rs.2000 is buying less units. When NAV is low (cheaper), SIP amount of Rs.2000 bought more units.

This is what should be the objective of investment, right? Buy less when things are expensive, and buy more when price is low.

SIP VS. LUMP SUM INVESTING

Not everybody would prefer investing via SIP route. Yes, this is a fact. SIP is not for all type of investors. 

It is important for us to understand, in which cases SIP will work, and in which cases lump sum investing is better

Let me give you few examples, based on which this difference will become very visible. 

Case#1 – NAV is only rising

NAV of mutual fund is bullish. Price is moving up. During this course of time (say 4 months), the NAV of mutual fund rose from Rs.10 to Rs.28.

In this case lets see, which investing style is better: Lump-sum or SIP.

Lump-sum:

  • Investment amount Rs.8,000.
  • Price: Rs.10/unit.
  • Number of units purchased 800 nos (8000/10)
  • Market value of the held units at the end of 4th month is: Rs.28 x 800 = Rs.22,400.

SIP:

  • Investment amount: Rs.2,000/mon (for 4 months).
  • Number of units purchased: 452 nos [200 nos (2000/10), 100 nos (2000/20), 80 nos (2000/25), 72.428 nos (2000/28)].
  • Market value of the held units at the end of 4th month is: Rs.28 x 452 = Rs.12,656.

At the end of 4th month, market value of units are: 

  • Lump sum: Rs.22,400 and
  • SIP: Rs.12,656. 

Hence we can conclude that, in bullish market lump sum investing will be more profitable.

Case#2 – NAV falls & then recovers

Best SIP Plan for 20 Years - 1 NAV Falls Recovers

NAV of mutual fund is Volatile. Price falls, then recovers. During this course of time (say 4 months), the NAV of mutual fund first fell from Rs.23 to Rs.12. Then it rose to Rs.30 levels.

In this case lets see, which investing style is better: Lump-sum or SIP.

Lump Sum:

  • Investment amount: Rs.8,000.
  • Price: Rs.23/unit.
  • Number of units purchased: 826 nos (8,000/23).
  • Market value of the held units at the end of 4th month is: Rs.30 x 347.826 = Rs.10,434.

SIP:

  • Investment amount: Rs.2,000/mon (for 4 months).
  • Number of units purchased 29 nos [86.96 nos (2000/23), 166.67 nos (2000/12), 100 nos (2000/20), 66.667 nos (2000/30)].
  • Market value of the held units at the end of 4th month is: Rs.30 x 420.29 = Rs.12,608.

At the end of 4th month, market value of units are as follows:

  • Lump sum: Rs.10,434.
  • SIP: Rs.12,608.

Hence we can conclude that, in volatile market, SIP will be more profitable. How does this information helps us?

In real life scenario Condition 2 is more prevalent. Market remains generally volatile. Condition 1 is a rare phenomenon.

Hence, we can safely conclude that, SIP plans will prove better in normal market scenarios.

SIP Plan Vs Recurring Deposit (RD)

Why invest in SIP when a much safer investment option like Bank RD is around? The answer is linked with the potential investment returns.

Recurring Deposit is more of a saving option. Long term returns of a bank RD will be low compared to equity SIP.

Long term return of equity is better than debt linked plans. Though returns of equity (SIP) is volatile in short term, but in long term, profits are almost assured.

On one side we have RD whose returns are assured, but its ROI is low. On the other hand we have equity SIP whose returns are volatile, but its ROI is high.

Best SIP Plan for 20 Years - 2 SIP Vs RD

So an an investor, what we must choose? Depending on the available time horizon, suitable investment option can be selected.

When time horizon is longer than 3 years, equity SIP plans will be better. When time horizon is shorter than 3 years, RD will be better.

  • Time < 3 yr: Debt plans (like bank RD)
  • 3 yr< Time < 5yr: Balanced Fund.
  • Time > 5 yr: Equity Fund.

In short term, NAV of equity SIP will be volatile. Hence chances of loss (if one redeems) will be very higher. But when units are held for more than 3/5 years, growth is more assured.

How Much will be the SIP returns?

This is a very common question. What will be my return in SIP? A common answer will be, go and check in moneycontrol. But this can lead to misconception. How?

Not that moneycontrol gives a wrong data. The misconception happens due to wrong interpretation of data by ‘us’. The return numbers shown in moneycontrol will be like 15% p.a. in 10 years (example).

But in reality, effective return of SIP will be much lower (8.79%)

Use the above SIP calculator. It will help you to calculate the “real returns” possible from SIP (Effective Annualised Returns)

To elaborate on this topic, I’ve written a separate blog post on SIP return calculator. Please read it. It will be worth reading, as it unearths a different aspect of systematic investment plans (SIPs).

So doest this revelation makes SIP a bad choice? Not at all. SIP will continue to be the best investment plan for small investors.

The point I am making here is, we shall consider SIP’s real returns to calculate our corpus while dealing with SIP. Better will be to use the SIP calculator to estimate the corpus (like provided above).

SIP Plans make investment easy

Best SIP Plan for 20 Years - 3 SIP Automatic

There is no excuse left for not investing when SIP is around. Why? Because SIP plan makes investing both easy and affordable. How?

Generally speaking, people often give the following three reasons for not investing:

  1. Lack of money &,
  2. Lack of time.
  3. Lack of know-how.

But SIP plan can remove all these excuses. SIP investments are low cost. Moreover, it requires virtually no involvement of the investor. SIP invests money automatically every month by use of an online mandate.

In my early days, I did not invest enough as I was not in the habit of doing it. But SIP built that ‘investment habit’ in me.

Not investing is a bad habit. How to eliminate this bad habit? Just start a SIP and let it continue for next 7-10 years. 

SIP in Mutual Funds Vs SIP in Direct Stocks

Yes, SIP in individual stocks is also possible. But in direct stock investing the risks are very high. Not that mutual funds (equity based) are not risky, but in direct stocks, the risks get magnified

SIP in mutual funds is better. Why? Because a mutual fund portfolio is composed of several stocks (basket of stocks). Even if one stock is not performing, other stocks will negate the loss.

But individual stocks has no protection. Why? Because there is no outside protection when dealing with individual stocks.

Best SIP Plan for 20 Years - 4 Diversify

To ensure enough protection, direct stock investors must include several stocks in the portfolio. But again, investing in several stocks will be not be as economical as SIP (like Rs.500 per month).

Moreover for non-experts in stocks, mutual funds provides another benefit. No expertise is necessary to invest in mutual funds through SIP route.

On the other hand, direct stock investing requires lot of “business specific know how”. This is what makes “direct stock investing” difficult for small investors.

But isn’t mutual funds also contain stocks? Yes, it does. But these stocks are very carefully bought. How?

Mutual Funds generally buy Stock of good companies at right price.

It is the responsibility of the mutual fund manager to buy good stocks at right price levels. The investor has no obligation. He/she can be rest assured that the money is handled well by the fund house.

How to Start a SIP?

If one has an online trading account then starting SIP becomes easy. Let’s take an example of how AxisDirect can help to start SIP. The procedure is simple, and the same rules applies for almost all platforms dealing with online investing in mutual funds. 

Best SIP Plans - how to invest
Best SIP Plans - how to invest

Step 1

Select the AMC. In our example I have selected HDFC ASSET MANAGEMENT CO. LTD

Step 2

Select the Fund-Category of mutual fund. In our example I have selected EQUITY fund.

Step 3

Select the Sub-Category of mutual fund. In our example I have selected DIVERSIFIED EQUITY fund.

Step 4

Search for the SCHEME NAME. Click the ‘Magnifying Glass’ under Scheme Name

This will open a new pop-up window which which will show all fund under the said sub-category. Select your preferable scheme. In our example I have selected HDFC PREMIER MULTI-CAP FUND-GROWTH.

Step 5

Select monthly SIP amount & date of SIP Start

Period in “months” must also be confirmed. If one selects a period of 60 months, it means the SIP will continue uninterrupted for next 5 years.

Once done clicking on SUBMIT button and the SIP starts for the next 5 years. 

Starting Early is Beneficial

By merely investing Rs 1,000/month one can build lakhs. See the below examples:

  • Rs.1,000/m @9.2% p.a. can build Rs.2.0 Lakhs in 10 years.
  • Rs.1,000/m @9.2% p.a. can build Rs.6.9 lakhs in 20 years.
  • Rs.1,000/m @9.2% p.a. can build Rs.18.5 lakhs in 30 years.
  • Rs.1,000/m @9.2% p.a. can build Rs.44 lakhs in 40 years.

From these figures we can understand that, the more time we give to SIP, the bigger will be the corpus. Why? Because in later years the corpus multiplies faster. Let’s understand this with an example

Jack and Peter are two friends. Both are 22 years of age. They will retire at 60 years of age (after 38 years from today). 

Jack decided to start a SIP to fund his retirement plan. He started with a decent sum of Rs 2,500/month in a diversified equity fund. The fund generated an average return of 15% p.a. Investment time span was 38 years.

 By investing Rs.2,500 / month, Jack built a corpus of Rs.5.8 Crore in 38 years

Peter realised the importance of SIP later. Hence he started the SIP after 5 years from Jack. He also began investing with the objective of accumulating Rs 5.8 crore by the time he is 60 years of age. 

But in order to do it, he has only 33 years in hand (Jack had 38). 

 By investing Rs.5,300 / month, Peter built a corpus of Rs.5.8 Crore in 33 years

Best SIP Plan for 20 Years - 5 SIP Start Early

Peter regretted and cursed himself for starting to invest late. Why? Because to build the same retirement corpus (Rs.5.8 Crore), Peter had to spend Rs.5,300 per month compared to Jack who was investing only Rs.2,500 per month. 

Why this happened? Because Peter started 5 years later than Jack.

So if you also want to become a crorepati by the time you retire, start investing in  SIP Plan from today.

Effect of Inflation on Wealth Built through SIP

In the above example of Jack and Peter the retirement corpus of Rs.5.8 Crore. The value looks inspiring, right? But there is a catch. The amount of Rs.5.8 Crore is not as formidable as it sounds. Why? Because of inflation

To understand the effect of inflation, we will have to calculate the present value of Rs.5.8 Crore. Why present value? Because Rs.5.8 Crore 38 years from now will not be the same as today. Why? Because inflations erodes the purchasing power of our Rupee. Read more about the time value of money here…

How to calculate the present value? By using the present value formula in MS EXCEL. The Present value formula is like this:

Present value = PV (rate, nper, pmt, pv, type)

  • Rate – 6% (average inflation for next 38 years).
  • Nper – 38 years.
  • Pmt – 0.
  • Pv –  Rs.5,80,00,000 (Rs.5.8 Crore retirement corpus).
  • Type – Here also the payment is due at the end of period. Hence we will use zero(0).

= PV (6%, 38, 0, 58000000, 0)

Best SIP Plan for 20 Years - 6 SIP PV Formula

Assuming that the average rate of inflation for next 38 years will be 6% per annum. Present value of Rs.5.8 Crore is 63.36 Lakhs. What does it mean,?

63.35 lakhs (of today) = 5.8 Crore (after 38 years).

The value of currency falls with time. Every year, the purchasing power of our Rupee goes down due to inflation. Hence, do not get distracted by the big numbers (like Rs.5.8 Crore) coming into your hands in future.

To get the real feel of those numbers, always use the Present Value estimation.

Best SIP Plan for 20 Years

How to find such a fund? I generally refer the resource offered by Morningstar India. 

I look for those funds which has performed best in last 10 years time horizon. 

Generally when I have to invest for a time horizon as long term 20 years, I will go for a multi cap fund

Using these two screening criteria, the Top 5 funds that has been suggested by morningstar are as below:

(Updated as on Dec’2018)

SLName of FundReturn (10Y) %
1Invesco India Multicap Fund (G)23.17
2Mirae Asset India Equity Fund (G)21.68
3Reliance Multi Cap Fund (G)21.19
4IDFC Multi Cap Fund (G)21.19
5HDFC Equity Fund (G)18.50

Have a happy investing.

2 Comments

  1. Best thing about the Kotak mutual funds is they allow you to invest small amounts through SIP. So, whenever you set up your SIP with any of the mutual fund, the account will be debited the fixed amount each month in your SIP plans.

  2. The major advantages of investing through SIP investments are they will help to cultivate the investing habit. Moreover, such investment amounts do not have to be huge. You can invest as low as 500 Rs to 1000 Rs per month in your Kotak mutual funds scheme.

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