Question 1

What is a Systematic Investment Plan (SIP) and how does it work?

Accepted Answer

A Systematic Investment Plan (SIP) is an investment vehicle offered by mutual funds where you invest a fixed amount of money regularly (e.g., monthly) instead of making a one-time payment. It allows you to build wealth over time through compounding and benefits from Rupee Cost Averaging, meaning you buy more units when prices are low and fewer when they are high.

Question 2

What is the difference between SIP and Lumpsum investment?

Accepted Answer

A SIP involves regular, periodic contributions (monthly, weekly, etc.) into an investment plan. It is ideal for salaried individuals to invest systematically. A Lumpsum investment is a one-time major deposit made at once, suitable for those who have a large surplus of idle cash (e.g., from bonuses, property sales, or savings).

Question 3

How does the compounding formula calculate SIP returns?

Accepted Answer

SIP returns are calculated using the Future Value of an Annuity formula: M = P × [ ( (1 + i)^n - 1 ) / i ] × (1 + i), where P is the monthly investment, i is the periodic interest rate (annual return rate divided by 12, then divided by 100), and n is the total number of monthly payments. Compounding helps your accumulated returns earn further returns over the investment period.

Question 4

What expected return rate should I enter in the calculator?

Accepted Answer

Mutual funds do not offer guaranteed returns as they are linked to the market. Historically, long-term equity mutual funds in India have delivered average returns ranging between 12% to 15% per annum. Debt mutual funds generally yield between 6% to 9%. You should choose a conservative expected rate of return based on your fund type and historic performance.

Question 5

How does Rupee Cost Averaging help long-term investors?

Accepted Answer

Rupee Cost Averaging eliminates the need to time the market. When market prices fall, your fixed SIP installment buys more mutual fund units. When markets rise, it buys fewer units. Over a long tenure, this averages out the cost of unit purchase, lowering your overall purchase price and maximizing profits when the market trends upward.

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