Investing regularly in stocks or mutual funds every month is called SIP (Systematic Investment Plan). But how does SIP actually work? How does it generate returns? In this article, we’ll walk through these questions using an Excel sheet to show you the real power of SIP.
Understanding SIP
I’ve often talked about disciplined investing, and the best example of this is SIP. You may have heard about SIPs from mutual funds, Smallcase, or even me.
So, how does SIP work? How does monthly investing lead to compounding returns?
This is a fundamental question many people ask. My answer is simple: you choose a fixed date every month and invest consistently in a stock, mutual fund, or Smallcase, regardless of its price on that day.
Now, many people wonder: if I bought a share or mutual fund unit for ₹100 last month, and this month it’s ₹110, why am I buying it at a higher price? Why not wait for the price to go back down to ₹100 to get better returns?
This confusion often derails the whole investment process.
To explain how SIP generates returns, I’ll show you an Excel sheet comparison. I’ll also explain how SIPs are different from lump-sum investments and a critical factor to consider when signing up for a SIP.
How SIPs Work
To analyze how SIPs work, I referred to the Association of Mutual Funds in India (AMFI), which provides historic data of mutual funds. You can also check it out;:https://www.amfiindia.com/
I picked one mutual fund—PPFAS Flexi Cap Direct Growth Plan (Note: This is not a recommendation). I chose this randomly. Please make investment decisions using your own judgment.
On AMFI’s site, you can download the NAV (Net Asset Value) data. NAV is like the share price of a mutual fund unit. As NAV rises, the value of your investment increases. You can access NAV data of any mutual fund, even if it’s old—freely available.
I downloaded the NAV data from August 2011 to July 2016 (maximum 5 years allowed at once). The fund was launched around May 2013, and the NAV on 28th May 2013 was 9.9992, usually a NAV starts at about 10. By 27th July 2016, the NAV had risen to around ₹18—almost doubling in 3 years. Continuing from August 2016 to July 2021, the NAV reached around ₹45—meaning it increased 4.5 times in 8 years.
Types of SIP
Understand these type of Sip and pic the right one as for your goal
Top Up Sip
Flexible
Perpetual SIP
What is a Top-up SIP?
A Top-up SIP allows you to increase your monthly SIP amount at regular periods — say, every year..
For example, ₹5,000 per month today. After one year, you might increase it to ₹6,000, then ₹7,000 next year, and so on. This flexibility helps you scale your investments as your income grows.
Why is this powerful?
Because as your income increases, your cost of living goes up — but ideally, your investments should also grow proportionately. If you want to increase your investment when you have a higher income then A Top-up SIP help you do that
Also, by gradually increasing your SIP amount, you:
- Take better advantage of compounding returns.
- Invest more in high-performing funds over time.
- Avoid the temptation to spend surplus income.
This simple choice can make a huge difference in long-term wealth creation.
Here’s an example:
If you invest ₹5,000 every month for 10 years, your total investment would amount to ₹6 lakh
But if you increase your SIP by just ₹1,000 every year, your total investment becomes ₹9 lakhs — and your corpus grows significantly faster due to higher compounding!
So if you’re confident that your income will grow in the future, Top-up SIP is one of the smartest ways to grow your investments along with it.
Flexible SIP
a Flexible SIP You can increase or decrease your investment amount based on your income, expenses, or personal needs.
Perpetual SIP
A perpetual Sip offers you to keep investing without set a end time or date
Usually, SIPs have a fixed time like 1 year, 3 years, or 5 years. But with a Perpetual SIP, your investments continue until you decide to stop.
SIP in Action: Excel Sheet Analysis
Let’s say we started investing ₹5000 every month starting May 28, 2013, in this fund. We consistently invested ₹5000 on the 28th of each month up to June 2021.
What did that give us?
- Total Investment: ₹4,90,000
- Total Value: ₹11,60,000
- Growth: More than doubled in 8 years
If we had invested ₹10,000 monthly instead:
- Total Investment: ₹9,80,000
- Total Value: ₹23,00,000
Clearly, SIP gives excellent returns—better than any Fixed Deposit (FD). The return percentage remains the same, but the absolute amount increases as you invest more.
Return Calculation
Let’s calculate the returns:
- Investment of ₹5000 in May 2013 is now worth ₹22,000.
- Total SIP: ₹4,90,000
- Current Value: ₹11,60,000
- Absolute Return: 137%
Now, let’s annualize this return using a standard formula. The result?
- Annual Return (CAGR): ~11% over 8 years
Even better if sold after:
- 6 years → 12% return
- 5 years → 13% return
- 4 years → 14% return
- 3 years → 17% return
- 2 years → 22% return
- 1 year → 25% return
Why higher returns recently? Because market growth was stronger in recent years.
This is a well-performing fund, but most decent mutual funds show similar trends.
The Real Advantage of SIP
Systematic Investment Plan (SIP) offers many different benefits. Here, we will talk about a few of them.
SIP is like a risk-free FD. You invest ₹5000 each month in a fund or Smallcase, without fail. Over time, your money grows substantially:
- Doubled in 7 years (109%)
- 50% increase in 2 years (49%)
And you don’t need to time the market. You don’t need to guess if the market is high or low. You just invest with discipline, and ideally increase the SIP amount over time.
Flexibility
The best part of SIP is that you don’t have to time the market. You just choose a fixed date and keep investing every month consistently in a stock or mutual fund.
Over a long period of time, it will result in compounding returns.
Direct vs Regular Plans
Now, let’s talk about something very important.
When you start a SIP in a mutual fund, you’ll find two types of plans:
- Direct Plan
- Regular Plan
Many people opt for a regular plan—through banks, agents, or relatives who recommend funds.
But here’s the problem: Expense Ratio.
- It’s the percentage of your money that is not invested but used to cover management costs.
- For example, if the expense ratio is 1% and you invest ₹100, only ₹99 is actually invested.
- In regular plans, agent commissions are included—making them more expensive than direct plans.
So, if you’re using a regular plan, it’s wise to convert to a direct plan.
How to Convert to a Direct Plan
It’s not simple, but it’s essential. Here’s why it’s tricky:
- Exit Load – If you exit a fund early, a fee may be charged.
- Short-Term Capital Gain Tax (STCG) – If sold before 1 year, tax is 15%; after 1 year, it’s 10% (LTCG).
Despite the complexity, converting to a direct plan can save you a lot in the long run.
A tool I personally use for this is INDmoney. It helps you convert regular SIPs to direct ones easily.
You can watch this video to learn how:
👉 Watch on YouTube
What About Lump-Sum Investment?
Another common question is: What if I have a lump-sum amount?
Don’t invest it all at once in the market. You might mistime it and regret the decision.
Instead:
- Put the lump-sum in a Debt Mutual Fund (safer, offers fixed returns).
- Start an SIP from this amount.
For example:
- Lump-sum = ₹1,00,000
- Monthly SIP = ₹10,000 from the debt fund
- The money will last 10 months. After that, continue SIP from your regular income.
This way, you avoid timing the market and still benefit from regular, risk-managed investment.
Final Thoughts
SIP is the most risk-free method to grow your money. Getting 11% returns annually over 8 years means your money grows 2.5x. It beats FDs and avoids the stress of market timing.
If you’re new to investing, SIP is the best way to start. Once you’re confident, you can explore advanced options.
If you have any questions, feel free to ask in the comment section.
