SIP Plans for Rs. 5000 Monthly- What is a Systematic Investment Plan (SIP)

Posted by  Fintra , updated 2023-02-17

A Systematic Investment Plan (SIP) is a facility offered by mutual funds to investors who desire to invest in a disciplined manner. The SIP facility enables investors to invest a fixed amount of funds at pre-defined intervals in the chosen mutual fund scheme. In general, one can invest as low as Rs. 500 and/or by just investing Rs. 5000 monthly in a SIP, the investor can create high returns to meet long-term goals. An investor can simply use an online SIP calculator to determine the SIP returns. The pre-defined SIP intervals are either weekly/monthly/quarterly/semi-annually or annual basis. To enjoy higher returns, the funds ideally should remain invested for a minimum of 5 years. By making investments in SIP, investors invest in a time-bound manner without having to worry about the market dynamics and they get to benefit in the long term due to the average cost and power of compounding.

In this blog, Fintra shares the list of a few debt and equity funds that you as an investor can explore to begin a monthly SIP of Rs. 5000. Do note that the returns will keep varying based on how each fund performs. The topics we will cover are:

1. Category-wise SIP Details
2. Benefits of SIP Investing
3. Will a small SIP of Rs. 5,000 create a big difference? 
4. How to choose the SIP instruments? 
5. Should you invest Rs. 5000 in one fund?  

As described above, SIPs help to lower the risk of market fluctuations and make it affordable for the younger working class to invest in the equity market. A systematic investment plan enables an investor to invest a monthly sum in a single type of fund, which can be equity, debt, gold, etc. Investors may choose to diversify its portfolio by investing in different types to balance out the risk. SIP's key advantage is that an investor can easily monitor the performance of the funds based on which it can either increase or decrease the amount of investment. However, as stated earlier, to enjoy higher returns, the funds should stay invested for a minimum of 5 years.

Category-wise SIP Details

Experts advise that you should opt for plans by assessing how much risk you are willing to endure and what goals you are attempting to accomplish. The following details provide some deeper insight into the different categories to assist in choosing the best monthly SIP plans for Rs. 5000.

1. Equity Funds: These types of funds are invested in stocks and shares of a firm. The value of the funds goes up or down depending on the performance of the firm. This difference is what determines the returns at the base level. 

Equity Sectoral / Thematic

Sectoral/Thematic funds invest in the stocks of firms that belong to a particular niche such as pharma, technology, infrastructure, etc. For example, the ICICI Prudential Technology Fund and the Tata Digital India Fund invest primarily in the equity of tech or IT firms. The 3-year annualized return for each fund is approximately 34.25% and 31.11% respectively. Thus, a monthly SIP of Rs. 5000 in each of these funds for at least 3 years will increase your investment of Rs. 1.8 Lakhs to approximately over Rs. 3 Lakhs.  

Equity Funds by Market Cap

Funds which get invested in equities of large firms, ranking in the top 100 as per SEBI guidelines, are known as large-cap funds. Similarly, small-cap funds are funds that invest in firms ranking above 250. Mid-cap funds fall in the range between. Thus, the greater the market capitalization of a firm, the more possibility it is to obtain steady consistent returns. 

For example, Axis Small Cap Fund invests in equities of small-cap firms, therefore, the risk is extremely high. Its 3-year annualized return for the fund is approximately 30.08%, therefore, a minimum SIP amount of Rs. 500 per month is needed. The total fund size is nearly Rs. 9261 Crores. On the other hand, Mirae Asset Emerging Bluechip Fund invests in a mix of large and mid-cap firms. Its 3-year annualized return stands at around 21.18%. A monthly SIP of Rs. 5000 for 3 years will become around Rs. 2.38 Lakhs from the total of Rs. 1.8 Lakhs invested over the time period.

2. Tax Saving Funds: These funds are mainly equity-based investments, but they have tax benefits under Section 80C of the Income Tax Act, 1961. A Monthly SIP of Rs. 5000 in these funds can enable you to save on taxes on the extra income earned via the returns on investments. 

Equity ELSS

Quant Tax Plan and Mirae Asset Tax Saver Fund have a lock-in period of 3 years during which one can't withdraw any funds. Their 3-year annualized returns are approximately 36.82% and 20.61% respectively.  

Do note that the tax benefit is subject to changes in tax laws. 

3. Debt Funds: Debt funds are known to be low-risk in nature, and subsequently, the returns are lower than the equity instruments. Investors ideally should split their SIP investments into both debt and equity to generate decent returns while erring on the side of caution. For example, in Aditya Birla Sun Life Corporate Bond Fund nearly more than 96% of the investment is made in debt funds comprising Government securities and extremely low-risk securities. The fund's 3-year annualized return is around 7.5%. On the other hand, ICICI Prudential Short-Term Fund and other such short-duration debt funds get invested in bonds that mature in 1-3 years. Thus, the value of a monthly SIP of Rs. 5000 that has been invested 3 years back will now have become appropriately over Rs. 2 lakhs.

Benefits of SIP Investing

Power of Compounding

Benefits get magnified by the compounding effect when investing regularly through SIP for a longer term. The compounding effect ensures one earns returns on the principal amount and also on the gains on the principal amount. For example, the money grows over time as the money one invest earns returns, and the returns even earn returns.

Power of Starting Early

Experts advise that the earlier you begin saving and investing regularly, it becomes easier to achieve your goals. Presuming you begin to invest Rs. 5,000 monthly at various stages of life till the age of 60 years, assuming a return of 12% p.a. then the following will happen: If one begins SIP at age 25, a corpus of approximately Rs. 2.76 crores can be generated at retirement. If waited 5 years and began SIP at age 30, a corpus of approximately Rs. 1.54 crore will be available at retirement, i.e. a difference of Rs. 1.21 crore, this is the cost of delaying starting SIP. 

Will a small SIP of Rs. 5,000 create a big difference?  

The answer is a yes- It will indeed make a huge difference by investing in a SIP of Rs. 5,000. Even a small amount will make a huge difference. Pondering how much difference a SIP of Rs. 5,000 per month can create wealth for you. The answer is that it will make a great difference if one continues the investment for the long term in a disciplined manner without making any withdrawals of the investments and investing in powerful asset classes such as equities.  

When having a conservative approach with a long-term horizon, although it is nothing but not using the true potential of capital. The investor's risk appetite and investment horizon must trickle down to its expected returns. Moreover, the risk appetite should also be calculated by analyzing the minimum essential expenditure, cash inflow, age, number of dependents, along with the like. 

How to choose the SIP instruments? 

After understanding your risk appetite and investment horizon, you then need to map the same with the funds. In general, equity funds are suited for a horizon over five years, especially the ones that get invested in mid and small-cap names.  

The Fintra team has curated a table that reveals the ideal time horizon and risk levels for different fund categories:

Considering the same, let us analyze the corpus one may make when risk appetite differs:

From the table above, we can observe the returns are highest in the high-risk category, and even when the amount is small such as Rs. 5000 per month for 15 years, it can help to fetch nearly 4x wealth in 15 years.

Should you invest Rs. 5000 in one fund? 

Experts advise that you shouldn't invest Rs. 5000 in only one fund. This is so because if you invest all in one fund, you will get into concentration risk where the capital will be invested only in one fund. Don't forget the vital fact that as an investor, you have to have a diversified portfolio to benefit from each of the funds and reduce the volatility at the portfolio level by holding smaller portions in each. Thus, it is a wise decision to pick 1-3 funds to make it Rs. 5000 per month.   

Conclusion

We can now conclude that a monthly SIP plan for Rs. 5000 will definitely give an investor increased returns if it continues to keep the funds invested for 5 years or more. Although there's a wide range of options available, it's wise to stick to safer options such as large-cap funds and hybrid funds if you are a beginner. Later on, as you gain more knowledge, you can gradually increase the investment amount and move towards creating a diversified portfolio that comprises equity and debt funds.

Systematic investment plans, or SIP, are indeed one of the great tools for investing funds. It helps create a significant amount of wealth over time for various investors. Do keep the following three basic principles in mind as they work in favour of a SIP:

• The earlier one begins investing, the more returns get accumulated over time. In turn, this leads to more profits. In financial parlance, this phenomenon is known as the power of compounding.
• In SIP, time plays a more crucial role than timing. The earlier one begins, the more it makes; the longer it keeps the funds invested, all the more gains are received. This phenomenon even supports why a regular SIP creates a better wealth ratio than a step-up SIP. Step-up SIP is when the investor tends to increase the amount of SIP every year when its inflows increase.
• An investor has to always remember two things to get the power of compounding. First, leveraging the power of equities does benefit in the long run. Secondly, the accumulated profits must remain reinvested to reap further benefits.