Systematic Investment Plan (SIP)
A disciplined investment strategy where you invest a fixed sum of money at regular intervals (usually monthly) in a mutual fund scheme. It helps in building wealth over the long term by instilling financial discipline and averaging out the cost of purchase.
Rupee Cost Averaging
This is the inherent benefit of SIPs. When markets are down, your fixed SIP amount buys more units. When markets are up, it buys fewer units. Over time, this lowers your average cost per unit, reducing the risk of investing a lump sum at a market peak.
Compounding
Often called the "eighth wonder of the world," compounding is the process where the returns you earn on your investment start earning their own returns. In an SIP, your principal earns interest, and in the next cycle, that interest also earns interest. The longer you stay invested, the more dramatic this effect becomes.
CAGR (Compound Annual Growth Rate)
The mean annual growth rate of an investment over a specified time period longer than one year. Unlike absolute returns, CAGR provides a smoothed-out picture of growth, making it easier to compare different investment avenues like FDs, Gold, and Mutual Funds.
Step-Up SIP
A strategy where you increase your SIP amount periodically, usually once a year, in line with your income growth. This fights lifestyle inflation and significantly accelerates wealth creation. It is also known as a "Top-up SIP."
Expense Ratio
The annual fee charged by the mutual fund house to manage your money. It covers fund manager fees, administrative costs, and marketing. A lower expense ratio (found in Direct Plans) means higher take-home returns for you.
Exit Load
A fee charged by mutual funds if you withdraw your money before a certain period (usually 1 year). It is designed to discourage premature withdrawals and protect long-term investors.
NAV (Net Asset Value)
The price of a single unit of a mutual fund. When you invest in an SIP, you are essentially buying units at the current NAV. If the NAV is ₹20 and you invest ₹1,000, you get 50 units.
XIRR (Extended Internal Rate of Return)
Since SIP involves multiple cash flows at different times, a simple CAGR cannot be calculated. XIRR is the correct metric to measure SIP returns as it accounts for the timing of each installment.
Lumpsum vs. SIP
Lumpsum is a one-time investment, while SIP is a recurring one. Lumpsum is best when you have a large windfall (like a bonus), whereas SIP is best for salaried individuals with regular cash flow.