Introduction towards Systematic Investment Plans (SIPs)

A Systematic Investment Plans (SIPs) is a process of investing the fixed amount in a mutual fund. SIP allows investors to purchase a unit periodically at different price points. SIP is like your partner which provides you with reliability, consistent for the long term.This a Discipline approach towards your habit for regular saving. SIP investment is a smart investment for your future financial support and growth. SIP is a long term wealth creation, making it an attractive option for a Citizen,small and medium scale investor.

Importance of Systematic Investment Plans (SIPs)

SIP is a Discipline way of saving your income for a future. It will protect for a future financial security for wealth creation. SIP provides Discipline and flexible components for people with different income levels and financial goals.

Key Importance for SIP

Flexibility to increase, decrease, or pause Investment as per financial circumstances
Financial Stability for long term
Power of compounding enables money to grow exponentially
Affordable Investment
Allows buyer to buy a units when then are low unit price and fewer when they are at high price which is also known as Rupee cost Averaging
High return in long term

How Systematic Investment Plans (SIPs) Work ?

SIP works on the Principle of Compounding and Rupee cost Averaging. This Principle gives a clear understanding, how SIP works. Once you get ideas and clear understanding you can drive your investment journey smoothly and consistently.

Power of Compounding

A tiny seed, with proper care and time, grows into a massive tree. That’s What happens when you let it grow your money in compounding with proper time on investment and with proper plan.

Here how compounding works

Let’s take an example, you have invested Rs.1000 yearly and it earns a 12% Interest rate each year. In First year you will earn Rs.120. If you leave that Rs.120 in your investment, the next year you will earn interest not just on your original Rs. 1,000, but also on the Rs. 120 you earned in the first year.

Let’s make a 5 year SIP plan in table by assuming RS. 1000 investment for each year at a 12% Interest rate.

Year	Initial Investment (Rs.)	Dividend (Assumed- 12%) (Rs.)	Total Amount (Rs.)
1	1000	120	1120
2	1120	134.4	1254.4
3	1254.4	150.528	1404.928
4	1404.928	168.591	1573.5193
5	1573.5193	188.82	1762.34

Additionally, The process of gaining returns on both the initial investment amount and on the returns that have already been received is known as the power of compounding. This keeps occurring and can have a significant impact on the growth of your investment over time. Hence, You can Invest your money annually, semi-annually, quarterly and monthly.

Rupee Cost Averaging

Rupee Cost Averaging is a smart way of investing money where you invest a fixed amount regularly, no matter whether prices go up or down. Over time, this helps you buy more units when prices are low and fewer units when prices are high, balancing the cost of your investment.

How Rupee Cost Averaging Works

Let’s take an example you Invest RS. 1000 every months in mutual funds through SIP, here how it works

Month	Price per Unit (₹)	Amount Invested (₹)	Units Bought
January	10	1,000	100
February	8	1,000	125
March	12	1,000	83.33
April	9	1,000	111.11

Total amount Invested: Rs.4000 (Rs.1000 each months)

Amount Invested / Price Per unit = units boughts

Example

1000 / 10 = 100 units

Total units Boughts: 100+125+83.33+111.11 = 419.44 Units

Average Cost per unit = Total amount Invested / Total unit Bought

Example

4000 / 419.44 = Rs.9.53

What Happened?

Even though the price changed every week:

When prices were low, you got more units.
When prices were high, you got fewer units
The average cost Rs.9.53 is lower than the highest price Rs.12 because you bought more units when prices were lower.

Over time, this balanced the cost, and you didn’t overpay even when the price went up.

Benefits of Systematic Investment Plans (SIPs) in Nepal

Benefits of SIP lies in its reliability, consistency, simplicity and accessibility. It offers encouragement for long term financial growth, Discipline in your Investment journey. When you save your money regularly it sets a habit, which will be tough to break. Investing in SIPs makes it simple to take money out when you need it. This is useful when you have specific financial goals or in an emergency. Investing in SIPs allows you to skip installments or gives you the freedom to change your investment amount without any extra fees. This flexibility helps you reach your financial goals more easily.

Some of the benefits of Systematic Investment Plans are

Power of Compounding
Rupees Cost Averaging
Flexible Investment
Discipline Financial Planning
Investing for Certain Goals

Systematic Investment Plans (SIPs) Investment in Nepal

In Nepal, SIPs are gaining popularity in Nepal as a best and easy investment way in mutual funds for financial growth. They offer a range of advantages, especially for those looking to secure their financial future.

SIP Investment in Nepal provides

Power of Compounding
Rupees Cost Averaging
Flexibility
Protection against inflation
Low Risk

What do you mean by Mutual fund

A mutual fund is like a big money pool where many people put their money together. This pool is then used to buy things like stocks (company shares), bonds (loans to companies or governments), and other types of investments.

When you put your money in a mutual fund, you get shares in that fund. These shares show how much of the money pool you own. If the investments in the pool do well, the value of your shares goes up. If the investments don’t do well, the value of your shares goes down.

The performance of the mutual fund depends on how well the things it invests in are doing (like how much money the companies make or how well the bonds pay back). But, the fund manager charges a small fee for managing all the money in the fund.

Let’s take an example and understand how mutual funds work

Imagine you and nine friends each have Rs.1,000.
Together, you pool Rs.10,000 and give it to a trusted person (the fund manager) to invest.
The fund manager uses the Rs.10,000 to buy stocks, bonds, or other investments.
If these investments grow, everyone gets a share of the profit. If they lose value, everyone shares the loss.

Based on structure, there are two kind of mutual fund

1. Open-ended mutual Fund

An open-end mutual fund is like a store that is always open. You can buy or sell shares (units) of the fund whenever you want. The number of shares available in the fund can increase or decrease based on how many people are buying or selling.

Let’s take an example
Imagine there’s a chocolate shop where you can buy chocolates anytime. If more people come to buy chocolates, the shop owner can make more chocolates to sell. Similarly, in an open-end mutual fund, you can buy or sell shares whenever you want.

2. Close-ended mutual Fund

A closed-end mutual fund is like a special event where only a certain number of tickets (share) are available. Once the tickets (share) are sold, no more tickets can be bought, and you can only sell your ticket (share) to someone else if they want it. For example Nepal stock exchange (NEPSE)

Let’s take an example
Think of a concert with only 100 tickets. Once all the tickets are sold, no more tickets are available. If you want to attend but didn’t buy a ticket, you have to find someone who is willing to sell their ticket to you. Similarly, in a closed-end mutual fund, the number of shares is fixed, and you can only buy or sell shares from other investors, not directly from the fund.

Why SIP is added to mutual funds

A Systematic Investment Plan (SIP) is added to mutual funds to make investing easier and safer for individuals. Let’s take an example and understand how SIP work

1. Regular Small Investments

Instead of paying a big amount at once, SIP allows you to invest small amounts Rs.500 or Rs.1,000 every month.
This is helpful if you don’t have a lot of money upfront.

2. Reduces Risk (Rupee Cost Averaging)

By investing regularly, you buy mutual fund units at different prices over time.
This balances out the highs and lows of the market.

3. Example

Month 1 Net Assets Value (NAV) price is Rs.10, you get 100 units for Rs.1,000.
Month 2 Net Assets Value( NAV) is Rs.20, you get 50 units for Rs.1,000.
Month 3 Net Assets Value (NAV) is Rs.5, you get 200 units for Rs.1,000.
Over time, you get an average price for your investments, reducing risk.

Difference between Sip and mutual fund

Mutual Fund (Lump Sum Investment):

Example: You have Rs.1,20,000 in your bank account today. You decide to invest all of it in a mutual fund at once.
How it Works: The entire Rs.1,20,000 is used to buy units of the mutual fund based on its current price (called NAV - Net Asset Value).
Risk: If the market is high when you invest, you might buy fewer units, and if the market drops later, your investment value may decrease.

SIP (Systematic Investment Plan)

Example: You don’t have Rs.1,20,000 in one go, but you can invest Rs.10,000 every month for 12 months in the same mutual fund.
How it Works: Each month, Rs.10,000 is used to buy mutual fund units. If the market is high one month, you buy fewer units, and if it’s low another month, you buy more units. This is called rupee cost averaging, which reduces risk.
Risk: Because you spread your investment over time, you avoid buying all your units when prices are high.

Steps to Invest Systematic Investment Plans (SIPs) in Nepal

Here are some steps to Invest in SIPs in Nepal

1. Get a Demat Account

Open a Demat account at any bank. This is where your investments will be stored.

2. Pick the Right Fund

Choose a fund based on:

Your goals (e.g., saving for education or retirement).
Your risk level (low, medium, or high risk).

3. Find a Reliable Investment Company

Select an experienced and trustworthy company to handle your SIP investments.

4. Complete KYC (Know Your Customer)

You’ll need to provide personal details like your ID and address to complete the KYC process, which is required for all investors.

5. Start Investing

Decide how much to invest each month (e.g., Rs.2000).

Use your bank account or digital wallet to make regular payments.

Banks that provide Systematic Investment Plans (SIPs) In Nepal

Here are some trusted banks that provides SIPs in Nepal

NIBL Sahabhagita Fund by NIBL Capital Markets.
Siddhartha Systematic Investment Plan by Siddhartha Capital.
NMB Saral Bachat Fund-E by NMB Capital.
NIC Asia Dynamic Debt Fund by NIC Asia Capital.
Subha Laxmi Kosh by Laxmi Capital.
Nabil Flexi Cap Fund by Nabil Investment Banking.

Why You Need a SIP Calculator

Before diving into the setup process, let's understand why SIP calculators are invaluable:

Realistic Goal Setting: A SIP calculator helps you determine how much you need to invest monthly to reach specific financial goals, whether it's buying a home, funding your child's education, or building a retirement corpus.

Comparison of Scenarios: You can experiment with different investment amounts, time periods, and expected returns to find the strategy that works best for your financial situation.

Understanding the Power of Compounding: The calculator visually demonstrates how compounding works over time, showing you why starting early makes such a significant difference.

Informed Decision Making: Rather than investing blindly, you can make data-driven decisions about your investment amounts and timelines.

Step-by-Step Guide to Setting Up a SIP Calculator

Step 1: Choose Your Platform

You can access SIP calculators through multiple channels. Most mutual fund companies offer calculators on their websites, financial planning platforms provide sophisticated tools, and mobile banking apps often include built-in calculators. Choose a platform that's convenient and trustworthy.

Step 2: Gather Your Information

Before you start calculating, have these details ready: your desired monthly investment amount, the time period you plan to invest for (typically in years), and your expected annual rate of return (usually between 10-15% for equity mutual funds based on historical averages).

Step 3: Input Your Investment Amount

Start by entering your monthly investment amount. This is the sum you're comfortable investing every month. Remember, SIPs are flexible, and you can start with as little as Rs.500 in many mutual funds. Don't overstretch your budget; choose an amount you can sustain consistently.

Step 4: Set Your Investment Period

Enter the duration for which you plan to continue your SIP. This is typically entered in years. The longer your investment horizon, the better your returns due to the power of compounding. For wealth creation, consider time periods of at least 5-7 years or longer.

Step 5: Enter Expected Rate of Return

Input your expected annual rate of return. While past performance doesn't guarantee future results, you can use historical averages as a reference point. Equity funds have historically returned around 12-15% annually over long periods, while debt funds typically return 6-8%. Be conservative in your estimates to avoid disappointment.

Step 6: Calculate and Review Results

Once you've entered all parameters, click the calculate button. The calculator will display your total investment amount (the sum of all your monthly contributions), the estimated returns you'll earn, and the total maturity value (your investment plus returns). Calculate your SIP

Understanding Your Results

The results typically show three key figures. Your invested amount is simply your monthly investment multiplied by the number of months. The estimated returns represent the wealth generated through compounding and market growth. The maturity value is your final corpus, combining your investment and returns.

Most calculators also display this information visually through charts, making it easy to see the proportion of your contribution versus the returns generated.

Advanced Tips for Using SIP Calculators

Try Multiple Scenarios: Don't calculate just once. Experiment with different monthly amounts to see how increasing your SIP by even ₹1,000 can significantly impact your final corpus.

Factor in Step-Up SIPs: Some advanced calculators allow you to factor in annual increases to your SIP amount, which is realistic as your income grows over time.

Be Conservative with Returns: Use conservative return estimates, especially for shorter time periods, to avoid setting unrealistic expectations.

Account for Inflation: When planning for future goals, remember that ₹50 lakhs today won't have the same purchasing power 20 years from now. Factor in inflation when setting your target amount.

Review Regularly: Your financial situation changes over time. Revisit your calculations annually and adjust your SIPs accordingly.

Common Mistakes to Avoid

Many investors make the mistake of being overly optimistic about returns. While equity markets can deliver excellent returns over long periods, they also experience volatility. Using unrealistically high return estimates (like 18-20% annually) can lead to disappointment.

Another common error is not considering the investment time horizon carefully. SIPs are designed for long-term wealth creation. If you'll need the money within 2-3 years, equity SIPs might not be appropriate.

Some investors also forget that calculators provide estimates, not guarantees. Market conditions, fund performance, and economic factors all influence actual returns, which may differ from calculations.

Making Your SIP Calculator Work for You

Once you've set up and used a SIP calculator, the next step is action. Use the insights gained to start or adjust your existing SIPs. If the calculations show you need to invest more to reach your goal, consider increasing your monthly contribution or extending your investment period.

Remember that SIP calculators are planning tools, not crystal balls. They work with assumptions about future returns, which are based on historical data and market conditions. The actual returns may vary, but the discipline of regular investing remains valuable regardless.

Taking the Next Step

Setting up and using a SIP calculator is just the beginning of your investment journey. These tools empower you with information, but the real wealth creation happens when you commit to disciplined, regular investing. Start small if needed, but start today. The power of compounding rewards those who begin early and stay consistent.

Use your SIP calculator regularly to track progress toward your goals, make adjustments as your financial situation evolves, and stay motivated by seeing your wealth grow over time. With the right planning and discipline, SIPs can be your pathway to achieving your financial dreams.

Frequently Asked Question (F&Q)

1. Are returns from SIP taxable in Nepal?

Returns from mutual funds are subject to Nepal’s tax laws. Check with your financial advisor for current tax implications on your SIP investments.

2. Can I withdraw money from my SIP?

Yes, SIPs allow you to withdraw money partially or fully, depending on your needs. However, withdrawing too soon may affect your long-term wealth-building goals.

3. Is SIP suitable for short-term goals?

SIP is ideal for long-term wealth creation. However, it can also be tailored for medium-term goals like education or buying a car, depending on the fund you choose.

4. How much should I invest in a SIP?

The amount depends on your financial goals, income level, and risk appetite. You can start with as little as Rs. 500 or Rs. 1000 monthly and gradually increase it as your financial capacity grows.

Plan your SIP from : SIP Calculator

What do you mean by SIP: Learn from idea2grow