How Does a Systematic Investment Plan (SIP) Work?
A Systematic Investment Plan allows an investor to allocate a fixed sum into a selected mutual fund scheme on a recurring basis (typically monthly). Rather than attempting to time volatile equity markets, SIP leverages Rupee Cost Averaging: purchasing more fund units when market valuations dip and fewer units when prices rise.
The Mathematical Formula Behind SIP Compounding
The future maturity value is determined by the formula:
M = P × [ (1 + r)^n - 1 ] / r × (1 + r)
Where:
- M = Final maturity corpus
- P = Monthly investment sum
- r = Monthly interest rate (Annual expected return ÷ 12 ÷ 100)
- n = Total number of monthly installments (Years × 12)
Realistic Return Expectations for Indian Mutual Funds
Historically over 10-to-15 year horizons in the Indian stock market (Nifty 50 and BSE Sensex), broad market index funds have generated nominal returns in the 11% to 13% CAGR corridor, while top-tier flexi-cap and mid-cap funds have periodically yielded 13% to 15% CAGR. It is prudent for financial planning to model conservative baselines (10%–12%) to account for periodic market drawdowns and inflation.