Mumbai-based software engineer Ramesh Kumar dreamed of accumulating ₹1 crore in five years to start his own business. With a stable job but no lump sum to invest, he turned to systematic investment plans (SIPs) in mutual funds.

What are SIPs?

A Systematic Investment Plan (SIP) is a disciplined way to invest in mutual funds, allowing investors to contribute a fixed amount regularly—monthly, quarterly, or yearly. SIPs help build wealth over time through the power of compounding and rupee cost averaging, reducing market volatility risks. They are ideal for long-term goals like retirement, education, or home ownership. SIPs offer flexibility in investment amounts, making them accessible to all income groups. With options across equity, debt, and hybrid funds, investors can diversify their portfolios based on risk appetite. SIPs encourage financial discipline and are an effective tool for wealth creation.

The math behind ₹1 crore in five years

To reach ₹1 crore in five years, Ramesh needed to invest strategically. Based on historical returns, he found that equity mutual funds had delivered an average annual return of 12%–16%. Assuming a 12% annual return, the required monthly SIP was approximately ₹1,25,000.

Alternatively, if he opted for a more aggressive approach with a 15% return, he would need to invest around ₹1,15,000 per month. Understanding this commitment, Ramesh reworked his expenses and directed all surplus income toward SIPs.

The power of compounding is one of the most effective ways to build wealth over time. It allows investments to generate returns, which then earn additional returns, creating an exponential growth cycle.

Choosing the right mutual funds

Instead of investing in a single fund, Ramesh diversified his portfolio:

• Large-cap mutual funds for stability (40%)

Experts say diversifying across various funds balances risk and reward, ensuring that market fluctuations do not derail long-term financial goals.

Key considerations

• Market volatility: Equity investments fluctuate. A major crash near the goal period could impact returns.

Disclaimer: Mutual fund investments are subject to market risks, and past performance does not guarantee future returns. The calculations in this story are based on assumed rates of return (10%, 12%, and 15%), which may vary due to market fluctuations. Actual returns may be higher or lower depending on economic conditions and fund performance. Investors should consult a financial advisor before making any investment decisions. These views do not represent Fortune India.