They say that if you want to start investing in mutual funds via SIP, anytime is a good time. And this is true as is the time and not the timing that is crucial with mutual fund SIP investments.
What is a Systematic Investment Plan?
Also referred to as SIP, a Systematic Investment Plan is probably the simplest and most effective way to save and invest a fixed sum in mutual funds at regular intervals. It is probably the easiest way to gradually but steadily grow your wealth and become rich in the long run. Three important things to remember with SIP investments are –
- The earlier you start the better it is as you have more years in hand to accumulate wealth and can build a commendable corpus by investing small, fixed sums periodically. The process is referred to as the power of compounding where you earn interest on the earnings generated from your initial investment sum. Isn’t it great to witness your profits generate profits of their own?
- Although you invest a fixed sum periodically in mutual funds via SIP, it is better to consider upgrading your investments and topping up your investments every 12 months. Even if you increase your SIP investments by 10%, you will be able to achieve your goals faster.
- By investing in mutual funds via SIP investors can also buy more units and mitigate their investment risk through a technique called rupee cost averaging. What happens here is that since the SIP sum remains stagnant, but the NAV of the scheme keeps fluctuating, investors buy more units when the NAV is low and vice versa. Since equity markets are volatile most of the time, investors can buy more units, and in the long run average out the cost of purchase.
How can a SIP of Rs. 10000 help me earn in 20 years?
A lot you might not have faith in a tiny monthly investment like Rs 10000, but do you know the wonders even this small amount can make over the long run provided you invest regularly in a disciplined manner? Let us take the help of the SIP calculator to determine the potential earnings.
In the SIP calculator, enter –
Monthly SIP – Rs 10000
Investment horizon – 20 years
The assumed rate of return – 10%
Assuming 10% returns, at the end of your investment journey you would have accumulated a corpus worth Rs 76.56 lakhs out of which the total invested sum would be Rs 24 lakhs plus potential capital gains worth Rs 52,56 lakhs.
But how can your gains be twice as much as your investment amount? That’s called the power of the compounding effect. If you select the growth option and allow your mutual fund returns to get reinvested, over a period of time, the returns that you earn from your initial investment sum start earning profits of their own. This is referred to as the power of compounding and can only be witnessed by those who allow reinvesting of their profits over the long haul.
Investors can also use the SIP calculator to arrive at different results and they can get a clear understanding of what their investment sum should be in order to target their specific financial goals. However, the results displayed by the calculator are only for illustrious purposes. It does not take certain elements like mutual fund expense ratio, exit load, etc. while calculating results.