Systematic Investment Plans or popularly known as SIPs have demystified the realm of mutual funds investments to a huge degree.
The most basic advantage of SIPs is their flexibility and convenience, but its benefits aren’t just limited to this. SIPs are an excellent way to accumulate wealth in a disciplined way in the mutual funds’ horizon. But how does it work?
Essentially by subscribing to an SIP, you will be investing a preset amount in the prefered Mutual fund at regular intervals (monthly, quarterly, yearly… you get the idea).
Of course, the amount to be invested, the interval and the fund will be in accordance with your preference. Based on the then Net Asset Value (NAV) you will be assigned a particular number of fund units. With every instalment of SIP, you will be assigned with additional fund units.
However, the NAV may fluctuate with every up or down the market faces. In a rising market, the NAV of the unit will be higher which means you will receive fewer of them.
On the other hand, in a falling market, the units will become cheaper. Therefore, you’ll be allotted more fund units. This change in the prices over a period of time will average out your cost per unit; this phenomenon is called Rupee Cost Averaging.
SIP has been the go-to option for wealth creation. Since you are investing on a regular basis and the additional interest earned is reinvested, the magic of compounding leads to your investment growing exponentially. This process can be understood with the help of the following example.
Suppose at the age of 25, and you start a monthly SIP of Rs 5,000 in an equity fund. The annual rate of return is around 12%, and you are planning to continue the SIP till the age of 55. After 30 years of investment, you will end up with a corpus of around Rs 1.7 crore.
The table shows the wealth accumulation as you reach different stages in life:
Power of Compounding
|Time (year)||Amount Invested (Rs)||Wealth Accumulated (Rs)|
Sure, SIP is a pretty simple way of investing. But that doesn’t mean there aren’t any pitfalls that you should be wary about. Make sure not to terminate your SIPs in the middle of your investment horizon. This will affect the compounding process, which will affect the wealth creation of your investment. Always hold out till you reach your financial goal.
Make sure that you review your portfolio every once in a while. This way, you can weed out the underperforming funds in your portfolio.