Wealth creation takes time. Investing in mutual funds through a systematic investment plan or SIP is one way to achieve your financial goals by building a corpus over the long term. In an SIP, you regularly invest a fixed amount in mutual funds for a fixed tenure. It is the simplest form of investment you can get your hands on.
Why invest in an SIP?
A systematic investment plan benefits from compounding as well as gives you rupee cost averaging. In terms of wealth creation, it is one of the moving factors for investors. Even putting a small amount of savings in an SIP for a long duration can help you build a considerable corpus through compounding.
Let us understand it with a simple example.
You start a monthly SIP of Rs. 5,000 for a tenure of 30 years. Historical data suggests you can expect an average annual return of 10% in the longrun. With an SIP calculator, you can calculate your returns at 10%. When you do, you will see that your maturity amount at the end of your tenure will be Rs. 1.13cr. All this, after investing Rs. 18 lakh in total.
If you invest a lump sum amount in an equity mutual fund, you will own a fixed number of units at a Net Asset Value on your investment date. However, since an SIP is market-linked, the mutual fund adds more units at a lower NAV when the market goes down, thus increasing the total units. Thus, an SIP potentially provides better returns than traditional savings methods.
Advantages of an SIP
An SIP generates wealth over time due to its various advantages. Let’s have a look at them.
- Start small: You need not worry about investing a large sum at once. With an SIP, you can invest as low as Rs. 500 monthly for the long term. Some platforms also offer SIPs starting from Rs. 100
- Discipline: In an SIP, a fixed amount will be deducted from your account on a set date. This will make you more disciplined in saving a piece of your earnings for investment periodically
- Simple and easy: Regular investment is the key to wealth creation. When you invest in an SIP, you regularise your investments. All you have to do is give your bank standing instructions to invest a certain amount monthly or quarterly. Then, they will automate your investment which will ensure your investment dates are not missed
- Better returns:An SIP works in a way that allows you to get the maximum from the market. Also, the compounding factor makes it a go-to investment method
- The benefit of rupee cost averaging: An SIP mitigates the risk of market fluctuations. As the investment amount is fixed, you add more fund units when the market is down and fewer units when the market is recovering. Thus, reducing the average cost per unit. Moreover, no need to time the market.
Thumb rule for an SIP
- Start early
- Think long-term
- Be patient
Can SIPs make you rich?
SIPs are excellent route offered by Mutual Funds for wealth generation, provided you are ready to invest for a long tenure. In addition, these can let you reap the benefits of compounding if you start early and invest periodically.