A Systematic Investment Plan or SIP is a smart and hassle free mode for investing money in mutual funds. SIP allows you to invest a certain pre-determined amount Flexibility SIP Long-term Gains at a regular interval (weekly, monthly, quarterly, etc.). An
SIP is a planned approach towards investments and helps you inculcate the habit of saving and building wealth for the future.
HOW DOES IT WORK
SIP is a flexible and easy investment plan. Your money is auto-debited from your bank account and is invested into a specific mutual fund scheme. You are allocated certain number of units based on the ongoing market rate (called NAV or Net Asset Value) for the day.
Every time you invest money, additional units of the scheme are purchased at the market rate and added to your account. Hence, units are bought at different rates and investors benefit from Rupee-Cost Averaging and the Power of Compounding.
With volatile markets, most investors remain sceptical about the best time to invest and try to 'time' their entry into the market. Rupee-cost averaging allows you to opt out of the guessing game. Since you are a regular investor, your money fetches more units when the price is low and lesser when the price is high. During volatile period, it may allow you to achieve a lower average cost per unit.
POWER OF COMPOUNDING
Albert Einstein once said, "Compound interest is the eighth wonder of the world. He who understands it, earns it... he who doesn't... pays it." The rule for compounding is simple - the sooner you start investing, the more time your money has to grow.
If you started investing ` 10,000/- a month on your 40th birthday, in 20 years time you would have put aside ` 24 Lakhs. If that investment grew by an average of 12% a year, it would be worth ` 99.91 Lakhs when you reach 60. However, if you started investing 10 years earlier, your ` 10,000/- each month would add up to ` 36 lakh over 30 years. Assuming the same average annual growth of 12%, you would have ` 3.53 Cr on your 60th birthday - more than triple the amount you would have received if you had started ten years later!
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