Top 3 Benefits of SIP in Mutual Funds
Systematic Investment Plan (SIP) is popular among beginners as well as professional financial planners as they allow you to invest on a monthly or regular basis to meet your financial goals. This allows you to set aside a specific amount every month, quarterly or half-yearly basis towards your mutual fund SIPs. You can start investing when you are in your 20s, 30s, or even in your 40s to meet various financial goals such as higher education, vacation, retirement, and more. What are the benefits of SIPs? Let’s find out.
- What compounding interest can do to your wealth?
Compounding interest means you earn interest on the principal amount and interest. So, instead of investing a lump sum amount, you invest in small SIPs without withdrawing the principal amount or the interest accrued and this will earn you larger interest. Let’s understand this with an example. Say you invest a lump sum INR 12,000 in mutual funds that earn 10% interest p.a. for 10 years. This will earn you INR 31,125 by the end of your investment.
In the second example, let’s consider investing in a mutual fund via SIP. For instance, you invest INR 1000 every month, for the same period with the same interest rate. You will earn a whopping INR 2,06,552. That’s the magic of compound interest where you earn interest on interest. Interesting, isn’t it? So, next time you invest in mutual funds opt for SIP over a lump sum amount.
- Rupee cost averaging
Macroeconomic factors such as inflation and GDP and microeconomic factors such as demand and supply of goods and consumer behavior, affect the market. Market volatility depends on these factors that in turn affect the NAV (the price of each unit) of the mutual funds. So, when you invest in SIP spread over a period of time it is natural that the NAV will fluctuate depending on the market conditions. As a result of this, you end up with a more number of units or a lesser number of units depending on the market conditions. So, investing in SIP balances the market fluctuations which is called Rupee Cost Averaging.
For instance, if you invested INR 1000 every month which currently has INR 10 as NAV which earns you 100 units (1000/10). In the 2nd month, the NAV decreases to become INR 8, so you get 125 units (1000/8). However, the market rose to INR 20, so you earn (1000/20) 50 units. So, when you invest in SIP, these fluctuations even out offering you safer returns.
- Meet long-term goals with smaller SIPs
It is impossible to have a lump sum amount to invest in mutual funds but SIPs are an easier way to invest. With SIPs you can even meet your long-term goals such as retirement or your child’s dream to study abroad. If you cannot invest in the equity market, get the same benefits by investing in SIPs.
We hope this helps you make wise decisions. If you have more queries remember we are just a call away.
