Systematic Investment Plans (SIPs) have emerged as one of the most popular ways of investing in mutual funds, providing investors with an easy and convenient way to build their wealth for the future. The key benefit of investing in SIPs is that they help inculcate financial discipline by allowing investors to invest small amounts of money regularly.
SIPs offer several advantages, such as the flexibility to invest as per one’s financial capacity, the convenience of automating investments, and the potential to earn higher returns through the power of compounding. By investing regularly and consistently, investors can gradually build a corpus over time and achieve their long-term financial goals.
Another significant advantage of SIPs is that they help mitigate the risk of market volatility by allowing investors to average out the cost of their investments. This means that investors can take advantage of market fluctuations and potentially earn higher returns in the long run.
How do SIPs work?
Systematic Investment Plans (SIPs) operate on two fundamental principles that make them an attractive investment option for individuals seeking to build long-term wealth: Rupee Cost Averaging and Compounding.
Rupee Cost Averaging is a technique that helps investors escape the unpredictability of market volatility by eliminating the guesswork of market performance. Regular investing ensures that the average purchase cost is evened out over the long run. This means that when the markets rise, investors receive fewer units, and when the markets fall, they receive more units. As a result, the risk is minimized, and investors acquire investments at a lower average cost per unit.
Compounding is another powerful principle that makes SIPs an attractive investment option. Compounding refers to the ability of an investment to generate earnings on both the principal amount and the accumulated interest over time. By saving a small sum of money regularly for long periods, investors can take advantage of compounding and see exponential growth in their investment.
To illustrate the power of compounding, consider the following examples:
Suppose ‘A’ starts investing for his 60th birthday at the age of 40, with a monthly investment of Rs. 1000 and an assumed return of 7%. In this scenario, his total corpus at the end of 20 years would be Rs. 5,28,000.
On the other hand, if ‘B’ starts investing for his 60th birthday at the age of 20, with the same monthly investment of Rs. 1000 and an assumed return of 7%, his total corpus at the end of 40 years would be a staggering Rs. 26,56,436 — almost 5 times the corpus accumulated by A.
These examples demonstrate that regular investments spread over longer durations yield greater returns and profits. By taking advantage of the principles of Rupee Cost Averaging and Compounding, investors can build a substantial corpus over time and achieve their long-term financial goals.
In summary, SIPs are a popular and effective way of investing in mutual funds, offering investors a systematic and planned approach to building their wealth for the future. The benefits of investing in SIPs include financial discipline, flexibility, convenience, potential for higher returns, and risk mitigation. Therefore, SIPs are an excellent investment option for individuals who seek to create long-term wealth through a disciplined and systematic approach.