Over the years, the Systematic Investment Plan has emerged as a popular investment mode and has attracted the attention of a majority of investors. Though a lot has been claimed about the plan’s benefits and performance, most tend to skip the part that talks about the importance of SIP in wealth creation. In this article, I will enumerate the various reasons that make SIPs a powerful wealth creation tool. Read on!
In this article
What Works in Favour of SIP?
The power of compounding works in favour of SIP. It is further counted among the top advantages of SIP. Individuals can build a strong corpus over time by harnessing the power of compounding that comes along with SIP schemes.
The power of compounding manifests in SIP when individuals reinvest their earnings and earn further interests on them in due course. It is one of such features of SIP that helps an investor with a limited sum of money to generate wealth over time.
Karan invested Rs. 1,000 in Mutual Funds through a monthly SIP for 10 years. The investment accrued returns at a rate of 8% CAGR. At the end of his 10 year investment period; he will earn a Rs. 1.8 Lakh.
He then decided to reinvest the same for another 10 year term. The money would compound rapidly and would offer Rs. 3,94,967 by the end of his investment period.
In the absence of compounding interest, for traditional products like fixed deposits which are not market linked and returns are fixed, an investment of Rs. 5 Lakh would accrue Rs. 50,000 at the rate of 10%.
Whereas, when it comes to SIPs done in equity mutual funds, they are market linked. They may not be guaranteed but have proven to give far more returns that FDs in the past.
A close look at the income accrued through compounding interest and that generated through normal interest would show that the former is 3.43 times more than the latter.
Note: Investors please note that returns on investments through SIP are subject to market risks and not guaranteed.
What Are The Features of SIP That Ensure Capital Growth?
SIP allows individuals to invest a fixed sum every month into mutual funds of their choice. The regular investment habit helps inculcate a positive attitude towards investments and facilitates to build a corpus through the same.
Here a few of the features and benefits of SIP that help generate wealth over time –
- A small investment Amount
Even individuals with limited cash at hand can invest in Mutual Funds through SIP and reap the benefits that come along with such investments. The scheme works on a simple process of regular investments.
SIP allows individuals to invest a sum as low as Rs. 500 at regular intervals. .
- Freedom from market timing
As the investment plan requires individuals to invest at regular intervals, it helps to develop a disciplined approach towards investment and overall finances. Such discipline further allows individuals freedom from timing the market before every investment. It directly helps them to grasp every investment opportunity that would be beneficial for generating wealth over time.
- Rupee cost averaging
A stock market is a volatile place. No matter how much expertise an individual has on it, they can never predict its rise and fall. Even when the market is falling, individuals who invest through SIP can make the most of the situation. When the NAVs are falling, more units get added to an investor’s SIP account, which ultimately benefits the investor on redemption.
So, at a time when the market is booming and investors think they have reached their satisfactory level of returns, individuals can sell their units at a higher price and make profits. In the long run, individuals would be able to lower their average cost of investment and improve their scope of wealth generation.
- Better returns
Since market situations do not guide SIP investments, individuals are better equipped to make the most of the opportunities which occur in different market situations. Moreover, the compounding feature of SIP further helps to generate risk adjusted returns.
What Rules Should You Follow To Make the Most of Investing in SIP?
Follow these rules diligently to achieve your goals by making the most of the advantages of SIP–
- Start investing as early as possible.
- Develop a disciplined approach to financial planning and investments.
- Be patient with long-term investments.
- Do not stop investments mid-way.
- Do not time your investments as per market conditions.
Difference between SIP and Lumpsum Investment In Terms Of Wealth Creation
|Regular investments within a term.||One-time investment within a term.|
|Adds more units when the market is falling||Units do not get added on a regular basis. The unit calculation is done once, at the time of your lumpsum investment|
The differences mentioned above hint at the benefits that highlight why SIP is better for wealth generation.
These directly help them to build a corpus and generate wealth in the long run. All of which are necessary to become rich and lead a financially secure life.
Before routing your investments in Mutual Funds through SIP, make sure to use the SIP calculator to find out accurately if the principal investment is feasible for you to continue in the long run or not.
Disclaimer: This blog has been contributed by the content desk of Quantum Mutual Fund AMC.The views expressed here are of the author and do not reflect those of Groww.