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!
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% p.a. At the end of his 10 year investment period; he will earn a whopping 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, an investment of Rs. 5 Lakh would accrue Rs. 50,000 at the rate of 10%.
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.
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, which is extremely affordable.
- 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 stagnant, individuals who invest through SIP can make the most of the situation by purchasing more units at a lower price.
Similarly, at a time when the marketing is booming, individuals can sell their units at a higher price and make significant 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 steady returns and beat inflation effectively.
What Rules Should You Follow To Make the Most of Investing in SIP?
Follow these rules diligently to become rich 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.|
|Offers better returns in a stagnant market.||Offers better returns when the market is flourishing.|
|Acts as a cushion against a market crash.||May Incur losses during a market crash.|
The differences mentioned above hint at the benefits that highlight why SIP is better for wealth generation.
Individuals can earn a steady income in a low market by exposing their earnings to the compounding effect of the scheme. They can also cushion their earnings against the eroding impact of a market crash.
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 secured 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: The views expressed in this post are that of the author and not those of Groww