You may have heard the famous phrase “Little drops fill the mighty ocean” at least once in your lifetime. This phrase cannot get any more real unless it is compared with the idea of creating long-term wealth with SIP investments. Mutual funds are already a famous investment option for a large number of investors but starting a monthly SIP in a mutual fund scheme of your choice is even better. If you are planning on starting your investment journey with mutual funds, here is why you should consider starting a monthly SIP.
What is SIP?
Systematic Investment Plan or SIP as it is commonly referred to in the mutual fund industry is a simple and convenient investment tool that must not be confused by investors like mutual fund investments. There is a lot of speculation among few investors who feel that SIP and mutual funds are the same things. The fact remains that SIP is just one of the ways of investing in mutual funds (the other being lumpsum investing). Suppose you wish to build a corpus to buy that luxury car you always wanted. You give yourself 10 years to build that corpus. Let us assume that the car costs Rs. 15 lakhs right now but keeping inflation in mind the price is likely to go up by Rs. 5 lakhs over the next ten years. To build a corpus of Rs. 20 lakhs, one can start a monthly SIP of Rs. 11,000 per month assuming that the mutual fund scheme will deliver an average of 8% annual returns.
There are a few advantages of starting a mutual fund SIP which has made it an ideal tool of investment for a lot of retail investors. Here are a few benefits of starting a mutual fund SIP:
Power of compounding: The biggest advantage offered by SIP
When you start investing in mutual funds via SIP you may think about how it is possible to achieve a large corpus when you are investing such small sums. The answer to this is the power of compounding. The term compounding in mutual funds refers to the phase when the interest earned from the initial investment sum starts earning interest of its own. This allows even small SIP sums to snowball into a large commendable corpus in the long run. However, to truly benefit from the power of compounding one needs to remain invested for the long haul.
Using the online SIP calculator, we will demonstrate how compounding can turn small SIP sums into long term wealth:
If you start a monthly SIP of Rs. 5000 in a mutual fund scheme that offers an average return of 12%, after 5 years the total wealth created will be Rs. 4.08 lakhs out of which the investment sum is Rs. 3 lakhs. Now, if you continue to invest for 5 more years, the total wealth created through SIP investments at the end of the 10-year journey is Rs. 11.5 lakhs where the sum invested is Rs. 6 lakhs. Here the investor has earned almost twice as much as the sum invested. If you continue the SIP investments for 20 years, the total invested sum will be Rs. 12 lakhs whereas the wealth created will be Rs. 49.46 lakhs. That is four times the sum invested.
This is the power of compounding which can be witnessed by those who remain invested for the long haul. Retail investors have realized how magical they can increase their investment corpus by systematically investing in mutual funds via SIP. However, mutual funds do not guarantee capital appreciation and investors should invest as per their risk appetite.