How does mutual Funds SIP WORKS?

Answer 1

SIP or Systematic Investment Plan or SIP mutual fund is one of the most searches by people on Google. Many investors want to know about SIPs. Via SIPs you can become millionaires or billionaires by investing small amount monthly/ quarterly/ annually. In this article we're going to discuss about SIPs in brief & how you can use this tool to create wealth over long-term.

SIP ?

An SIP or a Systematic Investment Plan allows an investor to invest a fixed amount regularly in a mutual fund scheme, typically an equity mutual fund scheme.

Why should you SIP?

One, it imparts financial discipline to your life. Two, it helps you to invest regularly without Wrestling with market mood, index level, etc. For example, if you are supposed to put a fixed amount every month in a mutual fund scheme, you need to find time to do it. When you have the time, you might be worried about market conditions and think of postponing your investments. Or you might be thinking of investing more if the mood is optimistic. SIP puts an end.

What are the other benefits of SIPs?

SIPs help you to average your purchase cost and maximize returns. When you invest regularly over a period irrespective of the market conditions, you would get more units when the market is low and less units when the market is high. This averages out the purchase cost of your mutual fund units.

How much money do I need to start an SIP?

SIPs are so affordable that you can start with the investment of Rs. 500/- & there is no maximum limits. You can plan a SIP according to your financial goal. Being an advisor, We'll suggest you to start one SIP for a particular Financial goal, in another words we can say if you've 4 financial plan i.e., 1st Child Education, 2nd Child Marriage, 3rd Buying a Car (cost 10 lakh), 4th Retirement Plan. Then it would be good if you start 4 different SIP's for different plan.

Is SIP flexible?

Yes SIP's are very flexible. You can increase or decrease SIPs amount accordingly.

Target of Rs. 1 Cr. at the age of 60 @ 18% in 30 years.

For achieving this financial goal you need to invest Rs. 700/- per month.

-Benefit of Rupee cost averaging:-

With volatile markets, most investors remain confuse about the best time to invest and try to 'time' their entry into the market. Rupee-cost averaging allows you to opt out of the guessing game. Since you are a regular investor, your money fetches more units when the price is low and lesser when the price is high. During volatile period, it may allow you to achieve a lower average cost per unit.

Receive more units when NAV is lower, vice versa when NAV is higher….

Investment NAV No. of Units Remarks 10,000/- 20 500 Higher NAV-less units 10,000/- 16 625 Lower NAV-More units. Average Cost per unit 17.78

• The cost is thus average out as NAV falls.

• Longer the SIP period, better the impact of rupee cost averaging.

Benefits of Compounding:-

Albert Einstein once said, "Compound interest is the eighth wonder of the world. He, who understands it, earns it... he who doesn't... pay it." The rule for compounding is simple - the sooner you start investing, the more time your money has to grow.

The longer you invested, the wealthier you can be.

SIP of Rs. 1000/- per month growing @ 12% p.a.*

Period Principal (in lakh) Final Value Growth of Principal (Compounding Effect) 10 Years 1.2 2.3 Almost 2 times 15 Years 1.8 5.0 Almost 3 times 20 Years 2.4 9.9 Almost 4 times 25 Years 3.0 18.8 Almost 6 times Average Cost per unit 17.78

• For illustration purpose only. These are assumed returns & actual returns may vary.

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